Last week (29th Aug 2012), I was interviewed by Business Essentials for their monthly audio CD. There will be an audio recording in the PricingProphets Press Room soon, but in the meantime, here's a transcript of the interview...
Jon, you say that many
businesses fall into “denial” traps when it comes to pricing. Is it because
pricing is part art, part science and actually pretty hard to get right?
Those three
reasons you’ve mentioned are all factors. But in addition to that there are a
number of other explanations….
a)
Some companies don’t even consider the art vs. science debate.
Pricing is seen as a cost recovery exercise
b)
As a result, many companies think they can only charge what the
market will bear. That's a sign that companies don’t understand and communicate
the value they deliver, and finally;
c)
Some companies think pricing is easily reversible, so if they put
prices down, they can easily be raised again later on
Business is hard,
retailing is very hard, and there are discounts everywhere. In this sort of
business environment, isn’t it particularly difficult not to follow the herd in
reducing prices?
In some
product market, there is no doubt that's the case. Particularly in consumer
markets, customers love a bargain, just as much as the hunt for that bargain. What
this means is that companies need to look not only at price optimization, but
also discount management and containment, omni-channel retailing strategies and
differentiation on the basis of non-price factors such as quality, service,
availability and after-market sales and support.
To keep our pricing
strategies on track, you’ve come up with a list of 10 things to avoid in our
pricing. The first no-no is using pricing as a go-to-market strategy. What do
you mean?
Its amazing
the number of companies that go through a huge product development process, and
then when they get to the end of that process, and they are just about to
launch, they work out what price they should charge. This is not the best way
to do pricing.
A better
approach is to actually start with pricing. Ask customer what price they are
prepared to pay for a product of service, and then build a product for that
price point. This way, pricing is a forethought, part of the product
development process, and there is a much greater likelihood that the company is
providing value with a product that will sell.
Then,
using pricing to fix a profit and loss problem in your business?
This is very
common: We’ve got a $1mill hole in the budget, lets fix it with a price
increase. Unless that price increase is based on an improvement in value, this
approach is company-focused, rather than customer centric, and is unlikely to
succeed.
You also tell us that we
should always avoid an across-the-board approach when it comes to adjusting our
prices. Why is that bad strategy?
Well, most
companies sell more than one product. Across-the-board price increases often
leave money on the table, as some products will be in greater demand, provide
greater value, and can support greater price increase. Yet that value is being monetised
by an average price increase across the entire product portfolio.
You’ve warned us before
about cost-plus pricing. This is another item on your list. Tell us again why
we should avoid it?
Quite simply,
customers don't buy from you because of what it costs you to manufacture a good
or provide a service. They buy from you because of the value they receive. It
is easier to defend a price point based on value, rather than costs.
Then there are dangers
about making assumptions about competitors…or following their lead on pricing?
Indeed. Many
companies have a very narrow competitive set, when in fact, customers’ choices
are much wider. Unless you’re selling a commodity product, there’s a fairly
good chance your product is an apple, a competitors product is an orange, but
there are other varieties of fruit that customer can substitute apples and
oranges for.
What about gut instinct
on pricing…isn’t there space for that in working out your pricing?
Yes there is,
be that intuition, sales force or customer feedback. But just as important,
maybe more so, is hard numbers and quantitative analysis, of historical sales,
demand for compliments and substitutes, economic data and so forth.
Many businesses look at
price changes at regular points in the year, eg 1st July every year.
What’s wrong with that?
The problem
with this approach is that market conditions don’t change on the1st of July
every year: seasonal demand patterns over Christmas or summer may not be clear,
competitors don’t always launch on the 1st of July. The fact is
that, unless you are in a highly regulated market, any sort of change in market
conditions should prompt some sort of pricing review
Then, there’s scenario
modeling. Isn’t that quite a good idea?
There’s
nothing wrong with scenario modeling. In fact it is to be commended. Where I
see companies in denial is they like a certain scenario because it delivers the
outcome they are seeking without any due diligence on the likelihood of those
scenarios materialising
And finally, do
companies really say price changes are “unfair on customers”?
Believe it or
not, you occasionally hear companies say we can’t increase prices because it is
“unfair on customers”. 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
effectively, customer will continue buying from you.
So those are a lot of
don’t’s, with some alternative strategies that will work much better for us and
our businesses. If there’s one standout message about pricing, though, what
would it be?
Pricing is
getting really scary for a lot of companies and industries, whether due to the Internet
and online retailing in consumer markets, or powerful procurement departments
in business markets. In both types of market, companies need to change their
mindset from an internally, cost-focus approach, to a customer-centric,
value-based mindset.