Monday, August 27, 2012

Increase Prices with Confidence

A couple of years ago, I was fortunate enough to work with one of smartest and most entrepreneurial women I have met. She had launched her start-up business with what seemed to be the right pricing model at the time, but it had its flaws.

The service involved renting out an asset to its customers on a pay-as-your-go basis. But when the product was not “rented out”, it was still running up expenses: insurance, deprecation and the like. The legacy pricing model did not recoup these costs, and to correct this, every single customer was going to be asked to pay more.

The pricing was easy to fix: lower the usage charges and apply a subscription fee to recoup the costs incurred by the assets. But as with all companies, large and small, the biggest challenge was in the execution, and how to communicate the price change to customers.

All new customers would be put on the new price plans with immediate effect, while a personalised pricing communications strategy for existing B2C and the B2B customers was devised. Existing B2C customers would be sent a personalised email explaining the magnitude of the change, why the change was necessary and the objectives of the price change (the proceeds would be reinvested back into the business).

B2B customers received a personalised visit from the sales manager, who communicated the same message. Both the email and the face-to-face visits all concluded with the same message: “We understand if you wish to take your business elsewhere”.

The company did not lose one single customer. The well-executed pricing communications strategy worked, and within 12 months, revenue and customer numbers were up 20%.

Have the confidence to increase prices if you need to. With a well executed and disciplined pricing communications strategy, you may be surprised not to lose a single customer

[This posting also appeared on the Motivating Mum blog, on the 10th August 2012]

Cash Flow -Friendly Pricing Models

Early in August I had the pleasure of being a panelist at the NAB Small Business Summit in Melbourne. Along with a taxation specialist and a management accountant, our topic was “How to Best Manage Cash Flow”.

My contribution to the topic was that pricing is preventative medicine for cash flow. Get your pricing right, and you have the type of cash flow situation you want (a healthy one), but getting it wrong can be a contributor to cash flow problems.

There are a number of pricing models that are more cash-flow friendly than others:

Subscriptions: The world is moving towards a subscription economy, in both business (B2B) and consumer (B2C) markets, particularly for services. Look at companies like Flexicar and Quickflix (in Australia), and Zipcar and Netflix, the overseas equivalents. Spotify, and many Software-as-a-Service (SaaS) companies also fall into the same category.

The beauty of selling subscriptions are numerous, including the ability to “sell once and renew many”, lower perceived price points, greater segmentation opportunities and revenue that forms an annuity, rather than a lump sum payment.

Rentals: Companies selling tangible goods can achieve the same result as service providers offing subscriptions by renting out their products. Most companies don’t buy photocopiers any more: they rent them.

In addition to the advantages associated with subscriptions, further advantages of this pricing model is the ease with customers can be upgraded to new and improved models when they are released, as well as retention of ownership.

Goods Sold as a Service: A hybrid model, between subscriptions and rentals is to sell a good as a service. Those engines on the wings of airplanes have not been purchased by the airline you’re flying with. They are operating on “power-by-the-hour” contracts, with the airline paying for their use when the aircraft is in the air and earning the airline revenue. Likewise, Orica not longer sells explosives: it sells a ‘rock removal service’.

Link Pricing to a Value Metric: Often, the above-mentioned cash flow –friendly pricing models are non-linear, or have two or more parts. Subscriptions can be accompanies by usage charges. Photocopy rental agreements often comprise a rental fee as well as a cost-per-page price.

Ideally, these linkages should be to a value or usage metric that is going to grow within your customers business, thereby growing your revenue. If airlines fly more hours, then Rolls Royce earns more revenue. Just be aware that the converse may also apply.

There is one other benefit associated with these pricing models that illustrates why pricing is a holistic, business-wide initiative. Such pricing models can be easier for your sales force to sell, as they often become OpEx, rather than CapEx spending for clients.

Can you afford not to have a cash flow –friendly pricing model?

Tuesday, August 14, 2012

The Warren Buffet School of Pricing

My last column ("Are you Pricing Like Dennis Denuto?") seems to have resonated with many readers of Leading Company, if the emails I received are anything to go by. As an interesting juxtaposition, in this week’s column, I thought I’d take a look at five of my favourite and most powerful pricing quotes, three of which come from the one person.

“There is no bank in the world that accepts a deposit of market share”
Regular readers of this column will recognise this quote (which I have to attribute to ‘Anon.’) as the title of a column I wrote several months ago on price wars. Heavy discounting and price wars are a great way to win market share. And according to the Margin Media blog, M&Ms, Quicksilver and UGG were the most liked Australian brands on Facebook in July 2012, but banks won’t accept deposits of their respective 2.8m, 2.1m or 1.4m likes.

Banks will only accept deposits of cash, and Leading Companies maximise that cash via smarter, value-based pricing strategies.

 “Price is what you pay, value is what you get”
This is one of two quotes that have probably acquired pricing folklore status, the other being Oscar Wilde’s famous quote, “A cynic is a person who knows the price of everything and the value of nothing”.

The most important of these ten words of wisdom from Warren Buffet is the last word: ‘get’. Many companies think value is what they give, but companies do not determine the value their customers receive. Value is in the eyes of the beholder.

“The single most important decision in evaluating a business is pricing power”
On the 26th May 2010, the bi-partisan Financial Crisis Inquiry Commission (FCIC) interviewed Warren Buffet as to the causes of the financial crisis. When questioned about his investments in Dunn and Bradstreet and Moody’s, Buffet, who does all his own analysis and makes his own investment decisions, replied that the single most important decision in evaluating a business is pricing power.

“If you have to have a prayer session before raising a price by 10%, then you’ve got a terrible business”
Buffet’s next two sentences, the first of which is the quote above, provided some insight into what he actually meant by ‘pricing power”. The last thing a company wants to do before raising prices is to have a prayer session hoping the increase sticks. A company that has the power to raise prices without losing business to a competitor has a very good business. So how do you get this pricing power?

“Perhaps the reason price is all your customer’s care about is because you haven’t given them anything else to care about.”
This quote from marketing guru Seth Godin provides some insight into acquiring pricing power. This quote beautifully sums up a self-fulfilling prophecy: if all you talk to customers about is price, that is all they will care about.

Apple doesn’t talk to their customers about price. They talk to them about the brand, the products, their style and the functionality. As a result, they have densensitised customers to price and sensitised them to value. The evidence is in 2004 research which found that only 2% of an Apple buyers’ purchase decision was driven by price, compared to buyers’ of Packard PC’s, for which price represents 50% of the purchase decision.

Hopefully, these quotes inspire you to price more like Warren Buffet than Dennis Denuto.

[This post also appears on LeadingCompany, 16th August 2012]