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Jon Manning

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]

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

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, PricingProphets.com

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]

10 Pricing Lessons from Cartoons

Wouldn't you know it. As soon as I upload "Ten Pricing Lessons from Cartoons", I find another great pricing -related cartoon.

The Deer Have Now Got Guns

The French have always loved their food. So its hardly surprising that rising food prices, amongst other factors, contributed to the French Revolution of 1789 -1799. Several decades later, a Frenchman started another, less well known revolution: a pricing revolution.

Louis Auguste Boileau was a retailing visionary, many years ahead of his time. He had a vision of a social retailing experience for the women of 19^th century Paris, and engaged Gustave Eiffel to build the world’s first department store, Bon Marche.

There were two other things that were revolutionary about Bon Marche. Boileau decided that the goods for sale would no longer be kept behind a counter. They would be spread out across the shop floor so women could handle the goods and think they were ‘within their grasp’.

This made it difficult for sales assistants to say to customers “you can’t afford that, have a look at this instead”, which had previously been the practice. Boileau solved this problem by putting the price on each article, creating the price tag. Frank Woolworth and Aaron Montgomery Ward (inventor of the mail order) loved the idea of price tags so much, they introduced them in America shortly thereafter.

It’s unclear whether these two initiatives lead to the development of “vanity price points” (e.g. FFR 9.95), but it is possible.  One of the reasons for the popularity of such price points is the audit function they perform: the shop assistant has to give the customer change, rather than just slipping a 10 franc note in their pocket.

Today, there is a new revolution in retailing: the Internet. At the moment, customers are better at harnessing its powers against retailers, than retailers are against customers, with what I call “the deer have now got guns” syndrome.

The ‘guns’ shoppers are using include price comparison websites, and smart phone and tablet apps that let them find and buy the cheapest products online. Retailers are still working out how to respond to this.

From a pricing perspective (and pricing is not the entire problem), a good place to start would be for retailers to take a leaf out of their customer’s books and embrace technology. This would include apps for sales floor staff, linked to CRM (Customer Relationship Management systems), and price-setting technology which has been around for many years now.

But it could also include a new breed of pricing technology that has taken off in the last two years, that of competitive price intelligence and monitoring platforms, such as that offered by the likes of UpstreamCommerce.

Retailing is looking for its next Boileau. Fighting fire with fire is one place to start.

[This post also appears on LeadingCompany, 12th April 2012]

The Beer on the Beach Experiment (Re-visited)

By Greg Eyres, Consulting Director at PricingProphets.com

In the 1980’s or 1990’s (I can’t remember which), the Chicago University –based Behavioural Economist Richard Thaler conducted what has become known as the “Beer on the Beach” price experiment.

He asked participants in the research how much they would be prepared to pay for an ice cold beer purchased from a run-down corner store at one end of a beach, and what they would be prepared to pay for an ice cold beer from the upmarket hotel at the other end of a beach.

As you would expect, participants were prepared to pay more when the beer was purchased from the latter, vis-a-viz the former. But as I discovered last week, this is not quite what happens in Fiji.

I was staying at a 3.5 star resort on one of Fiji’s many islands.  Very much marketed as a family resort, it offers just about everything a family could want.  It sits on a bay with spectacular views from the bar and restaurant. Most importantly, it offers a Kids Club where the ankle-biters can enjoy time away from their parents. 

At the other end of the bay is another resort that is much more marketed to couples and honey-mooners.  It is a 4 star resort that again offers spectacular views of a tropical paradise.

A glass of the house wine at the 3.5 star resort costs $11 (Fiji dollars).  What do you think a glass of the house wine costs at the 4 star resort?  Well, to my way of thinking, it would be reasonable to expect that it would something more than $11 - maybe $15.  Probably a better quality wine and a more exclusive and tranquil setting.

In fact, the 4 star resort charged us $5 for glass of the house wine.  Why?  Have they made a reasoned decision or are they pricing incorrectly?

At the 3.5 star family resort, what is the value of the glass of wine?  Mum and Dad have saved up all year for the annual holiday, the 2 kids are in at Kids Club, the sun is shining and they are finally starting to relax.  Are they going to pay the $11 or walk for 10 minutes to the other resort, where they can’t charge their drinks to their room?  Easy answer – they ain’t walking!  What they are really paying for is relaxation and a chance to unwind.  Walking around to the other resort will cut into that time and as any parent knows, that time is golden.

So, what of the 4 star resort?  My wife reliably informs me that the wine there was not as good a quality, although reasonable enough.  It is a beautiful setting and the accomodation and common areas are certainly of a better standard.  Why are they serving lower quality wine at a low price?  It clearly looks like a case of offering the wrong product at the wrong price.  A low quality, low price wine is incongruous with the quality of a 4 star resort.  They should be offering a premium wine at a premium price. 

In contrast to the 3.5 star resort, this resort is selling quality and quality products.  Pricing should reflect quality.  They may even attract a few mums and dads from the other resort who are seeking a better wine.

Having said all that, I don’t drink wine so it makes no difference to me.  I had a great time relaxing and snorkeling … while the kids were at Kids Club.

PricingProphets on Sky News

I was on the Sky News Tech Report today (Mon 2nd April) talking about Pricing and PricingProphets.com. We hope to post a video of the interview shortly, but in the meantime, here's a happy snap of Brooke & myself

Selling goods as a service

Inventory isn’t something companies want to sit on. You want to sell it as quickly as possible and turn it into revenue – not pay for it to be sitting in a warehouse. Why not turn your unsold goods into a service?

This month, a friend invited me to opening night of an exhibition by a renowned Melbourne-based artist. As we viewed the 23 pieces on display, Bob started telling me about the artist’s business model.

I was a bit surprised to hear of an artist with a “business model” – especially one with its own three letter acronym, ICE, which stands for (seek) Inspiration, Create (the art) then Exhibit (and hopefully sell) it.

But what I found more surprising was that the artist was sitting on 300-400 unsold pieces of artwork, which they valued at $1 million. What sort of business would sit on $1 millon worth of unsold inventory?

Believe it or not, this got me thinking about aircraft engines. Rolls Royce and other engine manufacturers ceased selling them years ago, and now sell “power by the hour” service contracts.

The case for selling art as a service, to display in corporate offices and boardrooms, using a subscription pricing model, is a very compelling one.

The client can enjoy a change of scenery every three months or so, and they can expense the cost, rather than capitalise the purchase of the artwork.

In the case of the artist, they retain ownership of their artwork and the utilisation of their unsold inventory starts to generate a revenue stream, rather than a lump sum that would be earned on selling the art. Potentially, the artist could earn more revenue from “renting out” their artwork, rather than selling it.

Selling a good as a service is a great way to generate income from unsold inventory. What unsold inventory do you have lying around that you can sell as a service?

[This post also appears on LeadingCompany, 29th March 2012]

How do you price legal services...?

Hat Tip: We would like to thank our lawyer for sending us this. 

And for the record, he doesn't charge by the hour. Thats why we use him

The Sound of Silence

Silence isn’t a sound that most leaders want to hear in the aftermath of their pitch for new business. Still, if customers don’t immediately sign on the dotted line, silence is the second best reaction. Let me explain.

I recently sat down with the managing director of a company who wanted to discuss his pricing over lunch. We chatted about things like the value he delivered, recent sales performance and the cost and frequency associated with updating his service.

Then we got to the heart of the matter. Peter had recently achieved some big wins: some of the biggest companies in his target market had taken a three-year subscription to his top-of-the-range product.

But why weren’t the other companies in his target market following suit? They had seemed impressed with his pitch and the product on offer, but they had gone quiet. That left Peter worrying that his price was too high, and maybe he should drop it.

I suggested to Peter that the sound of silence was not a reason to drop his price. In fact, the opposite is usually the case: customers won’t remain silent if the price is too high.

I suggested a different response to Peter: he should reduce the number of products in his product ladder from six to five, making it easier for customer to choose which product to buy. It was an idea that appealed immediately, and we finished our Malaysian spread with Peter in a more jovial mood.

Like that lunch with Peter, this blog is all about practical pricing advice.

It is more than just the dollars and cents; pricing can mean the difference between success and failure. It is at the heart of every company’s business model, but is often forgotten and poorly managed.

There’s going to be a lot to talk about, so hats off to the team at LeadingCompany, the first Australian media outlet to devote a regular column to the topic of pricing.

[This post also appears on LeadingCompany, 15th March 2012]

Click Here if You “Like” Behavioural Pricing

Imagine, sometime in the not too distant future, scanning the contents of your supermarket trolley. The self-service register totals your purchases to £175.25, and then asks you to scan your Facebook Card (Tesco Clubcard was wound up a couple of years before this). The electronic voice from the cash register now asks you “How would you like to pay for your £214.89 of groceries: cash or credit?”.

If recent sensationalism[1] is to be believed, this is what retailers will start to do: charge you more because you’re a Facebook fan or Twitter follower of certain companies and brands.

Retailers everywhere could be excused for paying attention. Most of them are doing it tough at the moment for a whole host of reasons which (in Australia) includes a slow down in demand, the high Australian dollar, and the exodus of consumers to online shopping sites, just to name a few.

To all the retailers reading this, we apologies for being the bearer of bad news, but we just cannot see this happening. Let us explain why:

• What does “Liking” on Facebook really mean? It means someone has clicked a button, that's all, and probably moved on. It does not indicate a preference for one product over another, and it certainly does not involve any sort of sacrifice, financial or otherwise;

• It assumes that companies will have an information advantage over consumers. Yes, one or two retailers may have made some gains in this area (Amazon springs to mind), but so far, the internet has been better used by consumers to find out what’s going on in marketers minds, rather than the other way round;

• History is not on behavioural pricing’s side either. Speaking of Amazon, remember their failed DVD pricing experiment, where they tried charging customers different prices (-30%, -35% & -40%)? Consumers didn’t take too kindly to that and despite the cost being small (an average refund of $US3 paid to 6,896 customers), damage to goodwill was far greater;

• The claim that the behavioural pricing revolution will happen this year is just over-hyped sensationalism. Airlines have taken 40 years to master the art and science of passengers sitting next to each other (and talking about the differences in fares paid

Yes, the Digital Buzz Blog did publish figures that said that the average annual spend by a McDonald’s Facebook fan was $159.79 more than a non-Facebook fan ($310.18 vs. $150.39 respectively), but it did not report that this was due to higher pricing. It could be explained by larger and/or more frequent purchases.

Retailers should not misinterpret “Liking” or “Following” as a signal to charge customers more. Nothing could be further from the truth. Behavioural Economics (not to be confused with behavioral pricing, as it has more credibility) has taught us that the pain of a loss is approximately twice as potent as the pleasure of a gain (a discount). And according to a late 2011 report from The E-Tailing Group, 63% of consumers ‘Like’ a retailers Facebook page for the possibility of getting a deal or a discount. Consumers are not going to sign up to pay more!

So what’s going to happen? We think there are a number of scenarios and implications for retailers:

• There will be a clash of paradigms: in the one corner will be companies that continue their price-based strategy, using services like Groupon & Living Social, and making sure they have the most competitive prices in Amazon’s PriceCheck App and their ilk. In the other corner will be companies that adopt behavioural pricing technology. That's going to be a battle worth watching.

• If and when large organisations adopt behavioural pricing technology, should small retailers (SMEs) be worried? We don’t think so. Not adopting behavioural pricing will give you a competitive advantage, but the big guys may not allow that to go unchecked for too long.

If the activities consumers participate in online results in a lighter wallet or purse, it will not be long before consumers change their behavior. The basic fundaments of pricing will be the same as they are today.

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[1] See: The Mail Online, The Next Web and StartupSmart