Saturday, December 15, 2012

Pricing in 2012 and Thoughts for 2013

Let's face it, Pricing is not sexy. Ask a marketer, what would they rather have on their CV: credit for an award winning advertising campaign, producer of a YouTube promotional video that went viral, account manager that helped launch a clients’ beautifully designed product with revolutionary new packaging, or the person who set the price of a product or service?

When the iPod first came out, it was so expensive, some people thought it was an acronym for Idiots Price Our Devices: not exactly the claim to fame marketers want on their CV, and for that reason, I guarantee that any marketer would prefer to have any of the other above-mentioned accolades on their CV, rather than ‘price setter’.

Many marketers consider pricing a cure for insomnia. It involves numbers, math and formulas like 'price elasticity' that will drive anyone to sleep. After all, you can't control pricing, can you? You can only charge what the competition is charging, or "what the market will bear". 

Pricing is the coalface of marketing, where the buyer exchanges money for the benefits received, making Pricing the only P in the marketing mix that generates revenue: the other P’s generate costs. Yes, it may be un-sexy, boring and involve numbers, but getting it right can mean the difference between profit and loss.

Before we look at why pricing will be the “P” that rises to the top in 2013, lets reprise some major pricing milestones over the last year or so.

Pricing in 2012
Three American companies epitomise the world of Business-to-Consumer (B2C) Pricing in 2012: Netflix, JC Penney and Apple.

In the (northern) summer of 2011, Netflix tried to separate its DVD rental and video streaming business in two (a subscription to which cost $9.99), attempting to levy a separate ($7.99) subscription charge for each.

In the world of social media, customers don’t tell you they dislike your prices anymore: they tell everyone they know instead, and vote with their feet. Within days, Netflix had received 82,000 hostile comments on its Facebook page, lost 3% (800,000) of its subscriber base and its share price fell from a July 2011 peak of $299, to $130 on the 25th September. Not a pretty picture.

By early 2012 however, the picture was not as bad as it first appeared. Although the share price has not recouped all its losses, the 800,000 subscribers lost were actually half that amount (the 800,000 figure had included free subscribers). More importantly, revenue per subscriber was up 11.9%, quarterly revenue was up 10% and profit contribution had risen 15.4%. Some commentators started calling CEO Reed Hastings a hero, rather than a villain, pointing out that the price changes need to be evaluated over the long term, not the short term.

It is for this reason that it maybe too early (just yet) to evaluate what is shaping up to be the worlds biggest price change in 2012: that initiated by former Apple executive Ron Johnson at JC Penney. Johnson decided that “Fair and Square Everyday Pricing” would be rolled out across JC Penney’s 1,100 stores that had wafer-thin margins, thanks to 75% of stock being sold at an average of 50% off. The initiative also involved the elimination of coupons as well as the 590 ‘sales’ that were held in 2011.

“Fair and Square Everyday Pricing” meant three types of prices: ‘Everyday Prices’ (typically 40% off), ‘Monthly Values’ for events like back-to-school and Valentines Day, and ‘Best Prices’ for clearance items. The jury is still out on the success or otherwise of this change, but early signs are not positive: JC Penney’s shares fell 18% after it announced its first quarterly results after the price change, same-store sales fell by a similar amount, and footfall fell by 10% as customers reportedly miss the thrill of finding a bargain.

Meanwhile, demand for consumer technology products shows no sign of slowing down, and the share price of Johnson’s former employer, Apple, went into the stratosphere in 2012 (it has since come back to earth a bit). There is no doubt that this is the result of innovative, beautifully designed and functional products, but also a finely tuned and well-executed pricing strategy. When was the last time you saw an Apple product discounted?

The lessons for Australian companies are ominous: social media can kill you (Netflix), understand and listen to customers (JC Penney) and sensitise customers to value, quality and innovation, rather than price (Apple).

Australian companies have also had their own unique pricing challenges in 2012. The carbon tax arrived, and the ACCC monitored dozens of carbon tax –based price increase, the most infamous of which cost the CEO of a bakery his job. And retailers are under siege on many fronts: the GST tax-free threshold, the strength of the Australian dollar, and the rapid growth of online shopping to name a few.

So What’s in Store for 2013?
Demand for products and services in the US and European economics has ground to a halt (although there is evidence that the former is rebounding). This is rubbing off on the Chinese economy, where many of those products and services are manufactured. This in turn, will affect the Australian economy, whose companies either power or provide raw materials for the factories in China that make those products and services.

Australian companies will be forced to take a good hard look at their Pricing in 2013, not only because it is shaping up to be a tough year, but because price optimisation is more profitable than business process re-engineering, cost reduction initiatives or selling more products.

Challenges and opportunities will be found throughout the value chain:

1.      The War Between Pricing & Procurement Will Continue
For many years now, companies have been more concerned about the price they pay for products and services than the price they get for their own products and services. Anecdotal evidence from companies who attend my pricing workshops suggest 80% - 100% of companies have a purchasing or procurement department, but less than 20% of companies have a department dedicated to Pricing.

As a starting point, Pricing, Sales and Marketing professionals need to spend time with their own Procurement departments, understanding their mindset and the tools that they use, as a step towards developing counter-procurement tools and strategies.

2.      Pricing Opportunities will be found in Big Data Projects
The days of across-the-board price increases are gone. The opportunities lie at a segment, sub-segment and increasingly at the individual customer level. And the only way companies are going to identify these opportunities is by mining through megabytes and megabytes of data, looking for the meaningful rather than the mean, and finding differences rather than similarities.

3.      The Subscription and Service Economy
More and more products that were previously sold on a transactional basis are now being sold on a relationship basis utilising a subscription (sell once, renew many) pricing model. This includes DVD rentals (Quickflix, Netflix), car rentals (Flexicar), music (Spotify) and numerous technology products adopting the Software as a Service (SaaS) model. Even razor blades are being sold via subscription by

Expensive capital goods are also being sold as services. Rolls Royce, Pratt & Whitney and the like have been “renting” aircraft engines to airlines for many years. Xerox, Cannon and others “rent” photocopiers to corporate clients. Orica no longer sells explosives, but rather “rock removal services”.

The benefits of selling services are numerous: services are difficult to commoditise, margins are higher, retention of ownership, and the client spends OpEx rather than CapEx. Expect this trend to continue, and proliferate, in 2013.

4.      Usage of Pricing Competitive Intelligence Tools
Online shopping is rapidly approaching 5% in Australia, 10% in the US and almost 20% in the UK. Retailing will become more and more cut throat, and the competition can be on the other side of the street or the other side of the world.

As more and more consumers make price-based purchasing decisions, remaining competitive on price will mean the difference between smaller profits or losses for many retailers, large and small. Online Pricing competitive intelligence tools & platforms will become firmly entrenched in many retailers’ arsenal but sadly, some retailers will use these tools the wrong way, contributing to their own demise.

5.       The Role of Social Media in Pricing
What, if any role, social media plays in Pricing will become a bit clearer in 2013. Early in 2012, there was some irresponsible scaremongering about the concept of “behavioural pricing”, whereby Facebook fans and Twitter followers would be asked to pay more for goods they liked or followed.

Amazon tried something similar to this in 2000, when they charged different customers different prices (-30%, -35% and -40% off) for the same product. Customers didn't take too kindly to this, and despite the cost being small (an average of $US3 being refunded to 6,896 customers) the damage to Amazon’s good will was far greater.

More interesting are developments at C&A in Brazil, where products are hung on coat hangers that show the number of likes the garment has had on Facebook (assuming the garment is on the correct coat-hangar).

6.      The Beginning of the End for Behavioural Economics?
Marketers have certainly learned a lot from Behavioural Economics (BE) over the last 30 years. With a fairly robust set of heuristics now firmly established, I wouldn't be surprised if BE provides marketers with a new, third generation approach to market segmentation.

But I also believe cracks will start to appear in BE, the first of which involves trust. Why would I accept a ‘nudge’ in the direction of a particular products or service, whether its offered by a bank or a government, if I don’t trust them?

Technology may also start to undermine BE. Imagine a smartphone app that, upon scanning a products’ barcode, tells you whether you should buy it on cash or credit, which bank account or credit card to use (talking into account overdraft limits and interest rates), and what your loyalty points balance will be after the transaction has been completed? Technology will provide the rationale for those irrational decisions consumer had been making.

Some of these developments are already underway, and some may never happen. But as Bill Gates once said, we tend to over-estimate what will happen in the next two years, and under-estimate what will happen in the next ten years.

Wednesday, December 05, 2012

Finding the Pricing Sweet Spot

Is $NZ 1.8m a 'pricing sweet spot"?

In my last column, A Pricing Lesson from Richard Gere, I mentioned that the most frequently asked question I was being asked during a series of in-house workshops was “How do we know we’re charging the right price?”

As my roadshow for this client rolled into Auckland this week, an attendee told me how he thought he’d found the perfect price for a product he’d launched a couple of years ago with another employer.

He described five textbook steps that contributed to the products success in achieving New Zealand market share dominance.

Step 1: Understand the buying process. The product in question here was a domestic building product, and just as important as understanding who the key participants in the buying process are, it is equally important to understand the relationships between the players and their value drivers.

For example, architects are interested in great looking (hopefully award-winning) designs, so aesthetics may be a more important value driver than structural integrity, which is important to Engineers. Builders, on the other hand want a product that's is safe, easy and efficient to work with. And homeowners and landlords are obviously the ones paying the bill.

Step 2: This involves understanding not only your own product, but also critically, the competitor’s products. Ask yourself the following three questions:

(a)  What are the points of similarity?
(b)  What are the points of difference?
(c)    What are the points of contention?

Step 3: This is the logical extension of Step 2 above: once you know and understand the value proposition of your product, vis-à-vis the competition, quantify it. Typically in B2B markets, that value can come from one or more of the following three sources:

(a)  the product increases your customers’ revenue;
(b)  the product reduces your customers expenses, or;
(c)   the product minimises your customer’s risk.

In the case of this particular product, because its useful life was twice as long as anything else on the market, the product reduced the buyer’s risk and saved them money. Sales reps were trained in not only communicating the value proposition, but also how the economic value had been quantified in the process of setting the price.

Step 4: Start from a position of strength. In communicating the economic value provided (e.g., we help to reduce your expenses), it is always best that sales reps start from a position of strength. In the case of this home building product, there’s no point discussing how the product reduces expenses until the benefit that accrues from risk minimization is explained to the customer.

Step 5: Finally, wear your heart on your sleeve. Once this building product was fixed to a house, so too was a badge that said the product is guaranteed to last for 25 years. Not only does this reinforce the value proposition, and help justify the price tag, it was highly valued buy new homeowners or landlords when the property later changed hands.