Pricing is … a Magnifying Glass

Magnifying glassManagers who understand pricing well have a unique view into the health of their company. Here are several examples.

How well do our marketers use Value Based Pricing when setting the initial prices? When we do this well, we truly understand our market. We know what our competition offers and at what price. We know how our customers make their purchase decisions. If we expect our product development teams to build the best products, they must have and utilize this information.

How do our realized prices compare with our competition? If we are lower priced, it’s an indicator that our product development team didn’t build enough value into the product. Earning prices higher than our competition show we intentionally build differentiated products that our customers value.

Can we explain our price dispersion? We want to charge different customers different prices based on their willingness to pay, so price dispersion is good. However, it shouldn’t be random. When we can explain which customers get the best prices (or the highest prices) we show we understand our customers decision processes which will help in future product development decisions.

Are we watching ASP (Average Selling Price) on a product by product basis? Declining ASPs are an indicator that something in the market is changing. New competitors may be entering. Competitors may be lowering their prices. Customers may be changing their preferences. Monitoring ASPs creates an early warning into market dynamics.

Do we monitor our pocket price? This is the price we realize after taking into account all of the costs to serve a customer (e.g. shipping, early payment discounts, damage reserves). Careful scrutiny on pocket price keeps our profitability high.  Decreasing pocket price, especially if ASP is not decreasing, is a strong indicator that we are giving too much away in the sales process.

How well do our salespeople achieve the target prices? The salespeople who sell at higher ASPs for the same product are the ones who are selling value. They are communicating our features and benefits to our customers. The ones who sell at lower ASPs may be relying too much on price. They need to be trained.

As you can see, understanding and monitoring pricing provides a powerful lens into many aspects of your company. What are you watching?

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

Photo by  Images_of_Money

What You Don’t Know Does Cost You

HeadacheDo you buy generic aspirin (i.e. the store brand) or Bayer? Do you buy generic acetaminophen or Tylenol? How about generic ibuprofen or Advil. It turns out 70% of us buy generics. Higher than I expected, but still 30% of us pay for the brand name.

For those of us who buy the brand name version, we can pay 2 or 3 times as much for the exact same thing. Why do we do this? There are several possible explanations, consumers just make random mistakes and that brands may be more effective especially considering placebo effects.

Recent research from some University of Chicago professors found evidence for the explanation that we just don’t know better. We are not sure what to do. They compared the purchases of doctors, nurses and pharmacists with the purchases of the rest of us. They found that pharmacists only purchase branded headache medicine 10% of the time (compared to our 30%).

NPR interviewed a lawyer who buys the branded version. He said, “I don’t have time to make the decision, so I’m just going to, you know, pay an extra buck or two and buy the brand name.”

This is fascinating, but what does this have to do with pricing? Here are a couple of pricing lessons we should learn.

Perceived Value – People pay for perceived value, not just for real value. In the case of headache medicines the law dictates the generics have the same effectiveness as the branded versions. There is no difference in real value. But there is a difference in perceived value. You can and should focus on how to create more perceived value. This includes building a brand.

Segmentation – Remember to segment your markets. If you were in the headache drug business with only one product, you would likely go after the 70% of the market. But the branded versions are much more profitable than the generics. The ideal solution is to build both and do your best to keep the markets separate. Do you have different versions of your products so you can capture different segments?

What other lessons are there?

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

Photo by psyberartist

Value Based Pricing Is Only an Attitude

Car SalesValue Based Pricing means charging what your customers are willing to pay (WTP).

The other day I was describing this to a successful, self employed business woman, and she kept asking, “How do I know what my customers are willing to pay?”

I mentioned how she should put herself in her customers’ shoes, compare her offering to the competition.  She said, “I don’t always know who else my customer is considering, and I certainly don’t know what he thinks about our offers.”

I told her she could use win/loss data to narrow down the possibilities.  “I don’t have that many data points.  Will this be significant?”

I described how she could use conjoint analysis to determine what types of customers are willing to pay for which features.  “But that doesn’t tell me about the customer I’m talking to right now.”

I suggested she learn from her customers during the sales cycle.  “Sure, but they aren’t going to tell me the most they are willing to pay, even if they know it.”

Finally, I conceded with an Aha! of my own.  We will never know how much a specific customer is willing to pay in a specific situation.  We can’t read his mind and he’s not going to volunteer that information.  If we can’t know his true willingness to pay, what good is value based pricing?

Think of value based pricing as an attitude.  We know we won’t always be right, but we are doing our best to estimate what our customers are willing to pay and charging as close to that as possible.  We can use experience (and statistics if possible) to guide our estimating methods.  For example, if we continually lose, then we are estimating too high and need to lower our pricing.  If we always win, we are pricing too low and need to estimate higher.

When you go purchase a car from a dealership, the salesman is looking you over, trying to determine how price sensitive you are.  In other words he is estimating your willingness to pay.  He’s looking at the car you arrived in.  He studies your clothes and your jewelry.  Once you give him your address he will look up the value of your house on Zillow.  He can never know exactly what you will pay, but he can make estimates based on observable criteria.

This is what Value Based Pricing really is, estimating willingness to pay.  If you know which competitor your customer is considering, that can help you know how much to charge.  If you know which market segment your customer is in, you will price more appropriately.  The more you know about this customer and this situation, the better.

This lack of precision is probably one reason companies like and use cost plus pricing.  They know their costs.  (At least they think they do.)  If you always charge 2 times your cost then there is no uncertainty.  In fact, no thought is needed.

However, if you want to be more profitable, if you want to capture more of the value you create, then adopt value based pricing.  Value based pricing enables more powerful pricing strategies, like price segmentation and product portfolio pricing.  It has the power to focus the entire company on creating more value.

Value Base Pricing may not be precise, but it is powerful.  Adopt the attitude.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

Photo by brianteutsch

Irrelevant Price Comparisons – How They Work

Apple and Orange

“Rice flavoring is more expensive than a Porsche.”

“Ink costs more than blood.”

“Bottled water costs more than gas.”

Surely you’ve heard many more of these shocking comparisons.  Read any of these linked articles and you find they are justifiably true.  On a price per weight basis, rice flavoring is more expensive than a Porsche.  On a price per volume basis, the second two statements are true as well.  Although true, they are misleading and irrelevant.

What is going on?  The answer is simple.  We all have expectations about what items are worth.  Although we don’t explicitly rank the value of all of these items in our minds, there is an implicit ranking.  For example, you probably think a Porsche is worth more than rice flavoring, blood is worth more than ink and gas is worth more than water.

These comparisons are created when some imaginative person uses a common measure  for the two items even though both products are not purchased using this single measure.  We don’t buy a Porsche by the pound.  We don’t buy blood at all.  These are the easy ones to figure out.

What about water and gas?  The bottled water “study” linked to above shows that a 9 oz. bottle of Evian water sells for $1.49.  Do the math and that results in $21 for a gallon of Evian, way more expensive than gasoline.  But typically when you’re at the gas station you buy a small amount of water and 10 gallons or more of gasoline.  It’s not a reasonable comparison.

What would it cost to buy 10 gallons of “bottled” water?  A check of Alhambra’s web site finds they will deliver 10 gallons of water to your house every two weeks for under $15.  That is only $1.50 per gallon.  It would be even more economical if you drove to pick it up yourself.

Although fun, each of these price comparisons is completely irrelevant.  They do not add any value to a potential customer making a decision.  The only possible value they have is to grab someone’s attention, to shock them.

Of course sometimes there are absolutely shocking price comparisons that are true, like this one:  “This T-shirt is more expensive than a car.”  However, if you’re even considering purchasing this t-shirt, money doesn’t matter to you anyway.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

Photo by Kokopinto

Thank you to my friend Jon Manning for the blog on Price Benchmarking that got me thinking about this.

How to Earn a Raise – Lessons from Pricing

promotion and raiseThe other day one of my employees asked for a raise.  Believe it or not, as director of pricing at a large company, I don’t really have much influence on the salaries of my people.  However, I wanted to give him thoughtful advice on how to get a raise. This is just a pricing problem, people putting a price on themselves.  Here is part of my advice.  If you are an employee hopefully you will find it useful.

You are a product!

Just like your company buys computers, manufacturing equipment, building space and paper clips, they buy people.  Actually they buy your time and ability (your features) to generate results (their benefits).

Companies who properly price products charge what their customers are willing to pay.  You should too.

Imagine you are a PC.  One of the company’s PCs just quit working, so they have to buy a new PC to replace it.  How much will they pay for you?  The answer is it depends on how much other PCs are going for.  They will surely get more benefit than what they pay, but they will try to pay as little as possible.  If you as a PC cost 50% more than another PC you will not be selected.  The best you can do is charge the going rate.

Now imagine you are a Mac.  You charge 50% more than a PC and some people pay it.  Why?  Because a Mac has features that aren’t found on PCs.  Some people highly value the ease of use, the lack of virus, the beautiful design.  A Mac is different and some people are willing to pay more for it.

Let’s bring this back to people.  If you are like everyone else, you will get paid the going rate.  The company doesn’t owe you a raise just for being there.  The company may be willing to give you a raise but only if you provide more value to them than someone else they can hire.

Important lesson #1:  Add more value.  Ask yourself how you can build your knowledge and skills to make yourself much more valuable to your company and to the market.

Now ask yourself, are you commodity or a highly differentiated product?  If you are a new college grad, you are a commodity.  Many people graduate with the same degree you have.  Your salary will be based on the going rate for that degree.  Sure some companies pay more, but they are trying to skim the cream off the top.  Can you prove you’re cream?

Important lesson #2:  Become highly differentiated.  Pick an area where you want to focus and become an expert.  Prove you’re an expert through papers, presentations, blogs, social media, etc.  This one thing will make you more valuable.  It’s OK if other people are in the same area.  The point is there won’t be millions.  Become an expert.

IMPORTANT Aha! moment:  Doing your job will NOT get you a big raise.  Doing your job well will NOT get you a big raise.  The only way to get a big raise is to do MORE than your job.  Add more value to your company than anyone expects.  Of course this alone will not get you that raise, but it is a prerequisite.

Pricing has many more lessons to teach us employees about making more money.  We may cover them in future blogs (if there is interest).  But today remember the single most important lesson in pricing:  Charge what your customer is willing to pay.  Willingness to pay is completely driven by your value relative to the other options.

If you want a big raise, make yourself valuable.  Make yourself more valuable than others like you.  Become an expert.

 

(My friend Wendy Hanson and I discussed this concept on a radio show.  If you want to hear it go here.)

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

Photo by David Blackwell

Should You Unbundle?

Luggage to checkA friend recently asked about a Pragmatic Pricing blog from 2 and a half years ago.  It was about the furor that was going on when the airlines were unbundling – they were beginning to charge for checked luggage.  It’s very interesting to re-read that blog now that we have emotional distance from the events.

As you read it, notice there is no longer all this anger toward the airlines.  Obviously, the negative reactions were caused by how they did it, not what they did.

My friend’s question: When does unbundling work?

Unbundling works when you are currently providing a complete solution for a single price and a large number of customers don’t benefit from all of the features.  In other words, your solution is too big.

In the airline situation, they were selling the full solution of air travel which included checked luggage.  However, many travelers didn’t check any luggage.  The complete solution was too big.  They were forcing people to buy features they didn’t use.  They could have (and did) offer a “complete solution” that had fewer features.  They removed checked luggage from their solution.  This new offering is a complete solution to some set of customers.

Should you unbundle?  If you currently offer a complete solution, but a large segment of your customers don’t use the entire set of features, then you are ripe for unbundling.  You can reduce the features of your complete solution and offer the other features as options.  This allows you to be even more price competitive with the base product while making up profit selling the add ons.

If you don’t want the complexity of a base product (that is a complete solution for some) and a myriad of a la carte choices to add on, then consider creating good, better, best bundles.  Thinking about unbundling can help you create a new “good” product that is more competitive and attractive to more customers.  Your current product can be considered better or best.

The secret to unbundling is thinking about the complete solution.  If you sell a complete solution, look for the minimum set of features that a segment will still buy.  If your smallest offering has more than that, then consider unbundling.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

Photo by sun dazed

Kid Rock Plays with Pricing

Kid RockThis article in the Wall Street Journal describes how Kid Rock is changing the business model for his upcoming tour.  He is lowering the price for almost all of the seats to $20 and in exchange will begin receiving a cut of the concessions.

As all new business models should be, this may be a win-win-win.  A win for Kid Rock.  A win for the fans.  And a win for Live Nation Entertainment who owns or operates the venues where he will be playing.

Win for the fans is easy to understand.  Lower ticket prices mean more people can afford to go.

How is this a win for Kid Rock and Live Nation?  This only happens when overall revenue goes up, and that is a strong possibility.  In 2009, Kid Rock sold 17,000 tickets in Chicago.  This year he has already pre-sold 28,000.  Los Angeles sold out in 9 days and St. Louis sold out and wants another show.  It looks like $20 tickets will bring in many more fans.

Kid Rock also wins because many people who were “dragged to the show by a friend” become fans.  This builds his fan base.

What pricing lessons can we learn from this?

1. Business models are about pricing.  You should regularly rethink your business model.  When you create a new model where everyone wins you have the potential to change an industry.

2.  Don’t forget about complementary products.  Think of “share of wallet”.  In years past, Kid Rock would fill a venue, bring people in, so other people can make money selling them parking, beer or t-shirts.  If you have the attraction, you have potential to make money on everything.  In fact, you can lower the price of your main item to attract buyers for your complementary products.

3. Think about the lifetime value of a customer.  If Kid Rock creates new fans he will potentially make money from them in the future.

It’s always fun to watch a high profile pricing experiment.  The question is, are you thinking about your pricing?  Are you rethinking your business model?  With the pace of change today, someone may soon change the business model in your industry.  Will you lead that change or hope to catch up?

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

Photo by familymwr