Tuesday, July 31, 2012

Are you Pricing like Dennis Denuto?

In the 1997 movie “The Castle”, Dennis Denuto (played by Tiriel Mora) was the incompetent lawyer who tried to fight the compulsory acquisition of the Kerrigan’s family home. Denuto fell into the trap of denial: the eviction goes against “the vibe”.

Many companies also fall into traps of denial when it comes to their pricing. Here are ten of the most common examples.

Pricing should be part of the product development strategy, not the go-to-marketing strategy. Better still, companies should build a product to a specific price point that customers are prepared to pay. That way, companies can be confident they are providing value.

Top-down pricing is very common: There’s a $2mill revenue shortfall on the Profit & Loss statement. Lets jack up prices”. This is a company-focused approach to pricing, not a customer-centric approach, and is fraught with danger.

Many companies adopt an across-the-board approach to price changes, both increases and decreases. This ignores differences in demand, value and customers segments. As a result, this approach often leaves money on the table.

Cost-plus pricing is a sub-optimal approach to pricing. Not only does it ignore demand, customers don’t pay you because of your costs, they pay you because of the value you provide them.

Many companies assume their competitors are company A and company B. The reality is often different: customers’ consideration set may be far wider than just two competitors.

Companies that take a narrow perspective of the competition tend to price to the general level of the competition. This is often at the detriment of specific customer segments, which may be prepared to pay more for a product or service

Companies often move prices based on gut feel, intuition or sales force feedback, all of which are qualitative. While there is a role for qualitative feedback and research, it’s probably not as important as hard numbers and quantitative analysis, research and feedback.

So many companies always do a certain price change (5%, CPI) at one particular time of the year (often at the start of a new financial year). Unless you are in (say) a regulated market (like health insurance), you should be looking to review and change your prices anytime your market conditions change, or your value changes, just to name just a few.

Scenario modeling is great: it tells us what outcomes are attractive. Unfortunately, it doesn't necessarily tell us which of the assumptions are valid.

Believe it or not, you occasionally hear this. You run a business and customers are free to choose whether to buy your product or not. However, if you link your price increases to changes in value, communicate and execute price changes accordingly, customer will continue buying from you.

Following these ten simple steps will ensure you’re pricing more like Lawrence Hammil than Dennis Denuto.

[This post also appears on LeadingCompany, 2nd August 2012] 

Wednesday, July 18, 2012

Newspapers, Pricing and the Digital Age

With the possible exception of titles like The Wall Street Journal, The Financial Times and The Economist, newspapers all around the world, including Australia (as recent announcements attest to), are struggling with the transition to digital publications. Can smarter pricing help?

Here are 10 pricing initiatives that publishers might like to consider:

  1.  Standardisation of Ad Sizes: Make it easier for advertiser to buy (and sales reps to sell) advertising solutions (not products!) across different mastheads in different geographic markets.
  2. Improve Bundling: Standardised ad sizes makes it easier to bundle across print publications, but print advertising products should also be bundled with online product to assist in the migration of print-only advertisers to digital platforms.
  3. Paywalls I: There is no “gold standard” paywall model as yet: the model used by The New York Times is different from the model used by The Times of London. The success of any publishers’ paywall will be a function of understanding its readership and offering choice. Some readers will be ‘news hounds’ interested in food and wine. Others will be sports fans that keep an eye on the real estate market. Let subscribers pick-and-mix what content they subscribe to.
  4. Paywalls II: Offer corporate subscriptions. How much website traffic comes from employees getting a news or sports fix during a lunch break or, more importantly, researching work-related stories online during business hours?
  5. Invest in Tablets: Advertisers are now accepting higher advertising prices for tablets, vis-a-vis website advertising, or even paying to sponsor tablet apps. Readers are directed towards the Intelligent Life iPad app, which is not only sponsored (recently) by Credit Suisse, but also makes engaging use of audio and video for advertisers.
  6.  Diversification: The “rivers of gold” from classified advertising are never going to return, so digital publishers need to be leaner and meaner. It will take multiple revenue streams to start making a dent in the hole left by the ‘rivers of gold’ and become a successful digital business. Publishers should consider launching online radio & TV stations, for example.
  7. From Content to Services: Part of that diversification strategy may involve a change in mindset, from being a content provider to a marketing services company. Just done a feature story on the hottest travel destination in Asia, or review a fantastic Shiraz from the Barossa Valley? Let the reader click through and the purchase the product, clipping the ticket on the way.
  8. Manage Print Format Changes Carefully: The Times of London increased its circulation by 2% - 3% after changing to a tabloid. It put its cover price up £0.05p to £0.60 in Sep 2005. Sales of The Independent increased 15% - 20% after going tabloid, but McKinsey’s estimate 20% of advertising revenue is put at risk with a format change. Research advertisers’ and readers’ expectations carefully. Sure, it’s easier to read a tabloid paper on a crowded train (improved value) but does a full-page ad in a tabloid have the same value to an advertiser as a full-page ad in a broadsheet?
  9. Magazines are Weathering the Storm: If worse comes to worse, consider converting to a magazine. Magazines are inspiring, and often carry aspirational (and thus expensive) advertising.
  10. Consolidate Subscriber Database: Many publishers already have disparate databases of subscribers…to their e-newsletters, property alerts, even dating sites in some cases. These should be consolidated and analysed to come up with highly targeted offerings to an already engaged audience…and not forgetting those who still get the local newsagent to home deliver a newspaper.

In the late 1990’s, Kodak enjoyed margins of around 50% on its film products, sales of which were still growing at 14% pa. But in 2000, digital photography became mainstream almost overnight. Kodak’s subsequent strategy focused on, inter alia, three main businesses of Consumer, Health & Commercial. Margins subsequently stabilised at around 30%, but not enough to stabilise Kodak itself. The reinvention of newspapers in the digital age must include a focus on pricing.

Declaration of interest:
The author has been a subscriber to The Economist for over 15 years, but apart from reading the photo captions, has not read a single copy of the newspaper for the last six years. He listens to the audio edition on his iPhone religiously though!

[This post also appears on LeadingCompany, 19th June 2012]

Wednesday, July 04, 2012

What Price Do You Put on Executive Mental Health

What price does a Leading Company put on the mental health of one of its executives?

Mental health problems are estimated to cost the Australian economy about $4.3 billion a year, of which $1.4 billion is estimated to be lost through lost productivity. Fortunately, 40% of this burden can be avoided through early detection and intervention.

A group of Melbourne psychologists and businessmen have recently formed a company called the Institute of Performance and Wellbeing, which offers a range services called “Check Up from the Neck Up”, to detect and remedy executive mental health issues.

One of the services involves an executive completing an onsite questionnaire, which is followed by a one-hour assessment by some of the most reputable and well-known psychologists in the business (including Dr. Michael Carr Greg and Dr. Simon Kinsella), as well as the provision of a written report, recommendations and a discussion forum after this assessment.

Unsure of what to charge for the service, they asked the experts at PricingProphets.com, and the results provide great insights into how to price on the basis of economic value. In this case, the economic value is provided to clients in the form of risk minimisation. Other sources of economic value can come from increasing the clients’ revenues or reducing their costs.

Using hypothetical numbers and a simplistic example, lets take an executive who is on a $500,000 salary, and assume that the costs associated with that executive having a mental health problem is 5% of that figure (or $25,000). If the early detection of a mental health issue reduces this cost by half, the value delivered is $12,500.

Companies that employ value-based pricing will typically share such value with their client. If the Institute chose to share the economic benefit with the client on a 50:50 basis, then it’s pricing for the service would come in at $6,250.

From here, its very easy to create a sales tool or tablet app that allows the vendors’ client to vary assumptions, such as executive’s salaries, the costs associated with a mental health issues, and so on.

And lets not forget that if the pricing of the service is based on executive’s salaries, there is only one way revenue is going to go: up!