Watch Those Price Changes!

There is no doubt that over the next couple of weeks, Leading Companies everywhere are going to be executing price changes. This is a time for Pricing diligence.

Not only will companies be changing their prices for the new financial year, many will seek to pass on the costs associated with the carbon tax, which also commences on the 1^st July.

There are two types of costs associated with making price changes. The first are what’s known as “physical costs”, which are associated with updating customer or consumer –facing prices: those found on store shelves, price lists, rate cards, websites and the like. In 2003, a paper by Mark Bergen, Mark Ritson and others found that “in the retail grocery industry, the cost of changing prices is over $100,000 annually per store”.

But by far, the most expensive cost associated with price changes are the managerial costs associated with working out the magnitude of the price changes, what the new prices will be, and updating the necessary spreadsheets, systems and sales force tools and apps. One price change I devised for a client several years ago cost $285,000 to execute. Fortunately it generated $5.9 million in incremental revenue, so it was well worth the effort.

Given the time, effort and costs associated with changing prices, diligent execution over the coming weeks is essential. The stakes are high and errors can be costly, and history attests to this.

In 2007, United Airlines sold tickets from San Francisco to New Zealand for $1,062. The fare, sales of which were honoured, should have been $10,620 for Business Class. British Airways didn’t honour the 1,200 seats they sold from the USA to India in 2009 for $40. They were trying to increase prices by $40. And in 2005, Expedia advertised rooms at the Hilton Hotels in Tokyo and Osaka for $2 - $4 a night. No wonder one guest booked a one year stay at the Tokyo Hilton.

Over and under pricing probably occurs in equal numbers, but as I’ve mentioned in this column previously, customers aren’t going to tell you about under-pricing. All the more reason for pricing diligence and vigilance over the next couple of weeks.

Do I High-ball or Low-ball my Price?

One of my favourite pricing cartoons is that of a schoolgirl selling lemonade for $500, with the caption reading “I just want to sell one and call it a summer”.

The cartoon epitomises one of the most commonly asked questions in pricing which, on first appearances, could appear to be a rhetorical one: do I price high and come down if I have to, or do I price low and raise prices when demand takes off? Most Leading Companies would adopt the former strategy, but does starting high always make sense?

Starting with a high price is of course the “pricing textbook” answer, and there are a couple legitimate reasons for this. It is always easier to lower the price of lemonade from $500 than it is to try and raise it, and if you want to position yourself at the top end of the lemonade market, that price is going to be an indicator of quality for you.

T-Glass (not their real name) is not a cartoon strip, nor is it selling lemonade. It is an Australian-based beverage company who last week, asked the panel of pricing experts on PricingProphets.com if they should ‘low-ball’ or ‘high-ball’ the launch price of their latest locally-grown beverage. The response from one of the experts was very thought provoking, and not exactly “textbook pricing”.

In the case of this beverage, as with many other products, a launch objective is often to build product trail, penetration, and thus market share. Starting with a high price, which doesn't stick and subsequently has to be lowered, means starting that trial and penetration exercise all over again.

In this situation, starting with a low(er) price may help to achieve that trial, penetration and establish the product in the consumers’ repertoire. That leaves us with the question of how do you raise prices in the future?

In the case of a beverage that is made from seasonal, agricultural products, look no further than the wine industry: let the customer know that this particular harvest or season is exceptionally good, include that message in the pricing communications strategy and price accordingly.

This approach also enables you to avoid hard-to-defend cost-plus –based price increases, and set prices according to the value you deliver.

We’ll check in with the beverage company in a couple of months and see how they’re going.

[This post also appears on LeadingCompany, 7th June 2012]

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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]