Take a Look Outside Your Industry!

Were you inundated with suggested New Year resolutions this year? Have you already broken the ones you made a month ago? Did you make a Pricing resolution? If not, let me suggest one for the remaining 11 months of the year: take a look at how other industries do their Pricing.

There are some compelling reasons for taking the pricing model from one industry and applying it to another. Why re-invent the wheel, if someone else has already gone before you and done so? Reed Hastings, the founder of Netflix asked himself why a DVD rental business shouldn’t adopt a gymnasium–type pricing model, where customers could borrow as many DVD as they liked as part of their monthly subscription.

Sometimes it makes sense to adopt the pricing model of an adjacent industry. Airlines have been doing revenue / yield management for forty years now, which has now moved into adjacent industries like rail travel, via the likes of Virgin Trains, Amtrak’s Acela services in the US and the European high speed rail alliance, Railteam. As many rail passengers will also be air passengers, they already “get it” when it comes to revenue / yield management.

Another industry’s pricing model may prove to be more cash-flow friendly. Valve software, for example, has created “episodic” pricing, where gamers, rather than buying a $50 - $60 game, buy a $20 game, followed by subsequent downloads.

Several years ago, Virgin Blue took the humble pub happy hour and put it on their website between 13:00 – 14:00hrs to dispose of unsold inventory. One could argue that this initiative provided some welcomed PR, but perhaps it also created a new channel to reach the extremely price sensitive passenger.

Meanwhile, Johnson & Johnson’s cancer drug Velcade is offered to Britain’s NHS under a pay-for-performance pricing model, not dissimilar to Google’s cost-per-click pricing model. Patients who do not respond to the drug (in part or in total) will be taken off the drug, with J&J honouring a money-back guarantee to the NHS. Those that do respond will be fully funded by the NHS.

There are also examples of companies adopting a pricing model that is under-pressure and being rejected by customers in other industries. Take time-based pricing for example, so prevalent in the professional services industries.

Tsiferblat, a Moscow-based chain of cafés doesn't charge for lattes, mocha’s and cappuccinos the way most cafes do.  It charges for the time you spend in the café: two rubles per minute for the first hour, and one ruble a minute thereafter, up to a maximum of five hours.

And speaking of the legal industry, the UK law firm Addleshaw Goddard recently won the “Most Innovative Law Firm In Value Resourcing” in the FT 2012 Innovative Lawyers Survey. The judges commended its “…new and uniquely comprehensive approach to its pricing, which shows impressive learning from other industries and offers options to suit all clients.”

Now wouldn’t that be an achievement to celebrate next New Years Eve?

Advertising’s slow road to value-based pricing

As a pricing consultant, I am frequently asked by companies from all sorts of industries to assist them in a move to Value-Based Pricing (VBP). These companies tend to be acting proactively and initiate the move to Value-Based Pricing themselves. So what is Value-Based Pricing and why do companies initiate the move?

Value-Based Pricing is where a company monetises part or all of the economic value it creates for its customers. The economic value is created by the vendors’ products and services either increasing the client’s revenue, reducing their costs or minimising their risks. These three sources of value are not necessarily mutually exclusive: some products can increase revenue and reduce costs, for example.

One of the most commonly cited reasons by companies for shifting to Value-Based Pricing is that their customers don’t buy from them because of what it costs the vendor to provide the product or service purchased. They buy from them because of the value they receive. If the research is to be believed, then the 70% - 80% of companies that resort to cost-plus pricing are pricing on a dimension that their customers just don’t care about.

To put it another way, cost-plus pricing (like billing by the hour) is based on inputs, while Value-Based Pricing is based on outputs.

Value-Based Pricing requires vendors to have a knowledge and understanding their customers’ value-chain and their value creation process, and this is achieved via long-term, sustainable relationships, rather than the odd transaction here and there.

As a result, Value-Based Pricing is more holistic than alternative methodologies. It enables companies selling goods to monetise the services involved in the provision of such goods, while enabling service companies to shift their focus to the provision of solutions.

The majority of companies I work with want to move to Value-Based Pricing so they can become the “price maker” in their industry, and reap the rewards that go with wearing that crown. Such a move also helps differentiate them, particularly in industries that are being commoditised or disrupted.

Which brings me to the advertising industry, which is one of two major industries where customers are demanding a shift to Value-Based Pricing because the industry itself is refusing to go there (the other industry is Professional Services, such as Lawyers, Accountants and the like).

On 20^th April 2009, Coca-Cola said it would adopt a “value-based” compensation system for the advertisers that do work for its 400 brands. Rather than paying advertising agencies for hours worked, Coke will pay for results achieved”

The Economist, 14^th May 2009

The situation where customers demand Value-Based Pricing is not one you want forced onto you. It will catch you off-guard and force you to make mistakes that come with not planning ahead and being reactive to customer needs. You will be a commoditised “price taker”, constantly beaten up by powerful procurement managers.

Perhaps more worryingly, there is a huge risk of polarisation across the advertising industry. Those that can provide value-based advertising solutions to customers will command premium pricing.

And for everybody else, there’s “commoditisation hell”.

This article (one of two) first appeared on the TrinityP3 blog

How much are you discounting by...?

Here's a great photo, sent to me over the Christmas / New Year break, by my friend @dgmackay.

It was taken in Hong Kong.

Nothing like being precise with you how much you're discounting by...and getting attention in the process!

I'm sure @Metisans will find this very "crunchy"

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 25^th 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 DollarShaveClub.com.

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.