Thursday, February 26, 2009

Developing Pricing in Latin America

This is another great topic from the PPS LinkedIn community: how to develop pricing in Latin America:
"Pricing has become a top priority for companies in the US and Europe, given its enormous impact on the botton line and the consistent work of many organizations as PPS.

"However Latin America is still far behind in the trend. How can we help Latin American companies discover the value of the Pricing tools and the development of Pricing specialists?" (Ariel Baños)

I know that several of our pricing partners are reaching out to this market. What strategies are you as pricers using to both develop the pricing profession in Latin America or to expand the reach and potency of your products and services in this market?

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Wednesday, February 25, 2009

B2B Pricing White Paper

In response to the last post, I thought I would post this informative white paper on pricing from a B2B perspective, written by Nick Hague, the Director of B2B International Ltd. It provides a great foundation on how pricing works, gives and introduction to pricing research, and addresses some of the considerations pricers face in the B2B pricing environment:
"In the ever-changing business world of today, with increased globalization and low-cost manufacturing from Asia, competitive advantage is key. Competitive jostling is a never ending battle as continuous product innovations result in shifts in competitive advantage. Consequently the question most companies ask themselves is ‘How do we get more?’ This is one of the hardest questions to answer.

"The strategy of cost cutting, whilst intuitively making sense, is usually a road to ruin as some smarter competitor, often working from a new geography with a lower cost base, undercuts you. Very few companies can sustain the cost advantage for long. Equally, attempts to increase sales by any means such as ramping up the promotions (or cutting costs) or increasing the value added, takes considerable time. In fact, raising prices has to be seen as the easiest option to give more profit.

"Therefore the big question that needs answering is this: “if the price is increased, will sales volume decline and if it does, will it be more or less proportionately to the rise in price?”. No company wants to leave money on the table and so obtaining the optimum price has always been a key issue to marketers. However, asking customers to quantify the price they would be willing to pay for a product or service is one of the hardest questions for any researcher as the customer may not feel that they can answer such a question or if they can it may not represent their true actions if such a price was introduced to the market."

Read the full white paper "The problem with price".

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Tuesday, February 24, 2009

How to set prices in a B2B-environment?

Hi pricers - this is a great question that was raised in my linked in group, and that has spurred a lot of feedback from member pricers. I thought it was worth reprinting here because there are bound to be other pricers facing this issue or with valuable opinions to share. Warmly, EM

How do you set prices in a B2B-environment when there's no external reliable market information available? Do you just take the best information available, i.e. the insight of the sales team? (Kristof Fransen)

Umm generally, "insight" and "sales team" don't generally go together as their vested interest is in closing a sale. One approach is to look at the B-B contracts you already have, come up with an average of the discounts - say 60% off of list, for the accounts / products that are growing. Take this fact and compare it to the list rates for similar products from your competitors. Meaning, if you are giving on average, 60% discounts to a broad base of enterprise customers and winning business, then chances are, your competition is doing the same thing. A key assumption here is that your competitors have the same cost-basis as you do. Meaning that a large company should only compare itself to a large company regardless of the much smaller companies competing for the business. Much smaller companies have lower overhead, smaller support / pursuit / account teams and hence, can offer lower prices. This is why a large company should never (ever) compete on price with a company not on its level. Anyway, knowing that you give an average of 60% discount on your products (or whatever the number is), you just have to find the List Price for the product you want to price if already offered by your competitor and just match it or start with something a little lower. And then, do a classic cost analysis of labor, SG&A, product development, allocated costs etc to develop an in-house price floor that you must meet to cover costs and meet a certain direct / shared margin requirement or EBITDA target if that is your goal. Most B-B types like to have pricing at 20-35% direct margin over costs, so the trick is being able to hit this margin (or single digits) even -after-discounting the price 60% (or whatever your average was). That tells you what the market price should be. If your price is horribly skewed in relation to competitors, then work with the CFO and Product development to reallocate some costs to more profitable products to lower the price on your product /service. CFOs are good at the shell game of cost reallocation but that's another story.
(Samuel Mason)

If you do not have any external reference then I am assuming that your product or service is fairly unique? Have you tried to quantify the customer benefits or look at any Cost of Ownership analysis to try to understand what your customers are prepared to pay? Also, have you looked at what is your target customers next most preferred option to your product? This can give a valuable insight into the perceived value of similar offers and hence a guide as to your target price. You could of course ask a few select customers to tell you what they are prepared to pay or at least what they most value from a list of features & benefits. I face this problem all the time in B-B telecoms and have used all the above methods to realise high margin customer prices.
(John Burdass)

I respectfully disagree with the cost plus approach Samuel suggests. The real question is how much value are you delivering compared to the competition. Fortunately in B2B it can be easier than retail to quantify value. Either you are reducing cost or increasing revenue for your customer. Figure out how and where your product contributes to your customer's success, and you are halfway there. You also need to take a swag at how much value your competitors deliver. Hopefully, you deliver more, and can demonstrate and capture that value in price points. If you work on that info, your sales team can use that as well to drive higher price points. The more information and good price guidance you can give sales, the better off you will be. (Eric Ralph)

The issue of establishing price in a B2B world is one of establishing the value of the product or service. Unless you are dealing with commodities, stay away from cost based pricing as it will lead to an artificial price point that can be too high or too low (i.e. software is an obvious category).So value, how do you determine? Longer discussion than an online posting allows, but some common methods can be:
- Comparative evaluation: Using an existing competitor product that has an established price point, use a delta analysis to evaluate the impact of positive (and negative!) differentiators. i.e. do you use more or less power? does your product allow the customer to reduce overhead? etc. Generally differentiators should fall into two categories, reduces cost of ownership or enables incremental revenue. Of the two cost is your safer bet, as increased revenue is an assumption that is hard to prove (especially these days).
- Customer business case: Using your product, how does this effect the customer's P&L and based on the impact, what sort of payback period does your product have at various price levels. Determining appropriate payback periods is tricky as it is industry and situational, but overall I find for my products it can be anywhere from 6 to 24 months depending on the type of project.
- Competitive intelligence: While this is normally difficult in B2B situations where prices are not published, there are legal ways of getting the information. The best in my experience is looking for cases where the competitor has bid on governmental type projects that often require that the bid be "open". Sometimes there are industry events where there are "demonstrations" of product solutions that include example pricing. This is a dicey area, you just have to work on it.Most important though, there is no one perfect way... sometimes it takes multiple approaches to triangulate on optimal pricing. (Rick Robinson)

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Friday, February 20, 2009

Top 10 Things Your C-Suite Must Know about Pricing in 2009...

Many companies struggling to make the numbers are reverting to cost-cutting across the board - including pricing departments, training and travel budgets. Now it’s more important than ever to make your executive team understand the critical role of pricing for growing sales and profitability. If you’re wondering how to make your boardroom pitch for pricing training, here are some key facts and 10 Things Your C-Suite Must Know about Pricing Now:

1. Pricing changes rapidly – Staying updated is critical: Get the latest methodologies, structures and discipline for your pricing practice

2. Pricing is key to forecasting: You can contribute to your company’s forecasting accuracy

3. Pricing can boost sales and margins: Learn how to leverage pricing and how it impacts sales activities

4. Pricing is your voice: Price is the first thing your customers see and hear about your product or services

5. Pricing means profitability: Boost profitability through pricing

6. Pricing is everywhere: Effectively and efficiently manage worldwide(global) pricing

7. Pricing is not only numbers: Get the confidence to expand to other areas of pricing you don’t know

8. Pricing is a key part of what you do: Coordinate and integrate Customer Segmentation, Negotiation Strategies and Quantitative Methods to increase profits

9. Pricing is not a onetime deal: Change the pricing practice from reactive to pro-active

10. Pricing is in the Board Room: Learn how to communicate and discuss pricing with the C-Suite.

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Thursday, February 19, 2009

More Price Cuts in the High End Market

We have been talking a great deal about how different industries are being affected by the current economic mire, especially industries driven by consumer spending. Another industry is beginning to cave quickly, following in the footsteps of consumer electronics and other non-essential commodities:

"Luxury handbag maker Coach Inc. is bowing to consumers’ stubborn refusal to spend, lowering its prices 10 percent to 15 percent and offering more handbags under $300, executives said Wednesday.

"The lower pricing has already begun and should be fully implemented by fiscal 2010, when Coach will also cut the number of new stores it plans to open in North America to 20 from 40 and halt retail store expansion.

"The moves show just how much luxury retailers are suffering after the weakest holiday season in decades."

Read the full article from the Associated Press: "Coach trims prices, new stores". Cruise lines are also slashing prices and introducing larger, grander ships in an effort to fill bookings and attract would be travelers. Despite the abysmal year many retailers are facing, the cruise line industry is actually optimistic about its prognosis for the year:
"Vacationers who hit the high seas this year will find a treasure-trove of bargains -- and that's not all. At least 14 new ships, including the world's biggest behemoth and two intimate luxury vessels, plus innovative facilities and more U.S. departures, are on the way."

"Unlike your stock portfolio and many businesses these days, cruising is a growing enterprise. Cruise Lines International Assn., the industry's largest North American organization, says its members expect to carry 13.5 million passengers this year, up from 13.2 million in 2008 and 12.6 million in 2007."

Read the full article: "Cruise lines introduce ships big and small, and drop prices". Although the article reports that cruisers may face higher prices in some areas, such as on-board activities, the cruise lines are introducing new pricing packages and models to keep the industry growing in 2009:
"Besides fare discounts, some sailings come with free airfare, cabin upgrades, onboard credit and other money-saving extras. Many lines have relaxed deposit and cancellation rules, making it easier to get a refund if you decide not to go.

"For the best deals, steer your shopping to older vessels, longer itineraries and distant destinations. New ships and departures from some U.S. ports can still command top dollar, said Mike Driscoll, editor of Cruise Week, an industry newsletter based in Brookfield, Ill."

Will consumers continue to spend money on vacations even though they are cutting spending in virtually every other area? We will watch as the year unfolds. Cruise lines, despite dropping prices, are making up for some of the costs in other areas, such as increased fees or by charging for on-board activities that would have previously been no charge. We will see how the year progresses for some of these travel powerhouses. More soon, EM

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Pricing as an Economic Indicator

Pricing is not just an activity of business operations, a tactic to increase profits or a product of supply and demand. It is also a central economic force and therefore a powerful economic indicator, as this recent article accurately demonstrates:

"Prices for food in U.S. grocery stores jumped 6.6% last year - the biggest spike since 1980 - underscoring yet again that inflation is a much bigger problem than government officials, or most economists, say it will be.

Of all food categories, prices for cereal and baked goods hit U.S. consumers the hardest, zooming 11.7% in 2008 over 2007. Prices for meats, poultry, fish and eggs gained 5.1%. Fruits and vegetable rose 3.4%, while dairy products advanced 2.7%. It was the second straight year U.S. consumers were forced to pay a lot more for their groceries. In 2007, food prices at supermarkets rose 5.6%. Prices rose only 1.4% in 2006.

Consumers had to pay the price last year because food makers battled the largest spike in commodities they’ve ever faced, walloped by duel increases in key food ingredients and fuel, which all marched to historic highs in July, a month in which crude oil peaked at an all-time record of more than $147 a barrel.

This major escalation in food prices calls to question contentions that inflation is not a problem, a stance that - on the surface - appears to be supported by government statistics that appear to be fairly benign."

Read the full article: "Big Jump in Food Prices the Latest Suggestion That Inflation is Much Higher Than the Government Says". This supports Greenspan's recent dismal prediction that "the current global recession will "surely be the longest and deepest" since the 1930s". This is a unique and fascinating time to observe the innovative pricing strategies that businesses put into play to survive the current crunch in consumer credit and expendable income, and to witness first hand how powerful a role pricing plays in global economics.

Although these times are presenting incredible challenges, this presents an excellent environment for new pricers to learn solid principles to bolster their future careers, and for experienced pricers to apply pricing theories in new ways to their pricing operations. Do our readers agree? Warmly, EM

Wednesday, February 18, 2009

New On-Demand Pricing Webinars

New On-Demand Pricing Webinars from PPS expert source Simon-Kucher & Partners:

"Best Practice in Managing Changes to Your Pricing Strategy" - In this turbulent economic environment, pricing is still on top of the executive agenda. However, robust change management is crucial to ensure you can deliver the benefits of your pricing initiative. This webinar will provide you with the best practice in dealing with obstacles to changing your pricing strategy and offer useful tips and tricks.

"Optimizing Prices Using Win-Loss Analysis" - Win / loss analysis is a powerful methodology for optimizing prices of existing products and services that have many historical transactions. This session will demonstrate the benefits of using logistic regression techniques to statistically quantify the impact of variables like price and market segment on win / loss ratios and predict the likelihood of winning future deals. We will share our best practices from several recent experiences executing win / loss analysis for technology clients.

Click here for more on-demand pricing webinars from the Professional Pricing Society.

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More on Mobile Phone Pricing Wars

In follow up to my post last week: "Mobile Pricing Wars and Gas Pricing Study" - Demand is continuing to decrease in the consumer electronics markets as consumers continue to cut extra spending, and cell phone companies are feeling the heat more than most. Recent coverage of this industry is demonstrating what a competitive pricing market this is becoming.

One recent article reads:
Nokia and its main cell phone rivals have started to slash prices as demand falls and retailers cut inventories after lackluster holiday sales.

Consumer electronics demand slumped in the key Christmas season, and handset vendors Motorola and Sony Ericsson have reported grim sales figures.

For 2009, analysts have cut their market estimates with the average forecast now for a 7.9 percent fall in volumes.

Falling demand at a time when retailers and operators are trying to cut inventories has lead to increasingly aggressive pricing. While vendors often cut prices in January, some actions this year have been more aggressive than usual.

"Our researchers have seen significant price cuts in Europe by the major handset vendors as 2009 begins," said Tom Byrd, who leads device-pricing research at CCS Insight.

"This reflects the highly competitive pricing environment we have been predicting for this year," he said.

Read the full article: "Pricing fears rise in shrinking cell phone market". And it isn't just the phone sales that are suffering. Consumers are shrinking the amount of added services and functionality they want to pay for on their phones. (Thus the all you can use bundles we covered in a recent post). Even IPhone App developers are introducing new pricing models to encourage app sales, including a "pay-what-you-want" pricing model.
"iPhone application firm App Cubby—maker of Trip Cubby, Gas Cubby, and Health Cubby—has announced that it is attempting a new pricing strategy in hopes of improving App Store sales. The company, which has been open with its numbers as well as vocally against the $0.99 app store paradigm, has decided to start pricing their applications at $0.99 and to encourage users who are happy with their applications to donate more if they feel the applications are worth it.

"The tactic, which was brought to our attention by iLounge, is of course a calculated move by the company. While it will take five to 10 times as many purchases to earn what the company was previously earning, the developers are no doubt banking on free publicity they will receive from this move. There's also the addition of the impulse-buying costumer not necessarily found at the $5 and $10 price points, and the occasional generous customer who donates lots of moolah.

"This is the first instance I have seen where a company both charges for its product and asks for donations. Programmers of free apps have done the latter for some time, but variable pricing is something that is becoming more popular in the digital lifestyle. The band Radiohead is, of course, the most prominent example with its "pay what you see fit" album Rainbows in 2007. Since then, Nine Inch Nails' Trent Reznor has also dabbled with the concept."

Read the full article: "iPhone dev lowers prices, tries pay-what-you-want model". On another note - and going back to the sports franchise demand pricing trends we have been covering - on franchise is actually going against the flow and increasing ticket and parking pass pricing in 2009. The Houston Texans are so confident in their product and the experience that they provide, that they insist on raising prices to maintain the level of profits they need to preserve the quality of their product:
"The Texans continue to be the hottest sports ticket in the city, with seven consecutive sellout seasons since the team began NFL play in 2002. Since 2006, the league average ticket price has risen by more than 6 percent annually, while Texans tickets have increased an average of 4.25 percent.

"We are sensitive to the economic challenges that our fans are facing,” said Jamey Rootes, Texans president. "We have worked diligently to implement a pricing structure for 2009 which keeps our prices in the lower half of the NFL but is adequate to continue our progress both on the field and off. Fielding a competitive team and delivering a world-class experience for our fans demands that our revenues keep pace with our costs."

Read the full story here: "Houston Texans to raise ticket prices". How will consumers react? We will see. Warmly, EM

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Friday, February 13, 2009

Mobile Pricing Wars and Gas Pricing Study

In case you were ever wondering - (this is probably more for our beginning pricers than for our experts, but I thought it bore explanation just the same). We have spent a lot time focusing on how closely tied consumer spending, retail pricing and manufacturer costs are when it comes to commodity items. Indeed, in these difficult times, consumers are even starting to feel the pinch from increasing prices in grocery stores, in their water bills and in many other daily necessities.

Cell phones companies, always looking to steal customers from one another with the best new deal - bundled services, unlimited usage, etc. - are at it again. Although all four major providers copied each other last year with a $100.00 month unlimited services package, Sprint is taking the pricing war a step further by offering excessive talkers a way to cut their bill in half. From the New York Times, "Has Sprint Started a New Wireless Price War?":
"If you pay $100 a month or more to AT&T or Verizon Wireless on your wireless bill, don’t expect your bill to drop in half quickly. But the new $50-a-month unlimited wireless calling plan from Sprint’s Boost Mobile brand may well set off some significant price-cutting by wireless carriers.

"Sprint is starting a price war as a way to wring value from the underutilized network of Nextel, the wireless company it disastrously bought in 2005. Nextel’s claim to fame was its push-to-talk feature that let people communicate with other Nextel phones without paying per-minute rates. Now that most wireless operators offer plans that let people call anyone else on their network at no additional charge, demand for this feature is dropping. The limited selection of phones that use Nextel’s iDen technology also has discouraged customers.

"Boost Mobile is a Sprint brand that mainly sells prepaid wireless service meant to appeal to young people, who talk a lot but are very price-sensitive. Boost had 3.9 million customers at the end of last September. (Prepaid service is less expensive to operate than more traditional postpaid service, where customers get a monthly bill for use after the fact, because there are no credit losses. In addition, carriers don’t subsidize the purchase of handsets and often spend less on customer service.)"

Most of the time, as with this example, it's pretty easy to tie consumer demand to pricing trends in a commodity market, but for some reason gas prices never seem to play by the rules.

This article does a great job laying out the relationship of oil prices to gas prices for consumers who may not have an in-depth understanding of global economics. The author first points out, and rightly so, that "big oil" only owns about 5% of retail gas stations (unbenounced to a majority of consumers) and do not therefore profit from spikes at the fuel pump. Conversely, these stations are often independently owned retailers who are trying to whether the current economic storm just like retailers in any other industry. Here is an excerpt:

"Q: Why aren't gas prices falling at my local service station right now?

"A: While oil and gasoline prices very often move in the same direction, there's usually a lag between crude's decline (or rise) and that of gasoline. Analysts say the ongoing uptick is gasoline prices is likely tied to oil's sharp rise at the end of last year, when fighting between Israel and Palestinian militants raised concerns about supply disruptions in the oil-rich Middle East.

"Q: If that's the case, now that oil has retreated to below $40, shouldn't gasoline get cheaper?

"A: It should — and it might — but other factors are at play.

"For one, the companies that process crude into products such as gasoline are sharply cutting production, in part because demand has fallen off so much. Less production means less supply, which tends to push prices up.

"The gasoline producers are trying to make some money in the wake of a dismal 2008. When crude prices were so high in the first half of last year, refining margins — the difference between what refiners pay for crude and what they get for products they make from oil — were dismal. In the latter half of the year, margins improved as oil prices receded, but refiners continued to struggle because people were simply driving less and buying less gasoline.

"Companies that refine oil are publicly traded. If they don't turn a profit, they won't be around long.

"Refiners are not going to continue to sell gasoline at a discount to crude oil," said Ben Brockwell, director of data, pricing and information services for the Oil Price Information Service. "It simply hasn't paid to produce gasoline."

Q: But doesn't that mean they're simply inflating the price of gasoline?

A: That's the opinion of the nonprofit group Consumer Watchdog, which tracks the industry closely and has consistently called for greater regulation of refineries.

"Consumer Watchdog says production cuts at refineries in California, for example, have far exceeded the state's drop in consumption.

"The refinery cutbacks are for purely financial reasons," said Judy Dugan, the organization's research director. "Now is the time for government to insert sharper oversight and regulatory controls of the refining industry."

Q: How does my local station set gas prices? Does it follow orders from corporate headquarters to keep prices as high as possible?

A: One thing many people don't realize is that major oil companies own fewer than 5 percent of gas stations. Exxon Mobil Corp., for example, said last June it was getting out of the retail gasoline business, following other major oil companies who've been selling the low-margin businesses to gasoline distributors.

"Most stations are owned by small retailers — and many say they took a beating last year when crude prices spiked because they were unable to raise pump prices fast enough to keep pace.

"That's exactly why some stations raised prices quickly after oil futures jumped late last year: Not because the more expensive oil had made its way through the production process, but because they saw an opportunity to make some money after struggling with paltry profits for months. So the usual lag between oil and gas prices may not have occurred this time around at some stations — they wanted to raise prices, and they didn't feel like waiting.

"Gas station owners face a balancing act: They must try to maintain a price that allows them to afford the next shipment of gasoline, but they're also trying not to give the competition an edge."

Read the full article: "Meltdown 101: Why gas prices rise while oil drops".

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Price of Online Advertising Drops

The price of online advertising plummeted last year, which isn't a surprise as businesses have been increasingly tightening their belts and looking for ways to cut costs. Advertising budgets are often one of the first things to go, but this represents an interesting trend as print has long been suffering for the lower prices and wider reach of online advertising. The fact that online outlets are having to slash prices in order to attract advertisers gives us a new indicator of how tight corporate budgets have really gotten.
"The price for advertising on Web sites dropped by about 53% from Q4 2007 to Q4 2008, according to Douglas Quenqua, citing the Pubmatic AdPrice Index. The numbers show every vertical category suffered steep declines, with business and finance leading the way at 61%. Prices held up better on sites focused on technology, sports, entertainment, gaming, and music."

"Price drops had been expected, but not the rate and amount of declines. Quenqua explains that the news is slightly better for sequential results and provides some analysis. Prices declined slightly from the third quarter in 2008 to the fourth, compared with more severe drops in previous quarters. The index is a quarterly measure of online ad network rates for publishers." ("Display Ad Prices Cut In Half")

Here is another article in follow up to our recent post: "Demand Pricing Update - Apple and ITunes":
"Although Apple Inc. announced this month that some songs sold on its market-leading iTunes online service would be available for 69 cents instead of the 99-cent tag Apple had insisted on for years, the change won't necessarily put more money into the pockets of music lovers.In fact, record companies are the ones that plan to come out ahead.

"While some songs will be 30 cents cheaper, popular songs likely will be marked up to $1.29. That price breaks a psychological $1 barrier and prepares consumers for a new strategy by labels to bundle songs, videos and other exclusive content together — all in the hopes of reversing years of falling music sales.

"According to NPD analyst Russ Crupnick, the music industry has been faced with a vexing question as fans bought more digital singles but fewer albums: "As the album as we know it goes away, how do we replace a $12 or $13 item with something that costs more than 99 cents?"

"If the new variable pricing can make several songs packaged together seem like a relative discount, it could finally entice some consumers to pay more.

"You've got them spending $4, when yesterday they were spending 99 cents," Crupnick said. "Is this going to be the salvation of the industry? No. But all these incremental things that we do will be helpful."

"Music sales have declined in seven of the last eight years. The industry peaked in 2000, only to face the advent of the file-sharing program Napster, which made it easy for people to trade songs for free. Since Apple CEO Steve Jobs introduced iTunes in 2003, downloads of single digital tracks have exploded, but not in the volumes necessary to offset what last year was a 20 percent drop in sales of physical albums, which hold 10 songs or more."

Read the full article: "Changes to iTunes prices raise music labels' hopes". Will this pricing strategy pay and finally put record companies back on top? We will wait and see. Consumers have been increasingly reluctant to pay for music since they realized there were ways around it with the advent of P2P, Napster and the link. Although many of these methods have been shut down, consumers will not necessarily just jump right back on the bandwagon of paying premium prices. What do pricers think? How will consumers react? Time will tell - EM

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Thursday, February 12, 2009

Pricing in an inflationary downturn

Continuing on our subject of pricing in a downturn and, more specifically, in an inflationary downturn, The McKinsey Quarterly (a great resource for pricing articles and research) released a great article to guide companies through pricing hurdles in this uncertain economy.
"In the current environment, costs are rising as price sensitivity increases. Six tactics can help companies get pricing right."

"Getting pricing right is always a challenge in an economic downturn, as decreasing demand, excess capacity, and greater price sensitivity all conspire to drive down prices. In most downturns, the cost of raw materials, feedstocks, and other upstream supplies—as well as the cost to serve customers (for delivering goods, for example)—tends to stabilize and even decrease as business activity slows. As a result, decreases in downstream prices are at least partially offset by lower upstream costs. But in the current environment, not only is weaker demand from the end user making it harder to maintain prices, but significantly higher and more volatile input costs mean that companies caught in the middle are getting hit from both sides.
What’s a business to do?"

  • Watch for sudden shifts in price structure

  • Monitor customer-level profitability

  • Adjust to changing customer needs

  • Update price sensitivity research

  • Monitor your industry’s microeconomics

  • Study your suppliers

Read the full article: "Pricing in an Inflationary Downturn" The PPS pricing article archives also have great resources, including "Coping with High Inflation" and "Navigating Inflation's Hazards", to name a few.

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Tuesday, February 10, 2009

Consumers Want Low Prices, the Economy Needs Price Increases

Our continued economic woes and inability to restart the economy have led us to an interesting conundrum. The cost of goods and services is increasing beyond the level of high end goods. It is hitting consumers where it hurts - in everyday needs and expenses.

As a result, expendable income for many people is dwindling daily. Most consumers are severely tightening their budgets, saving what they can and seeking low prices where ever they can. Retailers and vendors, as we have seen, are responding with lower prices, demand pricing and more, doing their best to capture or re-capture what they can from the dwindling consumer pool. We have had many interesting discussion over the past couple of months about these various pricing strategies and how they are working in different industries.

As the LA Times recently reported: ("Shoppers are in the market for lower prices")
"Supervalu CEO Jeff Noddle discusses how the economy is affecting the grocery business."

"People are buying more private label products, they are using more coupons, buying cheaper cuts of meat and they are stocking up during promotions. Basically, shoppers are doing all you would expect them to do in a period of inflation and a down economy. This has probably cost us 1% of our sales.

"Last year was the biggest year for food inflation in nearly two decades. Energy and grain prices were blamed for the increases, but now that they have sagged can we expect manufacturers and food producers to lower their prices this year?

"I think we will see the rate of inflation go lower as the year progresses. In the interim, though, it's kind of a battleground with manufacturers right now. We are pressing for a reduction in prices. We are pushing hard.

"I don't think the economy has felt the whole impact of the job reductions and layoffs yet, and as it continues to soften the manufacturers will have to be more aggressive with prices or promotions."

Normally, cutting prices would be a good thing right? Cost of goods would be going down and consumers would be buying more. However, now economists fear the effects of record costs of goods coupled with price cuts and reduced spending. Further price cuts from struggling retailers, economists say, can at this point only do more harm than good.

As reports: ("Warning: Falling price zone ahead")
"Deflation has become the No. 1 fear of a growing number of economists, who worry that lower prices will further hurt the economy"

"Rarely has the potential for lower prices been so scary.

"While many cash-strapped Americans would welcome paying less for what they need to buy, many economists now say the possibility of deflation, or lower prices, is the greatest threat to the U.S. economy.

"And more deflation warning bells are ringing.

"On Thursday, the government reported that the Producer Price Index, which measures inflation on the wholesale level, fell on a year-over-year basis for the first time in five years.

"The Consumer Price Index, the government's key inflation reading, is due out Friday. Economists expect a decline in overall prices for the month of December.

"Some economists are forecasting the first year-over-year drop in the CPI since 1955. As recently as July, the CPI was up 5.5% over the previous 12-months.

"Economists worry about deflation because it is a sign of the ever-weakening demand for products. But it can also be a further drag on economic activity by cutting into the willingness of both businesses and consumers to start spending again.

"Businesses worried that the price of their products may continue to drop would be likely to cut back production. That can lead to additional plant closings and even more job losses. And even consumers who don't lose their jobs are likely to delay purchases, particularly of large-ticket items, if they think lower prices lay ahead."

So, what to do pricers? Further decrease prices and cut profits even more to try and capture what's left of a dwindling consumer spendable income pot? Of course retailers are going to do what they need to for survival. But can manufacturers continue to cut costs and keep their doors open? Even giants like Wal Mart are starting to feel the pinch and cut jobs. And how much more can the economy handle? What are the keys to pricing in a downturn? More commentary soon, EM

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Pricing Video Series 6 - Transfer Pricing

Here is the final video in the Managerial Accounting - Pricing series: Transfer Pricing:

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Wednesday, February 4, 2009

Domino's New Pricing Strategy

The economy is tough for everyone. Consumers are pinching pennies and seeking max value for their dollar not just in high end products, but in everything they purchase, as grocers and fast food chains are learning.

Domino's Pizza, for example, is looking to attract more value focused consumers and to recover many of the consumers it has lost due to recent price increases. Domino's told Forbes Magazine that it has lost the greatest number of consumers in the "single pizza customers" class, described as those who place an order for just one pie and are looking for a cheaper dinner alternative.

The article reports:
"Brandon said to bring those customers back to Domino's, the chain is now implementing a "barbell" pricing strategy. In that model, some products are priced lower to appeal to customers searching for a good deal while other more premium products cost more for those customers who are less price-sensitive.

"The company did not offer any specifics on whether it has lowered its prices on some of its menu items, but Brandon did say the chain's new hot sandwiches, which are priced at $4.99, are an example of the chain's new strategy.

"The burger guys have their 99 cent offering," he said. "We feel like we have to be in that space and in that game" by offering some lower-priced alternatives like the hot sandwiches."

Read the full article "Domino's Pizza implements new pricing strategy"

On the other side of the coin, this story focuses on how businesses are squeezing vendors on prices, especially in the realm of IT, software and technology upgrades. A recently released survey of CIO's reported the following:
"Chief information officers expect their 2009 technology budgets to fall roughly 2.3 percent but are spreading the pain: Executives expect better pricing from their key vendors.

"Bottom line: If you have budget–and are willing to spend it–deals abound, according to Citi’s quarterly CIO survey."

Read the full CIO Survey here. Isn't it interesting how pricing has come to the forefront in all industries? When the economy gets tough, pricing and business basics are the keys to survival. Warmly, EM

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Pricing Video - Target Costing Method

Here is video #5 in the pricing series we have been running. This video explains the Target Costing Method of pricing:

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Tuesday, February 3, 2009

The 10 Most Pressing Questions for Pricing Professionals Today

PPS listed the following as the top ten questions facing pricing professionals today:
  1. How should I respond to the unprecedented market turbulence initiated by the global financial crisis?
  2. How can I be ready to capitalize in opportunities the recovery will bring?
  3. How can I realistically assess my organization's readiness for pricing changes?
  4. How can I successfully structure services pricing during the recession?
  5. Are lower prices really the answer to stay alive in a down market?
  6. Can I improve my pricing practice even during these economic times?
  7. How can I protect profits in a challenging market?
  8. Am I ready to face the tough pricing negotiations ahead?
  9. Should bundling be used as a discounting strategy or as an overall pricing strategy?
  10. What do my customers truly value in a downturn?
What other questions are you as pricers asking? What other issues are you facing? What answers would you give to these questions?

These and numerous other pricing questions will be addressed at our annual Spring Pricing Conference in Anaheim April 1-3. Looking forward to seeing you there! Warmly, EM

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