Wednesday, September 21, 2005

The World of Pricing: Whats Happened in the Last 12 Months?

On Thu 22nd & Fri 23rd September 2005, I am chairing the Marcus Evans Pricing Optimisation Conference here in Melbourne. The following is an extract from my Opening Remarks, which I thought would be of interest to delegates at the conference and readers of this weblog alike....

I thought I’d look back at some of the developments and milestones in the world of pricing (both good and bad) that have caught my attention since the last conference here in August 2004.

For me, the Most Important Pricing Concept to emerge in the last year has been that of The Long Tail, which is an article written by Chris Anderson, Editor-in-Chief of Wired Magazine. It is a powerful article on the ability of the internet to aggregate inventory without the limitation of shelf space, and facilitates a shift from a mass market to a niche market approach. It has many implications for the world of pricing, such as challenging the use of ‘average pricing’ and Vilfredo Paretos’ 80:20 rule. Visit The Long Tail weblog here.

For those of you who are involved in B2B pricing roles, I’d strongly recommend a read of Building Loyalty in Business Markets, by Das Narayandas, which was published in the September 2005 edition of the Harvard Business Review. The article is not about B2B pricing or any particular industry per se, but the clarity of the writing and the models presented therein are commendable.

Its always nice to find a hidden gem in the annuls of pricing research, and for me that gem of an article would have to be Shattering the Myth of Costless Price Changes: Emerging Perspectives on Dynamic Pricing, by Mark Bergen from the University of Minnesota (and others). If you don’t know how much a price change costs your organisation, or even if you do, I would recommend reading this paper

Unfortunately, pricing disasters are still occurring from time to time. The best (or should that be worst) pricing disaster that caught my attention over the last year involved Argos (a UK catalogue retailer). Over the August Bank Holiday long weekend, Argos advertised a TV and DVD £0.49 instead of £350. The company website took 10,000 orders, thousands of which had money deducted from their bank account, an error that would have cost them £3,495,100 (by my calculations) if honoured.

Like pricing disasters, price wars don’t seem to go away either. Price War of the Year would have to go to the US automobile manufacturers, Ford, General Motors & Chrysler, who over the northern summer, offered anyone employee discounts. What do these companies do next? I suspect the case studies are already being written by the business schools.

Pricing Communications Strategies appear to becoming increasingly important these days, and I know there are two delegates in the audience from this company, so I hope I have got my facts and observations correct. In October 2002, Business 2 magazine ran a feature article titled "How Ikea designs its sexy price tags". Three year on, Ikea here in Australia are mentioning in their advertisements what that article talked about: the involvement of their designers in the development of their price points. Have a read of the article and keep your eye on Ikea’s advertising and you will see what I mean.

In the category of useless bits of Pricing Trivia, there are two candidates:
- Dell Computers, who can see a change in customer behaviour literally within minutes of changing prices on their website, and;
- HP Printers: Apparently, by volume, the ink for a HP colour printer is more expensive than Vintage 1985 Dom Perignon.

I spoke earlier about the transferability of pricing. For proof, look no further than Virgin Blue, who during the year took the humble pub happy hour and put it on their website with $1 fares between 12:00 – 13:00hrs.

The pursuit of Post Merger and Acquisition pricing opportunities seems to becoming an increasingly important area of work for the pricing professional. You might have recently seem a public statement from Symantec, who recently merged with Veritas, saying it would take at least a year before the company could really see any post-merger pricing synergies. One company predominantly uses single user and site user pricing models and the other tends to use CPU-based pricing models.

And finally, what was the best book that I read over the last year? Well, the topic of Post M&A pricing is the subject of a whole chapter in The Price Advantage (by Michael Marn, Eric Roegner & Craig Zawada), which is a great resource for the pricing professional. But the book I enjoyed the most would have to be Trading Up, by Michael Silverstein and Neil Fiske. If you’re not sure what the concept of ‘Trading Up’ is all about, let me give you a quote from pages 8-9 which will probably give you a basis idea:

As consumers buy more selectively, trading up and trading down, they increasingly ignore the conventional, midprice product that fails to deliver the ladder of benefits. Why bother with a product that offers neither a price advantage nor a functional or emotional benefit? Companies that offer such products are in grave danger of "death in the middle"…unable to match the low-cost products or the emotional engagement of New Luxury goods."