PricingPoints

Pricing Strategies Always Come Down to the Sales Team

noreply@blogger.com (Ralph Zuponcic) — Fri, 30 May 2008 18:13:00 +0000

I am amazed at times how pricing managers get caught up in strategies and analytics and seem to forget about where "the rubber meets the road". I'm referring to the people in an organization who are face to face with the customer on a daily basis and are often at the heart of executing price strategies.

Sales and Marketing Management magazine is featuring an article this month titled: "Be a Value Merchant, Stop playing pricing games". The article does a great job of using value a the key driver of pricing at the customer level. It helps you profile your salespeople to indicate the extent to which they sell on value. Very insightful.

The article also maps a process to help demonstrate and document superior value which is considered a rare commodity. Click here to see the full article.

Pricing Strategy: Development and Implementation Plan

noreply@blogger.com (Larry Robinson) — Mon, 12 May 2008 17:54:00 +0000

Pricing Strategy: Development and Implementation Plan:

Larry teaches an MBA elective on Pricing Strategy and Tactics at Fisher College of Business at Ohio State. The course includes a group project to develop a pricing strategy for a product, including the implementation plan. In this blog, we explain the first step in the project which is to develop an Economic Value Estimation. We will explain the other four parts of the assignment in the next four blogs on Development of a Pricing Strategy. Here is Part 1:

This project is intended to help you understand the process and factors to follow in developing and implementing a pricing strategy for a product which serves two market segments or has two uses (or use occasions) which are valued differently by a target market segment.

The assignment has five parts:

1. Perform an Economic Value Estimation (EVE) for two end user segments OR two end uses (or use occasions) for a product.
2. Perform a Managerial Price Sensitivity Analysis (MPSA) to provide information on factors influencing price sensitivity.
3. Develop a pricing strategy to capture value identified in part 1 and to respond to the price sensitivities identified in part 2.
4. Develop an implementation plan to communicate and deliver the economic value.
5. Document your analysis and strategy in a presentation and in a written report to senior management of the company.

The remainder of this blog explains the four steps in an EVE.

Steps in Economic Value Estimation

A product’s economic value is the price of the customer’s best alternative (reference value) plus the value of whatever differentiates your product from the reference value (differentiation value). The EVE which is the result of this analysis is the maximum price a potential customer would pay who is fully informed about the market and is seeking the best value.

There are four steps to EVE calculation which can also be referred to as TEV-true economic value. This process can be found in Professor Robert Dolan’s note on: “Pricing-A Value-based Approach”. Similar material is also found in Tom Nagle and John Hogan: The Strategy and Tactics of Pricing, 4th edition (Prentice-Hall, 2007):

Step I: Identify the cost of the competitive product or process that the customer views as the best alternative.

This is the product’s reference value.

Step II: Identify all factors that differentiate your product from the competitive product or process.

For example:

Superior (inferior) performance
Better (poorer) reliability
Additional (reduced) features
Lower (higher) maintenance cost
Higher (lower) startup costs
Faster (slower) service
Longer (shorter) useful life
Lower (higher) total cost of ownership (TCO)
.
Step III. Determine the value to the customer of these differentiating factors. Sources of value may be subjective (such as greater pleasure in consuming the product) or objective (such as cost savings, profit gains)

The positive and negative values associated with the product’s differentiating attributes are the differentiation value.

For business markets and for some consumer markets, the value of the product may translate directly into financial savings or increased revenues for the purchaser. In markets where values are less tangible, EVE calculations may require use of choice-based research techniques such as trade-off analysis, discrete choice modeling, Price Sensitivity Meter, or other estimates of willingness to pay. Such research techniques MAY seriously underestimate the EVE, since the customer may not fully understand the economic value of the differentiators when making choice-based decisions.

Step IV. Sum the reference value and the differentiation value to determine the total economic value. TEV is the value someone would pay who is fully informed and economically rational when making the purchase decision.

The total economic value is the maximum price the company might be able to charge for the product. The company may be able to include a “reputation premium” based on brand equity from other products sold to the same customers who are targeted for this product. Also, the company may be able to get a “switching cost premium” when the cost of changing suppliers is a consideration by the buyer.

The EVE could be the price IF purchasers knew everything the product (and the reference product) offered, knew their own needs, could easily determine how each product would help them satisfy their needs, and if they did not believe they could influence the seller’s price through negotiation. In the real world there are many reasons for gaps between buyers’ willingness to pay and the value they receive. This is why the team needs to do an MPSA to identify the reasons for price sensitivity and the tactics the supplier can use to reduce the gap between the value offered and the prices they are able to charge to win the business of the purchaser.

Our next blog will focus on Part 2 of developing a pricing strategy: Performing a Managerial Price Sensitivity Analysis (MPSA).

Pricing Strategies and Tactics MBA Elective Course

noreply@blogger.com (Larry Robinson) — Fri, 11 Apr 2008 16:15:00 +0000

Larry teaches Pricing Strategies and Tactics at Fisher College of Business at Ohio State. The course is for the full time and the Working Professional MBA programs. The enrollments have been between 60 and 80 students each year for the past four years. The objectives for the course are:

• Develop understanding of principles managers follow to make effective pricing decisions
• Learn how to do economic value estimation (EVE) for a product or service offered to a specific market or for a specific use
• Learn how to perform managerial price sensitivity analysis (MPSA) which identifies factors that influence price sensitivity when making judgments about the importance of price in a buyer’s purchase decision
• Recognize the objective of price competition is not to win market share, but to maximize long-term profitability
• Become able to analyze pricing concepts related to: new products, pricing changes, bundling/versioning, yield management/revenue management, & price wars
• Develop ability to integrate pricing decisions with product, promotion and channel management decisions

We use as our textbook The Price Advantage by Michael V. Marn, Eric V. Roegner, and Craig Zawada. We also use case studies from Harvard, Northwestern, and Virginia. Also, each course includes five or six guest speakers who are VPs of Pricing and Pricing consultants.

If you are interested in seeing the syllabus, just send an email to robinson_878@fisher.osu.edu.

Value Based Pricing Presentation

noreply@blogger.com (Larry Robinson) — Mon, 07 Apr 2008 18:14:00 +0000

We recently gave a presentation on Value-Based Pricing to the Breakfast Club of the Executive Education division of Fisher College of Business at Ohio State University.

We had an audience of 110 business executives for our presentation. Here is the promo piece that attracted the audience:

“Pricing is the moment of truth—all of marketing comes to focus in the pricing decision. But strategic pricing is about much more than just setting prices. There are many issues which require attention in arriving at the pricing strategy and tactics for any organization. Yet, few managers who participate in setting and implementing pricing strategies have any formal training in this important business activity.

The presentation includes:

1. The impact of 1% improvement in net realized price cmpared to 1% improvement in fixed costs, variable costs, or unit sales.
2. Why pricing is the number 1 issue for CEOs according to a recent McKinsey survey.
3. Common pricing methods compared to the best way to do pricing
4. Tools and methods used by companies known for pricing excellence.
5. Why pricing for new products and services is often done in a sub-optimal way.
6. How to assess potential for a price war and how to behave when in a price war.
7. How to do a Pricing Audit to determine actions toward pricing excellence.”

The presentation was followed by a lively and extended discussion which continued well after the meeting ended. We were also asked to develop a one-day workshop on value-based pricing to be offered by OSU’s Executive Education Division.

If you are interested in getting a copy of this presentation, just send an email to: rzuponcic@pricingpointpartners.com or to robinson_878@fisher.osu.edu

Reward Your Sales Team for Pricing Performance

noreply@blogger.com (Ralph Zuponcic) — Wed, 02 Apr 2008 14:35:00 +0000

We are currently working with a manufacturing company that has been hit hard by raw material cost increases. We’re talking double digit increases as high as 42% for certain components. This company happens to be in the chemical industry, enjoys generous profit margins, and wants to keep it that way. We can’t blame them.

They have asked us to help their sales force execute price increases. It seems that many companies struggle to get their sales organization to enthusiastically support price hikes and while there appears to be no outward resistance from this sales team, management wants to maximize the results.

While there are several elements to address in managing sales teams through price increase initiatives, the most critical is the incentive plan. Most companies that struggle with increases are rewarding sales reps on improvement in sales volume, not pricing or profit margin. It may be difficult to change incentive plans quickly but we have seen good results with temporary plans that reward short term price improvement results.

For example, consider a 90 day plan that simply rewards the sales rep a commission based on the actual price increase realized. I have seen companies offer as much as one half of the price increase, which is generous, and realize significant results. Most situations can be addressed with a much lower commission schedule. Also consider the amount of the reps total compensation and apply a commission accordingly.

We find that a commission for a price increase that contributes to 10% of the reps overall compensation plan is sufficient to capture their attention and get results. After all, it is only a short term effort. However, the payoff for the firm carries well into the future.

There are numerous additional schemes and one can be quite creative in developing an incentive. For some sales teams, vacations, merchandise and other tangible rewards are powerful incentives.

While incentive plans for sales reps are critical to price increase realization, there are a number of other critical details that require attention in order to successfully execute increases through the sales team. We will address some of these in future blog postings.

Inputs to Optimal Pricing

noreply@blogger.com (Ralph Zuponcic) — Thu, 14 Feb 2008 13:48:00 +0000

We were recently introduced to a large industrial distributor that was searching for strategies to optimize prices. Their first inclination is to identify price improvement opportunities through transactional level pricing. In other words, find the prices at the transaction level that may lie outside the target pricing range and specifically, prices that may be well below the target range.

One of our first steps in helping companies identify pricing opportunities certainly lies in an examination of transactional pricing. It is a rare case where price improvement scenarios are not discovered at this level. There are a number of analyses that can be performed to uncover these opportunities including price band analysis, margin band analysi and pricing waterfall analysis.

However, there are really three inputs to arrive at optimal pricing. The first is an analysis of historical pricing data at the transaction level. Using the analyses mentioned above is a good starting point. However, an analysis of market data is just as important.

Market data includes pricing market research performed on your customers in order to identify the perceived value of your products and services compared to the perceived value of competitive offerings. And, it includes an accurate measurement of the price sensitivity of your products offering and brand. This type of pricing research is highly specialized and accurate when appropriately administered. Without sound market data the limits of pricing thresholds are unknown and any attempt to increase price levels is akin to shooting in the dark.

The third input to optimizing prices is expert judgment. Even though we have seen great strides in pricing mangement software and other analytical tools, the expetise provided by your team and outside consultants is invaluable in making pricing decisions.

Make sure that you utilize all three inputs when optimizing prices. We see many firms focused on only one input and leaving money on the table or, worse yet, making price decisions that are disconnected from the overall business strategy.

Pricing Strategy Scholars

noreply@blogger.com (Larry Robinson) — Thu, 07 Feb 2008 19:33:00 +0000

Pricing Strategy Scholars

Our research to identify the leading pricing strategy articles and scholars identified 1,364 articles which appeared 19 major marketing journals between 1980 and 2006. Our approach to identifying the leading scholars was to identify all authors who contributed to the 1,364 articles. We then gave weighted credit by dividing the counts by the number of co-authors for each article. For instance, Professor Kent Monroe was the highest ranked scholar by article count Professor Monroe was an author or co-author on 28 articles, including several which had one or two co-authors. His weighted articles count was 13.92. The same procedure was used to determine scholar ranking by weighted citation counts. Professor Monroe had 405.50 weighted citations according to this process.

Top 20 Pricing Strategy Authors – Weighted by number of articles.

Rank Author Weighted Articles

1. Monroe KB 13.92
2. Grewal D 10.17
3. Tellis GJ 10.00
4. Schindler RM 8.50
5. Urbany JE 7.00
6. Chintagunta PK 6.75
6. Krishna A 6.75
8. Burton S 6.58
9. Lichtenstein DR 6.50
9. Parker PM 6.50
11. Lal R 5.83
12 Gerstner E 5.75
13. Winer RS 5.61
14. Ratchford BT 5.50
15. Shugan SM 5.33
16. Bearden WO 5.33
16. Bolton RN 5.33
18. Muzumdar T 5.25
19. Gupta Sunil 5.11
20. Walters RG 4.83

The top 20 Pricing Strategy Scholars ranked by Weighted Citations:

1. Thaler R 608.00
2. Zeithaml VA 601.00
3. Monroe KB 417.17
4. Tellis GJ 405.50
5. Gupta Sunil 311.50
6. Moorthy KS 311.00
7. Winer RS 306.67
8. Little JDC 273.33
9. Shugan SM 259.67
10. Guadagni PM 232.50
11. Grewal D 224.25
12. Rao AR 224.00
13. Simonson I 218.50
14. Lal R 202.67
15. Lehmann DR 196.25
16. Lichtenstein DR 195.17
17. Jeuland AP 192.33
18. Hauser JR 189.00
19. Russell GJ 180.17
20. Kamakura WA 178.50

The Pricing Strategy Scholars listed above have made the most impact on pricing knowledge of all scholars who have published in the 19 marketing journals included in the Social Science Citation Index. Our next post will list the 19 marketing journals by number of pricing articles and by citations to those articles. We will also show the top 20 institutions for which the scholars were affiliated at the time of publication of the 1,364 articles included in our study.

Narrow Price Variance Analysis

noreply@blogger.com (Ralph Zuponcic) — Thu, 07 Feb 2008 18:56:00 +0000

We have the opportunity to observe the pricing controls for many companies. Our first view is often a look at price variance within a business. Variance tells a lot about the discipline within a firm's pricing system. Depending on the amount of variance, price improvement opportunities may exist.

Typically, we look for wide variances in pricing for individual products or SKUs. Wide variances can offer an opportunity for reduction and increase the lower outliers for improved margin. Sometimes prices can vary as high as 250% from the lowest price or even more. And, in some industries, this may be acceptable.

However, on the other hand, we have seen businesses with very tight variances as well. In some cases, variances of only 3-5%. What does this tell us? At first glance it indicates strong pricing controls and discipline. Orders are being priced consistently. Customers expect similar if not identical pricing order after order. Overall, not a bad situation.

But, are we leaving money on the table? Are there opportunities to capture different prices for different customer, order or product attributes? For example, can we capture a higher price for expedited orders, low volume customers, or minimum order quantities? Or, is there an opportunity to capture more sales by reducing prices for high volume or large orders?

A change in prices due to any of the attributes will automatically widen the price variance and contribute to either higher margins or more volume. There are dozens of attributes for any business that can be leveraged making wider pricing variances a good thing.

Top 10 Most Highly Cited Pricing Strategy Articles

noreply@blogger.com (Larry Robinson) — Thu, 24 Jan 2008 20:03:00 +0000

Our last post featured top pricing strategy articles. This week we are featuring the Top 10 Most Highly Cited Pricing Strategy Articles published from 1980 to 2007. This list summarizes the most highly cited articles of the 1,364 identified in the study, using as a metric the “citations/year” which levels the playing field for more recently published articles.

The Top 10 Most Highly Cited Pricing Strategy Articles

#1. "Mental Accounting & Consumer Choice", Thaler, R,

Marketing Science, Volume 4, Issue 3, 1985 Citations per year: 27.41

#2. "Consumer Perceptions of Price, Quality & Value", Zeithaml, VA

Journal of Marketing, Volume 52, Issue 3, 1988 Citations per year: 26.89

#3. "Interactive Home Shopping: Consumer, Retailer, and Manufacturer Incentives to Participate in Electronic Marketplace", Alba, JW et al., Journal of Marketing, Volume 61, Issue 3, 1997 Citations per year: 25.00

#4. "Customer Satisfaction, Market Share and Profitability: Findings from Sweden", Anderson, EW, et al., Journal of Marketing, Volume 58, Issue 3, 1994 Citations per year: 21.31

#5. "A Logit Model of Brand Choice Calibrated on Scanner Data", Little, JDC, et al., Marketing Science, Volume 2, Issue 3, 1983 Citations per year: 19.38

#6. "Wine Online: Search Costs Affect Competition on Price, Quality and Distribution", Lynch, JG, et al., Marketing Science, Volume 19, Issue 1, 2000 Citations per year: 17.29

#7. "A Probabilistic Choice Model for Market Segmentation and Elasticity Structure", Russell, GJ, et al., Journal of Marketing Research, Volume 26, Issue 4, 1989 Citations per year: 14.61

#8. "Effects of Price, Brand and Store Information on Buyer's Product Evaluations", Dodds, WB, et al., Journal of Marketing Research, Volume 28, Issue 3, 1991 Citations per year: 13.19

#9. "On the Profitability of Long-Life Customers in a Noncontractual Setting: An Empirical Investigation and Implicatons for Marketing", Kumar, V. et al., Volume 64, Issue 4, 2000 Citations per year: 13.00

#10. "Long-term Manufacturer-Supplier Relationships: Do They Pay Off For Supply Firms?", Kalwani, MU, et al., Journal of Marketing, Volume 59, Issue 1, 1995 Citations per year: 12.75

Most Highly Cited Articles on Strategic Pricing-1980 to 2007

noreply@blogger.com (Ralph Zuponcic) — Tue, 15 Jan 2008 22:13:00 +0000

We are working on a project to define the pricing research that has appeared in the 19 marketing journals included in the Social Science Citations Index in the years since 1980. This chart summarizes the most highly cited articles of the 1,364 identified in the study, using as a metric the “citations/year” which levels the playing field for more recently published articles.

We have compiled the top 20 articles and feature articles 11 through 20 in this post. Next week we will feature the top 10 articles on strategic pricing.

Top 20 Most Highly Cited Articles Based on Citations Per Year

#11. “Work and Fun-Measuring Hedonics and Utilitarian Shopping Value”
Babin, BJ, et al., Journal of Consumer Research, Vol. 20, Issue 4, 1994
Citations per year: 12.46

#12. “Impact of Sales Promotions on When, What, and How Much to Buy”
Gupta Sunil, Journal of Marketing Research, Vol. 25, Issue 4, 1988
Citations per year: 12.37

#13. “Service Quality Delivery Through Web Sites: A Critical Review of Extant Knowledge”
Zeithaml, VA, et al., Journal Academy of Marketing Science, Vol. 30, Issue 4, 2002
Citations per year: 11.80

#14. “No Pain, No Gain: A Critical Review of the Literature On Signaling Unobservable Product Quality”
Kirmani, A. et al., Journal of Marketing, Vol. 64, Issue 2, 2000
Citations per year: 11.29

#15. “A Dynamic Model of Customers’ Usage of Services: Usage as an Actecedent and Consequences of Satisfaction”
Bolton, RN et al., Journal of Marketing Research, Vol.36, Issue 2, 1999
Citations per year: 11.13

#16. “The Effects of Price Comparison Advertising on Buyers’ Perceptions of Acquisition Value and Transaction Value”
Grewal, D et al. Journal of Marketing, Vol. 62, Issue 2, 1998
Citations per year: 11.11

#17. “The Price Knowledge & Search of Supermarket Shoppers”
Dickson, PR et al., Journal of Marketing, Vol. 54, Issue 3, 1990
Citations per year: 10.29

#18. “The Long Term Impact of Promotion and Advertising on Consumer Brand Choice”
Mela, CF, et al., Journal of Marketing Research, Vol. 34, Issue 2, 1997
Citations per year: 9.7

#19. “Managing Channel Profits”
Jeuland, AP et al., Marketing Science, Vol. 2, Issue 3, 1983
Citations per year: 9.50

#20. “The Internet Shopper”
Donthu, N et al., Journal of Advertising Research, Vol. 39, Issue 3, 1999
Citations per year: 9.25

What does this table mean to the reader of this blog?

You can presume these articles are worthy of being on your reading list if you are a scholar or practitioner in pricing. These articles have had the most influence (some times referred to as “impact”) on scholarly research in pricing in the past 25 years. Each “citation” is a reference to prior research made in articles published after the cited article was published. Importantly, the citation was in an article also published in a journal included in the SSCI.

In the next week or so, we will post blogs about “who and where” for the most highly cited research on pricing. We will recognize the most highly cited researchers, research institutions and marketing journals based on our study.

Managing Price Discounts

noreply@blogger.com (Larry Robinson) — Wed, 09 Jan 2008 21:40:00 +0000

We teach an MBA course on Pricing Strategies. Each student does a pricing audit for an organization of their choice, recognizing all organizations have a pricing strategy. Many of the organizations chosen by the students for this exercise are either retail stores with one location or service providers with limited staff. Other organizations include several major consumer products companies. The students are required to recommend improvement in pricing effectiveness of the organization.

The students had been taught to construct a pricing waterfall to detect all leakages (discounts, allowances, special deals) that could, in a given transaction, cause the seller to receive a lower pocket price. We used the text material in The Price Advantage by Marn, Roegner, and Zawada as our base information on the management of discounts and allowances. The students were looking for the “low hanging fruit” to get a 1% improvement in pricing results. They recognized discounts given, but not earned, are a major source of quick improvement in pricing.

When we reviewed the results for 70 such pricing audits completed in the past month, we were somewhat surprised to find many pricing audits focused on discount strategies: what discounts were offered and decision rules about when to give the discounts.

Examples:
A store which sells small, unique gift items gives 10% discount automatically to any purchase over $100
An oil change company that has a list of over 50 discounts that can be given to any customer by any staff member taking the order for as much as 40% off the list price

The idea behind effective discounts: only give the discount when it makes a difference in the purchase decision by the customer.

In example 1 above, the owner of the gift store decided to remove the 10% discount unless the customer specifically indicated they expected it and that it was a part of their decision to buy form this gift shop. The first day of the “new” discounting policy, a local company ordered $1,400.00 of a gift item for the annual Christmas gift for their employees. The invoice went out for $1,400.00 and was paid in full the next day. The owner called our student and said she just made $140.00 more on this transaction because of the pricing audit and her willingness to implement the recommendations.

In example 2 above, the owner of the franchise decided to incentivize the staff at their 10 local oil change shops. The incentive was to increase the pocket price by increasing the percentage of full pay customers for the basic oil change. They already had incentives for up selling other products and services.

It is easy for discounts that are intended for selective use to become available to everyone. We had a guest speaker who is Corporate Vice President of Strategic Pricing for an $11 billion manufacturer. The speaker showed us a scatter plot for a major product which showed that no customer paid higher than 90% of list price, because there was an available discount to be given by the salesperson of 10%. There was no approval needed and the customer did not have to ask for the discount; it became an automatic leakage to the pocket price for that product. The company changed to requiring a sales manager approval AND the company began to track the results. The new scatter plot shows many accounts getting less than a 10% discount.

So, the lesson here is to identify the discounts that make a difference in purchase behavior for specific customers or customer types. Then, manage the discounting such that discounts are only given when appropriate.

Five Fall Back Strategies For Price Increases

noreply@blogger.com (Ralph Zuponcic) — Thu, 03 Jan 2008 16:16:00 +0000

With the rise in prices in certain industries including those that are impacted by petroleum prices, we have helped a number of companies implement price increases. The common challenge that seems to face each firm is gaining support from the sales force in implementing these price hikes. Quite frankly, we find it easier for customers to accept price increases than we do most sales teams.

We find that sales representatives who must communicate price increases to their customers are fearful of the negative reaction that may occur at the time of the presentation. In most cases, sales reps will want to have personal meetings with their biggest and best customers in order to address questions or issues that may arise.

The key to diffusing the fear among reps is to make sure that each rep is well prepared with strategies and back-up plans going in to the meeting. Don't leave reps to spontaneously respond to resistance. That's a tough challenge even in the best of situations. Instead, create an opening approach to communicating the price increase and have at least two back-up plans in the event that negotiation is necessary. Here are 5 strategies that work and one strategy to avoid.

Eject Strategy
Remove yourself from the negotiation process. Defer any negotiation to management. Tell the buyer that you have no ability to change the price increase without discussion with your management team. This approach gives the sales rep time to return with a well crafted plan, removes the rep from the "hot seat" and helps to preserve the reps relationship with the buyer.

Defer
Defer the price increase to a later date. Emphasize that the increase amount in not negotiable but the increase can be delayed for 30, 60 or 90 days.

Trade Strategy
Offer to trade the increase for additional sales volume. Make sure that the additional sales volume profit dollars are equal or greater than the gain in price increase profit margin.

Reduce
As a next to last resort, reduce the amount of the price increase to a predetermined level for this account. Determine a pricing floor before presentation.

Swap
Swap products to a lower priced product. Understand that this approach may reduce the dollar profit margin even though the percent profit margin may be the same or even higher.

Rescind the Increase
A good option to avoid, if possible.

While these strategies may be useful for many situations there are a number of additional approaches that may work very well for your situation. The key is for sales reps to have a plan that they know they can go to when necessary. In the end, you will likely see better returns on your increase initiatives and reps who will be more comfortable with future price increase initiatives.

Actual Price Increases?

noreply@blogger.com (Ralph Zuponcic) — Fri, 14 Dec 2007 16:19:00 +0000

With many industries experiencing a rise in their raw materials due to increases in petroleum prices we are seeing more companies implementing price increases. The price increases, of course, are used to offset the rising raws and at least maintain profit margins.

However, for many companies, their price increases fall well short of the target to maintain margins. In fact, in our experience, we see many companies typically capture only 15-20% of the planned increase. For these firms they fail to maintain profit margins and may not even know it.

There are a number of factors that contribute to these pricing shortfalls including push back from large accounts, poor execution at the sales level, weak communications to the marketplace and a variety of other detractors. But the most common element among these firms is a lack of tracking and measurement tools to monitor actual price increase results.

When we ask managers about their price increase results we often get responses like, "We implemented a 5% increase last year". And when asked about the actual increase realized the response is often a guesstimate. While there are many factors which can detract from a successful price increase initiative the starting point lies in measuring actual results.

Create a system that will provide data to measure results down to the account level. Know exactly which customers accepted the increase and the amount of the increase. Identify which accounts did not accept the increase and why. Only then will you be able to analyze and understand what is really happening and make changes in your next price increase initiative to deliver the results desired.

To Publish or Not To Publish Price Lists

noreply@blogger.com (Ralph Zuponcic) — Thu, 06 Dec 2007 18:37:00 +0000

We met with a distribution company earlier this week who posed an interesting question and perhaps one that is becoming more relevant all the time. The question was whether to continue to publish their prices on their web site or consider removing them. The firm is the only participant in its industry to publish prices and happens to be the price leader. That is, other industry participants tend to follow the price moves of this company.

Publishing prices on-line has fueled more customers to place orders electronically which is freeing up sales staff to focus on getting new business. This sounds like a good move. But, like so many other issues, there are other aspects that require consideration.

For example, this firm's value proposition is focused on rapid delivery and customer service. Customer service is built partially on relationships. How well will customer relationships be fostered when we have fewer opportunities for personal interaction through electronic ordering? Will we lose the chance to communicate and negotiate with customers on price when we shortcut the process with technology? We may never have the chance to discuss price and gather feedback with on-line customers.

Publishing prices has some up-side. For instance, it is an effective way to legally communicate prices and price changes to competitors. This is a desirable strategy so long as competitors are faithfully following and not using the information to capture market share with lower prices.

And, publishing prices on-line eliminates the need for printed price lists and eases the task of updating.

Every situation is different and requires a careful assessment of all the upside and downside issues. Make sure that the overall business strategy and value proposition is considered when making price publishing policies.

Multipliers Make Pricing More Attractive to Owners

noreply@blogger.com (Ralph Zuponcic) — Thu, 29 Nov 2007 17:12:00 +0000

I recently presented a pricing program to a private equity firm in Cleveland. The early part of the presentation focused on pricing leverage. That is, how pricing can positively impact profit margins. While this point is well known among many, I take the theory a step further in my presentation and calculate how price improvement can lift the valuation of a firm.

Most private equity firms have a keen eye toward the financial performance of their portfolio companies. This private equity firm is no different. I presented a conservative example of how a $50 million company with a 6.8% EBIT could see a 1% improvement in price realization lift the value of the company by $2.5 million. That is, the potential selling price of the company would increase by $2.5 million because we estimated that the multiple on earnings to derive at the value of the company was 5.

A 5 multiplier is a very conservative number in today's market. My friends at the private equity firm suggested that today's multipliers are between 7 and 8, and may even reach as high as nine.

So, what does this mean for the value of our example firm?

Using a multplier of seven, we find that a 1% improvement in pricing revenue, assuming all other profit drivers remain unchanged, lifts the value of the firm by $3.5 million. That's an additional one million dollars in the pocket of the owners or shareholders.

With multipliers climbing the time to consider price improvement moves may never be better.

The Harsh Realities of Discounting

noreply@blogger.com (Ralph Zuponcic) — Mon, 19 Nov 2007 16:52:00 +0000

Our firm has enjoyed the opportunity to help many companies improve their pricing revenue. In nearly every case the sales team has played a critical role in implementing price changes. Many B2B companies empower sales teams to change prices according to specific customer situations. Most often, sales reps are compensated on volume only with no incentive to improve profit dollars.

The subject of compensating sales professionals is a key point of most effective pricing programs. While it should be a consideration in any program I will focus this post on the impact that price changes have on profit dollars in any given deal. A well crafted incentive plan will, however, change behavior and positively impact profitability.

Many sales teams are given the authority to discount products or services. What many teams fail to realize is the impact that discounting can have on profitability. Consider for example that a simple 3% discount for the average S&P 500 firm, if applied to all sales, will knock profits down by 37%. Most sales teams are unaware of the power that pricing has on margins.

Discounting can have serious effect at the transaction level, too. Consider this example. You are selling a product with a 25% gross margin. You are in a competitive situation and considering a 10% discount. What effect will this discount have on your business goals? A 10% discount in this situation means that you will need to sell an additional 67% of sales volume in order to make up for the profit dollars lost by the discount.

In an example where the initial sale is $100,000 it means selling an additional $67,000 to make up for the lost profit margin. That’s a lot of volume.

Fortunately, the equation works in the other direction as well. If you can sell at a 10% premium, you can sell 27% less volume to earn the same profit dollars.

Of course, the amount of incremental sales required to make up the lost profit dollars varies according to the original gross margin. For a table that lists a wide range of margins and the necessary sales required just send us an email and we will be happy to forward a copy to your attention.

In the meantime, be careful in using discounting to gain business. It may be costing more than you think.

Loss Leaders Strategy

noreply@blogger.com (Ralph Zuponcic) — Fri, 09 Nov 2007 17:54:00 +0000

I had the opportunity this week to meet with a group CEOs on the subject of strategic pricing management. We discussed the leverage affect of price on profitability and valuation, analytical tools to measure pricing variance, the importance of pricing market data in understanding pricing thresholds and a host of other strategies and tactics.

Each CEO shared their company’s approaches and methodologies to manage price. We learned what worked in some industries and what didn’t work in others. During our discussion the subject of loss leaders was presented. The concept of a loss leader, of course, is to offer a product that is very low priced in comparison to competitive offerings. In fact, the literal translation means that the product is sold at a loss. The trade-off is that the loss leading product is combined with a bundle of additional products that carry an acceptable profit margin. In the end, the bundle is delivering margins that are acceptable to the seller.

But, what are the repercussions in selling products at a loss?

First, obviously, is the margin loss on every unit sold. For many companies, and maybe for most, accurately calculating margins is difficult since the appropriate allocation of fixed costs is often in question. Standard pricing practice dictates that a cost plus methodology is used to establish price floors. That is, the minimum margin acceptable to the firm. Somewhere below the price floor lies the breakeven point and any price below this point results in a loss. With the allocation of costs in question it is difficult to identify at what price point loss really begins.

Now, consider that every competitor in an industry is likely experiencing the same situation. Each participant may be allocating fixed costs differently which results in a different breakeven point for each firm not to mention that each firm has different costs anyway. From an industry strategy standpoint, offering a loss leader may secure business but may also add confusion to industry participants who may wish to follow price leaders.

Our take on this issue is to focus on the value proposition that drives your business. It may be product performance, service, technology or other. Focus sales and marketing efforts on supporting the value proposition. Offering loss leaders can have a dramatic negative impact on overall industry profitability as competitors will often drop their price in order to compete with your loss leader and may trigger price wars. Focusing on the value proposition will cause the firm to be more selective in acquiring customers who value the proposition. Often, it means walking away from business that does not value your offering but may mean retaining higher margin business.

Is Radiohead's Pricing Experiment a Sign of Things to Come?

noreply@blogger.com (Larry Robinson) — Fri, 02 Nov 2007 18:09:00 +0000

We often ask our students and colleagues about new pricing strategies. Kathy Milette, who is a Fisher College MBA student and is also a student of internet marketing, brought to our attention the pricing strategy used by Radiohead. By now, the Radiohead set-your-own-price-for-their-CD event is old news in the blogging world. 1.2 million downloads in the first week at roughly $8 a pop, though many feel this number may be exaggerated by including preorders. We are not fans of Radiohead, but we are intrigued by their unorthodox pricing experiment, and what it means to the future of transaction pricing.

Presumably, Radiohead wanted to tap into the emerging social networking phenomenon. Their fans are likely an Internet savvy, texting-obsessed, MySpace loving' group. It just so happens this demographic is comfortable "sharing" digital versions of music with each other, or might pay only for a song or two. Radiohead (and their label) likely expect extra album sales from these folks. We presume these folks would otherwise not have shelled out for the entire compilation. Their willingness to enter into this type of transaction is a proclamation they respect and trust their fan base. As a financial consideration, it is evidence they are confident in their brand equity and reputation.

This pricing strategy is especially uncommon because it has to do with intellectual property. Simple economics dictates that if an owner of intellectual property is not compensated for their contributions, there is lack of incentive for future innovation (aside from artists, think software).
However, the logic behind this type of pricing isn't new. For example, weight management (and social networking) website thedailyplate.com (TDP) is a community of over 100,000 people using TDP's free on-line food tracking software to track their caloric intake. Users have the option of paying a fee for some lite-weight bonus features. And devoted TDP users do, despite the fact the bonus features are little more than some cute graphics and priority for service requests. But there is no requirement, no hassling, nor annoying emails and no pressure whatsoever to contribute. Those that contribute have determined there is value in TDP, and want to see it succeed.

Many websites offer free services, like thedailyplate.com does. Such sites get much of their revenues from advertising. But with online ads having questionable relevance and low click-thru rates, they may have to modify their business model to stay profitable. Has Radiohead shown us that if there is trust and respect between business and consumer, the goodwill will work both ways?

This is a level of participation and collaboration that is relatively rare. Web 2.0 principles are ushering in new behaviors between business and consumer. Beyond marketing and communication, traditional pricing for products and services may be challenged by this participation-driven phenomenon. As an afterthought, we are struck by the similarity between Radiohead's fans determining their album's value, and tipping a waiter or waitress for their service. Could the future of payment be determined on value after the fact?

Apple's I-Phone: The Price of Loyalty

noreply@blogger.com (Larry Robinson) — Wed, 17 Oct 2007 20:39:00 +0000

Marketers know that attracting new customers is more costly than selling to existing customers. That’s a major reason for loyalty programs: to keep and grow profitable relationships with existing customers. The incentives are often significant but still lower than the cost of attracting new customers. One form of loyalty incentive is to offer discounts for future purchases.

Consider jewelry stores. JB Robinson Jewelers (JBR) offers “holiday cash” incentives when shoppers purchase jewelry during the holiday season. Certificates representing cash for future purchases at JBR are given to buyers with every sale that is over a minimum dollar amount. These certificates are redeemable after a prescribed future date, say after January 15th. The certificates provide an incentive to return to JBR at Valentines Day, Easter, Mother’s Day etc. but expire well before the next holiday season. Consequently, merchandise may be purchased at sale prices during the holidays but not with certificates.

The concept of offering future discounts based on purchases made today is nothing new. It’s all about making the buyer feel good about the purchase at the time of the buy and later on. Maintaining loyalty with customers is all about managing long term relationships.

Consider the case with Apple’s IPhone. Apple dropped the price of the 8GB version by one third, from $599 to $399 just two months after it was released and caused its first buyers of the iPhone to complain. The company gave a $100 store discount coupon to the customers who had paid $599. Still, dissatisfaction with Apple’s actions continue.

Marn, Roegner, and Zawada report in their book The Price Advantage, that when a new product pricing error is made, 80 to 90% of the time the release price was too low. Certainly, in this instance the release price was NOT too low. Isuppli, a technology market research firm, estimated the cost to produce an iPhone was $265.83, so the markup was 140% for the 8GB phone at a release price of $599. And the 8GB version rapidly sold out at $599, which allowed Apple to capture $333.17 for each 8GB unit sold to the first one million customers. Actually, Apple captured much more value for each phone, since Apple had an agreement to share revenues with AT&T which required a two year contract for each buyer of the iPhone.

The pricing issue occurred when Apple lowered the price to $399 so soon after the launch of the iPhone 8GB version. Pricing strategy for high technology products typically follows a sequential skimming approach which identifies and responds to the price sensitivities of the early adopters who follow the innovators who had lower price sensitivity to the initial offering. It appears that Apple forecasted they could sell 10,000,000 iPhones for the Christmas buying season at a retail price of $399 for the 8GB model which would be a price point that should deliver the volume and high total margins (assuming the Isuppli estimated unit cost was close to actual cost AND that production economies from producing 10,000,000 would lower the unit cost substantially).

So, what is so wrong at Apple that there is such a huge uproar over their lowering the price so much so quickly? We believe the issue is how Apple managed the price reduction. Apple announced a huge price decrease (and the elimination of the 4GB model) and then responded to the outcry of criticism with a $100 store coupon. We believe Apple should have expected the negative reaction and should have proactively acted to blunt it. Apple could have announced a $200 store coupon for the buyers of the 8GB unit AND a $100 store coupon for the buyers of the 4GB unit as part of the price reduction. That approach, like the JBR example, would have placated the initial buyers AND would have given those buyers incentive to buy units as gifts AND would have made the initial entry of competitors such as Samsung more difficult.

Our take on this episode is NOT that Apple made bad pricing decisions, but that Apple could have implemented their price decrease in a way that would have increased affect toward Apple rather than cause the negative reaction they and their loyal customers experienced.

Chinese Reduction of VAT Impacting Prices for Thousands of Products

noreply@blogger.com (Ralph Zuponcic) — Thu, 04 Oct 2007 12:44:00 +0000

China has been applying a number of tools to address the escalating export growth and manage the growing trade surplus. One of the more recent tools is to revise the Value Added Tax (VAT) refund rates given to companies exporting products out of China.

Export VAT refunds have been used to keep export prices low. By increasing or decreasing the VAT refund rates the government can encourage or discourage the export of affected products. The amount of the VAT refund in many cases can mean the difference between profit or loss on a transaction and impacts the price.

In July 2007, China slashed the VAT rebates on 37% of the total classification of products. Some goods will see the VAT refund cancelled completely while others will see a reduction.

We have directly experienced the impact of the VAT reduction with one of our clients. The company is a manufacturer and marketer of printing inks. Most of the raw materials come from China. As a result, nearly all printing industry participants are implementing significant price increases in order to maintain profit margins. Many are announcing double digit increases. Industry participants are making public announcements through trade journals and the like to alert customers and, likely, competitors of their price moves.

The key for any competitor who wishes to follow is to move quickly. Response to price increases are always subjet to misinterpretation among competitors. No action on the part of any competitor may be interpreted as a move to capture share. At the very least, communicate your intentions in a legal manner that will solidify your pricing position within the industry.

Pricing Strategy courses at top 51 US Business Schools

noreply@blogger.com (Larry Robinson) — Wed, 26 Sep 2007 19:10:00 +0000

When I began teaching pricing strategy in 2003, I reviewed the elective course offerings at all 51 US business schools that had ever been ranked in the top 30 by BW, USN&WR, WSJ, or FT. The review method was to visit the web site of each business school and find the elective courses for the MBA program. If I found an entry for a pricing course I copied the course description. If there was no elective in pricing, I did a search of the web site for "pricing strategy". The result: in 2003 18 schools had a pricing course; in 2004, it grew to 23, in 2005 there were 25, in 2006 there were 27 and in 2007, there are 32.

What does this mean? It suggests there is a growing appreciation that pricing strategy is a subject worthy of study by MBA students at major US business schools. Pricing strategy is a growing area for major consulting firms, with McKinsey and Deloitte having centers for pricing consultations. McKinsey in its quarterly survey of CEOs in February, 2005, found that pricing was the area of highest concern by the executives surveyed.

Why such growing interest in pricing strategy? For many companies, it is the next frontier for spending the incremental dollar to get the best return. Pricing done well requires understanding and commitment by senior management that there is a process that can identify pricing actions that will improve profitability near term and longer term. There is a rapidly growing literature with over 1,400 articles in major journals in the past 25 years about pricing. There are now several excellent texts to use in the classroom. There are excellent case studies. There is a professional pricing society (www.pricingsociety.com) which provides a forum for practitioners, consultants, and academic researchers. Pricing is coming of age!

Welcome!

noreply@blogger.com (Ralph Zuponcic) — Tue, 25 Sep 2007 18:02:00 +0000

Welcome to the PricingPoints blog!

This new blog is focused on the rapidly developing world of strategic pricing management. Blog Managing Editors Ralph Zuponcic of PricePoint Partners and Dr. Larry Robinson of The Ohio State University’s Fisher College of Business take an active look at the theories, business and emerging culture of pricing strategy as it affects your world.

Larry is a marketing professor at Fisher College of Business at Ohio
State University where he teaches MBA level courses in marketing
strategy and pricing strategy. He has 30 years of experience in
marketing of services in financial, hospitality, and health care.

Ralph is the Managing Partner at PricePoint Partners, a strategic pricing management consulting firm located in the Cleveland, Ohio area. Ralph has experience in pricing management initiatives with Fortune 1000 and mid-sized companies. PricePoint Partners leverages pricing to improve profit margins and company value for B2B companies.

The PricingPoints blog will feature commentary on the most current pricing issues facing industry. Look for new posts on strategic pricing management in the next few days.