Thursday, March 29, 2012

Selling goods as a service

Inventory isn’t something companies want to sit on. You want to sell it as quickly as possible and turn it into revenue – not pay for it to be sitting in a warehouse. Why not turn your unsold goods into a service?

This month, a friend invited me to opening night of an exhibition by a renowned Melbourne-based artist. As we viewed the 23 pieces on display, Bob started telling me about the artist’s business model.

I was a bit surprised to hear of an artist with a “business model” – especially one with its own three letter acronym, ICE, which stands for (seek) Inspiration, Create (the art) then Exhibit (and hopefully sell) it.

But what I found more surprising was that the artist was sitting on 300-400 unsold pieces of artwork, which they valued at $1 million. What sort of business would sit on $1 millon worth of unsold inventory?

Believe it or not, this got me thinking about aircraft engines. Rolls Royce and other engine manufacturers ceased selling them years ago, and now sell “power by the hour” service contracts.

The case for selling art as a service, to display in corporate offices and boardrooms, using a subscription pricing model, is a very compelling one.

The client can enjoy a change of scenery every three months or so, and they can expense the cost, rather than capitalise the purchase of the artwork.

In the case of the artist, they retain ownership of their artwork and the utilisation of their unsold inventory starts to generate a revenue stream, rather than a lump sum that would be earned on selling the art. Potentially, the artist could earn more revenue from “renting out” their artwork, rather than selling it.

Selling a good as a service is a great way to generate income from unsold inventory. What unsold inventory do you have lying around that you can sell as a service?

[This post also appears on LeadingCompany, 29th March 2012]

Thursday, March 15, 2012

How do you price legal services...?

Hat Tip: We would like to thank our lawyer for sending us this. 
And for the record, he doesn't charge by the hour. Thats why we use him

The Sound of Silence

Silence isn’t a sound that most leaders want to hear in the aftermath of their pitch for new business. Still, if customers don’t immediately sign on the dotted line, silence is the second best reaction. Let me explain.

I recently sat down with the managing director of a company who wanted to discuss his pricing over lunch. We chatted about things like the value he delivered, recent sales performance and the cost and frequency associated with updating his service.

Then we got to the heart of the matter. Peter had recently achieved some big wins: some of the biggest companies in his target market had taken a three-year subscription to his top-of-the-range product.

But why weren’t the other companies in his target market following suit? They had seemed impressed with his pitch and the product on offer, but they had gone quiet. That left Peter worrying that his price was too high, and maybe he should drop it.

I suggested to Peter that the sound of silence was not a reason to drop his price. In fact, the opposite is usually the case: customers won’t remain silent if the price is too high.

I suggested a different response to Peter: he should reduce the number of products in his product ladder from six to five, making it easier for customer to choose which product to buy. It was an idea that appealed immediately, and we finished our Malaysian spread with Peter in a more jovial mood.
Like that lunch with Peter, this blog is all about practical pricing advice.

It is more than just the dollars and cents; pricing can mean the difference between success and failure. It is at the heart of every company’s business model, but is often forgotten and poorly managed.

There’s going to be a lot to talk about, so hats off to the team at LeadingCompany, the first Australian media outlet to devote a regular column to the topic of pricing.

[This post also appears on LeadingCompany, 15th March 2012]

Friday, March 02, 2012

Click Here if You “Like” Behavioural Pricing

Imagine, sometime in the not too distant future, scanning the contents of your supermarket trolley. The self-service register totals your purchases to £175.25, and then asks you to scan your Facebook Card (Tesco Clubcard was wound up a couple of years before this). The electronic voice from the cash register now asks you “How would you like to pay for your £214.89 of groceries: cash or credit?”.

If recent sensationalism[1] is to be believed, this is what retailers will start to do: charge you more because you’re a Facebook fan or Twitter follower of certain companies and brands.

Retailers everywhere could be excused for paying attention. Most of them are doing it tough at the moment for a whole host of reasons which (in Australia) includes a slow down in demand, the high Australian dollar, and the exodus of consumers to online shopping sites, just to name a few.

To all the retailers reading this, we apologies for being the bearer of bad news, but we just cannot see this happening. Let us explain why:
  • What does “Liking” on Facebook really mean? It means someone has clicked a button, that's all, and probably moved on. It does not indicate a preference for one product over another, and it certainly does not involve any sort of sacrifice, financial or otherwise;

  • It assumes that companies will have an information advantage over consumers. Yes, one or two retailers may have made some gains in this area (Amazon springs to mind), but so far, the internet has been better used by consumers to find out what’s going on in marketers minds, rather than the other way round;

  • History is not on behavioural pricing’s side either. Speaking of Amazon, remember their failed DVD pricing experiment, where they tried charging customers different prices (-30%, -35% & -40%)? Consumers didn’t take too kindly to that and despite the cost being small (an average refund of $US3 paid to 6,896 customers), damage to goodwill was far greater;

  • The claim that the behavioural pricing revolution will happen this year is just over-hyped sensationalism. Airlines have taken 40 years to master the art and science of passengers sitting next to each other (and talking about the differences in fares paid

Yes, the Digital Buzz Blog did publish figures that said that the average annual spend by a McDonald’s Facebook fan was $159.79 more than a non-Facebook fan ($310.18 vs. $150.39 respectively), but it did not report that this was due to higher pricing. It could be explained by larger and/or more frequent purchases.

Retailers should not misinterpret “Liking” or “Following” as a signal to charge customers more. Nothing could be further from the truth. Behavioural Economics (not to be confused with behavioral pricing, as it has more credibility) has taught us that the pain of a loss is approximately twice as potent as the pleasure of a gain (a discount). And according to a late 2011 report from The E-Tailing Group, 63% of consumers ‘Like’ a retailers Facebook page for the possibility of getting a deal or a discount. Consumers are not going to sign up to pay more!

So what’s going to happen? We think there are a number of scenarios and implications for retailers:
  • There will be a clash of paradigms: in the one corner will be companies that continue their price-based strategy, using services like Groupon & Living Social, and making sure they have the most competitive prices in Amazon’s PriceCheck App and their ilk. In the other corner will be companies that adopt behavioural pricing technology. That's going to be a battle worth watching.

  • If and when large organisations adopt behavioural pricing technology, should small retailers (SMEs) be worried? We don’t think so. Not adopting behavioural pricing will give you a competitive advantage, but the big guys may not allow that to go unchecked for too long.

If the activities consumers participate in online results in a lighter wallet or purse, it will not be long before consumers change their behavior. The basic fundaments of pricing will be the same as they are today.