Tuesday, October 21, 2008

Software As A Service (Saas) Sees More Price Aggression On The Horizon

Now this industry’s pricing outlook seems more “on point”. Highlighting change is coming but yet not panicking. Any one in the industry able to confirm or add a point or two about price changes in SaaS? Let us know what you think.

- Eric Mitchell Founder and Chairman PPS

Read the article from PCWorld: "Economic Woes May Lower SaaS Prices."

Is Ericsson CEO Right That Prices Are Likely To Remain Stable?

Ericsson cites citing weekend competitors as the primary reason for their rosy outlook for telecom.

Well this is one pricer who says “not so fast” The telecom maker should address that “other #1 factor” in pricing the customer.

Customer demand in a weakened economy?? Might look dismal going forward, me thinks. And if so bye, bye stable pricing market.

How is pricing stability looking in your industry? Do you think that the Ericsson CEO is right ? Or claiming fears? - Eric Mitchell Founder and Chairman PPS

Read the article from Bloomberg: "Ericsson CEO-no change in recent pricing conditions."

Monday, October 13, 2008

Innovative Companies Rethink Pricing Metrics

This is an excerpt from a great article from the Thunderbird School of Global Management entitled "Innovative Companies Rethink Pricing Metrics":

"When General Electric entered the jet engine market, the Ohio-based company took an innovative approach to pricing policy. Instead of selling jet engines for a one-time fixed cost, GE decided to charge “power by the hour” through a program that bills customers whenever the sold jet engine is in the air.

"Similarly, the DVD rental company Netflix changed the rules of the movie rental game by charging a monthly subscription and eliminating late fees.

"Despite such examples of the critical role that pricing policy can play in a company’s overall marketing strategy and success, business practitioners and scholars have largely ignored the topic and left managers with little guidance on the subject."

Read the full article: "Innovative Companies Rethink Pricing Metrics."

The Top 5 Myths of Strategic Pricing

Below is a summary of the article "The Top Five Myths of Strategic Pricing." This article By: John E. Hogan and Joe Zale is one of PPS' favorites from its Pricing Advisor Newsletter Archives.

Across the board, managers have absorbed these “worst practices,” and they unknowingly make poor decisions that undermine their businesses. A common reason for such poor decision making is that managers carry those rules and techniques from one competitive environment into another.

What may work in one situation becomes merely myth in another. Are you buying into any of the following myths?

Myth 1: You can’t raise prices and volume at the same time.

In many companies, executives believe demand curves (i.e., price and volume) are fixed. This leads into the trap of thinking that optimizing price and volume is the only hope for driving profit. However, price optimization is only a small piece of the answer. It’s actually possible to hit multiple points on a demand curve with one product that will drive both volume and price simultaneously. This can be accomplished by creating tiered offerings that break products and services into different bundles that attract different customer segments.

Instead of a one-size-fits-all product offering and price, multiple product offerings and price points can be created. The result is higher prices for premium offerings and higher volume for the standard offerings. The net effect, if orchestrated properly, is significantly higher overall profits.

Myth 2: Pricing more profitably means having to raise prices.

Structuring prices to encourage cost avoidance is another way to price more profitably without actually raising prices. Big opportunities to improve profits lie in areas not often considered in the realm of pricing. By that, we mean service features that often get wrapped into a company’s offering, such as rush orders, financial terms, warehousing and technical support.

Instead of bundling services into a product offering like an “all you can eat” buffet, positioning them as a la carte upgrades can help improve profits through cost avoidance. Customers will think twice about paying for services they don’t actually value. The net effects are to lower cost-to-serve and increase share from customers who forgo services, and increase revenue from those who value these services. When you add it all together, this approach can yield big dollars in profit improvement.

Myth 3: Prices should be set to cover total cost plus some target margin.

The goal of pricing is not to cover total costs. Our clients often struggle with this challenge because the concept is counterintuitive and the mistake so pervasive in companies. Instead, the goal of pricing is to maximize total contribution (i.e., unit price minus unit variable costs).

Why? Because the portion of price that affects profitability is contribution margin. Whether that contribution exceeds or falls short of profit objectives is not a pricing issue. In other words, allocating fixed costs within the price does not help make better pricing decisions because those costs are not actually incurred when making additional sales.

Myth 4: You should drive volume in a high fixed-cost business.

On the surface, this statement is true; however, there is a trap. We see many high fixed-cost businesses becoming more variable over time, and yet they are not adjusting their management thinking to reflect that change.

Myth 5: The prices you can charge are proportional to increases in product performance (e.g., quality, speed, costs).

While it sounds simple, many people fail to remember that product improvements are not proportional to the value they deliver. Superior performance can command superior pricing.Product managers often get fixated on a customer’s willingness to pay and worry too much about a product’s pricing history.

In particular, we find market researchers guilty of this mistake, providing recommendations
that leave significant value on the table for their clients.

Access the full article "The Top Five Myths of Strategic Pricing."

Wednesday, October 8, 2008

Airline Pricing: Are Airlines About To Get It Handed To Them ?

After years of being the butt of pricing jokes and the hall of Fame for Revenue Management, I now wonder if the tide is really gone to turn on airlines.

They have increasingly unbundled almost everything as a pro-active strategy. But below is a blog from the travel industry itself that begins to raise real questions about the sageness of this approach - Eric Mitchell

Here is a blog from Senior Travel Blog
By Nancy Parode, About.com Guide to Senior Travel

Unbundling Airfares - Good Value or Money Grab?
Monday October 6, 2008

"The Associated Press reported today that American Airlines is giving serious thought to "unbundling" airfares. This pricing strategy involves charging all passengers a base fee and adding options or groups of options for an additional charge."

"American Airlines' approach to fare unbundling seems to be based on the Air Canada model, rather than the more extreme, charge-you-for-everything Ryanair system. Air Canada offers four fare levels, with different options and privileges included at each level. Options include meal vouchers, priority boarding and baggage handling and reduced change fees.

What do you think? Would you prefer this "unbundled" pricing approach, or would you rather pay one price and have access to all the "options"? Take our poll and share your opinion."

And another perspective from MSNBC: "American Airlines plans à la carte pricing"

Carrier to offer bare-bones services at base fees, charge for add-on items.

"American Airlines is about to accelerate the trend of breaking the cost of a trip into an airfare plus many smaller fees.

Starting next year, American, which led a stampede by U.S. carriers to charge customers for checking even a single suitcase, plans to imitate the a la carte pricing structure pioneered by Air Canada, airline officials say. There are likely to be a few basic fare plans, and travelers can pick additional services — for a fee.

Fans of "unbundling," as it’s called, say it gives travelers lower base fares with the option of paying for extras that they really want, from beverages to blankets.

Some travelers are wary, however, and suspect the airlines are just trying to chisel them a few bucks at a time."