Thursday, May 24, 2012

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Wednesday, May 23, 2012

Believe it or Not, Pricing Needs Procurement

Every time I conduct a pricing workshop, during a tour de tables, I ask delegates amongst other questions whether their company has a Pricing department and whether their company has a Procurement department. The answer is typically 80% - 100% of companies have a Procurement department, but 20% or less have a Pricing department. What’s wrong with this picture?

The logical conclusion is that, very simply (and sadly), most companies are more concerned about the price they pay for goods and services, rather than the price they get for their own goods and services.

Any Leading Company operating in a B2B (Business-to-Business) market will, if they haven’t already, find themselves pitching a sale to a Procurement Manager. Here’s what you can expect:

·       All Procurement or Purchasing Managers are known as “Commodity Managers” and everything they buy is a commodity;
·       They will try to find out how your sales rep earns their commission;
·       Expect to see posters, and articles on competitors amongst the magazines, in the waiting area, as well as the commodity manager drinking from a competitors coffee cup during the meeting;
·       They never accept your first offer, tell you your competitors product, service and delivery is better that yours, and they never pay more than $X for the product you’re pitching to them.

Once the psychological games are out of the way (and the list above barely skims the surface), then the real fun and games begin.

The commodity manager is going to insist on “open-book costing” where, as the name suggests, suppliers must show the buyer how they price their products. They can then pull out the ‘Procurement Managers Toolbox’ and conduct overhead analysis, break-even analysis, look at marginal costings, total absorption costing, purchase price cost analysis, cost transparency and the total cost of ownership.

Round about now, your sales rep is slumped in her chair, feeling three feet tall and has probably given away 10% - 20% in price concessions. On the other side of the desk, the commodity manager knows her job is safe for another month and she’s going to get the kudos of getting the best price ever out of this supplier.

So why, if most or all companies have their own Procurement functions, are Pricing and Sales not better prepared for these discussion? Good housekeeping needs to start at home. Pricing Managers and Sales reps need to spend time with their employer’s Procurement managers, observing and developing counter-procurement strategies.

That's why Pricing (and Sales) need Procurement.

[This post also appears on LeadingCompany, 24th May 2012]

Sunday, May 13, 2012

Pricing: 10 Reasons to be S*** Scared

Here's the latest, MUST SEE edition of "Ten Things" 

"Ten Reasons Why You Should be S*** Scared of Pricing!"

To watch more episodes of "Ten Things", head over to PricingProphets TV on YouTube

Friday, May 11, 2012

Does Your Pricing Stink?

Last week, I was in Shanghai delivering some in-house and public workshops on value-based pricing. As the name suggests, time in the workshop is devoted to identifying the economic value provided by a company’s products or services.

One of these workshops was for a company that sells fragrances. Sounds like a pretty tough gig doesn’t it – how does this company price and sell something as intangible as a fragrance on the basis of its economic value?

It wasn’t that long ago that the most we knew about our sense of smell is that it is remembered longer than the other senses, and that 75% of human emotions are based on what we smell. But that's hardly a basis for pricing what is usually an ingredient in a recipe for a product on the basis of the economic value it provides.

Fortunately advances in, and new avenues of, market research now help not only with pricing fragrances on the basis of economic value (in both consumer and business markets) but also in changing behavior, including getting your customers to spend more, in a retail environment.

One UK Government agency has seen a noticeable decline in conflict and aggressive behaviour when they piped lavender into a room where people waited to pay fines.

In-store fragrances result in customers lingering longer in stores, and customers’ perception of the quality of the products and services on offer also improves. One shopping mall in the United Sates has increased average spend per customer by $US50 - $US90 by using fragrances.

Brand-specific research has found that customers have been prepared to pay $10 more for a pair of Nike shoes when they tried them on in a floral scented room. And businesses that have piped the cool feeling of peppermint into offices have saved 20% in air conditioning costs.

Fragrances are not the only commodity-like products with seemingly intangible benefits. With a bit of research, it is possible to identify the economic value of a product. And you won't have to worry next time a customer tells you your pricing stinks.

[This post also appears on LeadingCompany, 10th May 2012] 

Red Tent Radio Interview

I've just been interview by Ludwina Dautovic on Red Tent Radio. You can subscribe to Red Tent Radio via iTunes or you can listen to it here

Jon Manning
Founder & Managing Director,

Tuesday, May 01, 2012

Which way to the bank that accepts a deposit of market share?

Is there “pricing logic” behind the current price war being fought between Coles & Woolworths?

Pricing theory tells us that there are three situations where a price war may make sense, none of which support the strategies pursued by the two supermarkets.

Price wars make sense when there is a ‘format’ on the line. Sony’s Blu Ray technology won the format war against Hitachi’s HD-DVD when the former dropped prices aggressively. There is no format war in Australian supermarkets: with the exception of Coles at the Melbourne Showgrounds, they all make you walk to the back of the store to get the milk.

The second situation is where there is an opportunity to pick up significant volume or customer numbers at a “trigger” price. This happened in the broadband price war of 2004, when Telstra dropped prices to $29.95. Everybody has milk today, whether it’s at $1 a litre or $2 litre, but only 500,000 households had broadband Internet access back in 2004.

The third situation where price wars make sense is where one competitor has a distinct cost advantage over another. In India several years ago, Bajaj Auto started a price war with Hero Honda, knowing that regardless of the latters selling price, they had to send a fixed price royalty payment back to Honda in Japan.

So is the only logical conclusion we can draw from the supermarket price war, from a pricing perspective, is that the winners are the customers, and it’s all about market share?

Sadly, there is no bank in the world that accepts a deposit of market share. And while consumers may be the winners in the short term, the same cannot be said about the long term.

In his 2004 book The Paradox of Choice, Barry Schwartz found his local supermarket stocked 175 different salad dressings, 275 different breakfast cereals, and 360 different hair products (shampoo’s, conditioners and the like).

This paradox of choice is already starting to disappear from Australian supermarkets: Greenseas Tuna and Victoria Bitter has already disappeared from some retailers’ shelves.

The suppliers that survive may be forced to cut out the middlemen and sell direct via farmers markets for example, the number of which have doubled since 2004.

And as a keynote speaker warned at the recent National Sustainable Food Summit, artificial food factories may replace those suppliers that don’t survive. And then we’ll be wondering what everything we eat is, not just chicken nuggets.

[This post also appears on LeadingCompany, 26th April 2012]