Monday, April 27, 2009

Pricing for Product Managers

This economy is presenting both unprecedented challenges and exciting opportunities for pricers.

For those pricing professionals who can embrace the challenge, apply ingenuity and sound pricing strategies, and be agile enough to benefit for opportunities despite the obstacles that the business community as a whole is facing, they can build a foundation of success now that will catapult them ahead of the competition when the economy rebounds.

The Accidental Product Manager blog wrote a very interesting article covering this piece from the product manager perspective, citing the Wall Street Journal's recent coverage of how businesses are coping with the downturn:
"One thing that they’ve discovered is that when the economy tanks, this is a great time to prepare for the future by getting your customers to trade up. This sounds rather backwards right? I mean when times get tough, people tend to trade down. Even though the margins on your stripped down products are skinner, most product managers think that SOME sales are better than none.

"In emerging markets, product mangers have realized something much deeper. They get their customers to trade UP to premium products even though corporate budgets may be tight.

"The key to doing this successfully is to be very, very careful about how you set the prices for the different tiers of your product offerings. You can’t make the price differences between basics and premium products too much or else your budget constrained customers will get turned off.

"Instead, what you need to do is to accept a lower profit margin on your premium products - in fact, lower than most companies are normally willing to accept. However, we are not currently living in normal times. You want to signal to your buyers that your premium products are a good value.

"If you can signal to your customers that your premium brand is offering them more value for the money, then they will be both more willing to trade up to it as well as to stick with it during hard times."

The Wall Street Journal expands the perspective even further, examining how companies can learn survival strategies from companies in emerging markets who, despite the fact the current economic slump is global in scale, are taking the offensive as opposed to hunkering down and hoping the storm will pass.
"As Western companies struggle to navigate the worst economy in generations, here’s one piece of advice: Look at places where volatility is business as usual—emerging markets.

"In these countries, companies have learned they can’t just hunker down when bad times strike. They have to go on the offensive. In Eastern Europe, South Africa and Latin America, managers look at tumultuous times as a chance to implement bold, creative ideas, outflank rivals and boost their business.

"That means coming up with new ways to price their products. Or scrapping old marketing approaches. Or focusing on figuring out where the economy is heading next—and how to use that information to grab market share."

The article gives four tips for businesses seeking ways to survive and thrive in the current downturn:

1. When the economy is down, get customers to trade up.
2. Increase product and service visibility.
3. Rethink what customers value.
4. Look at new metrics.

Read the full article: "Surviving the Downturn: Lessons From Emerging Markets."

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Friday, April 10, 2009

Don't Just Cut Prices

Here is another great example of price cutting vs. staying true to your value proposition and developing innovative competition strategies that promote your strengths, not bend to market and pricing pressures. Best Buy is implementing a new customer retention strategy aimed at fighting Wal Mart's impossible to be price cutting without engaging in a price cutting war.

"Best Buy is preparing to fend off Wal-Mart's brutal price competition by giving consumers stores that are more interactive, Miguel Bustillo reports. Instead of being wowed simply by low prices, customers will be able to step into the world of a new videogame or see their faces captured by a high-definition video camera.

"The effort will be lead by current COO Brian Dunn, who takes over as CEO in June. A onetime Best Buy stereo salesman, he still believes that the best retail innovations come from front-line workers, and he has embarked on a tour of stores in search of inspiration for remodeling plans that he sees as a way to differentiate the retailer from competitors. "We want our stores to morph into a series of experiences," he says.

"Dunn says he intends to win customers by matching Wal-Mart on prices, and to build on Best Buy's existing strategy of helping customers navigate increasingly complicated technology. The key will be making the most of Best Buy's tech-savvy sales force, he feels."

Read the full article here.

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Thursday, April 9, 2009

Pricing Human Life

The New York Times ran an article last month entitled "Pricing Human Life," which uses pricing models and economics to explain the functioning of the nation's health system. This article is part of an interesting column called Economix, which is designed to educate people in "the science of everyday life."

I thought I would share as it is another unique example of how pricing principles are applied. The article also gives examples of cost effectiveness modeling in the healthcare industry.
"From an economic perspective, a nation’s health system can be thought of as a giant bazaar that presents the rest of society with a price list for wrestling from nature better health, or longer life, or both, through a variety of medical interventions.

"If one arrayed this price list from low to high, one might end up with a supply curve such as the hypothetical one shown in the graph below. It shows that each additional step toward better health will rise in cost by increasing increments.

Represented on the horizontal axis of this graph are so-called "quality-adjusted life-years," or QALYs.

QALYs are a metric widely used now in cost-effectiveness research. They are meant to adjust for the fact that not all years added to people’s lives are equal. A medical intervention yielding a given number of additional life-years in perfect health makes a greater contribution to human well-being than an intervention that yields the same number of life-years in less-than-perfect health. QALYs are used to adjust for that difference in a patient’s quality of life.

Read the full article here: "Pricing Human Life." Warmly, Eric

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Friday, April 3, 2009

Toys R' Us Prices for Kids, Competes Against "Dollar Stores"

Toys R' Us is implementing a new (and I think very intelligent) pricing strategy that will both increase the company's competitiveness against "dollar stores" and other low cost merchandisers, but that will also tap into a new (and loyal) market - kids.

Starting this week, Toys R' Us is displaying roughly 100 items right inside the front doors priced from $1-$3 to meet the budget of kids allowances:
"It's the world's biggest toy store's answer to popular dollar stores as shoppers have traded down to lower-price outlets.

"Karen Dodge, chief merchandising officer of Toys R Us in the United States, said the new shop is a natural extension of the company's broad range of toy prices, frequent discounts and promotions.

"Featured toys will be refreshed periodically. Toys R Us is also promoting its Geoffrey's Birthday Club freebies and adding new diaper and formula rewards to its Rewards R Us loyalty program."

This is a great example of an innovative approach to the current consumer spending downturn. In the professional soccer arena, MLS team the New York Red Bulls have decided not to raise ticket prices when they move into their newly finished stadium next year. This is an opposite strategy to some teams who have decided to raise prices on the basis of the "value" their sporting organizations bring to the local economy. The Red Bulls move shows confidence in the loyalty of their fan base:
"SECAUCUS, N.J. (AP) — The New York Red Bulls say they will not charge higher prices to current season ticket holders when they move into the new Red Bull Arena in Harrison next year.

"As a thank you to our most loyal fans for their continued support, we have decided to freeze pricing for the first season in Red Bull Arena," managing director Erik Stover said. "We have a very loyal fan base that has waited a long time for Red Bull Arena to be built. Not only will they be the first in line for seats, they will also receive this additional price freeze."

Read the full article here. Also in pricing news this week, the New York Times reported that movie goers are "demanding" higher prices because of the fact that Monsters and Aliens in 3-D topped the box office this week. The 3-D theaters average $3 more in admission fees than regular movies. Is it really that consumers are demanding higher prices and more 3-D films, or that once again family friendly movies are dominating the box office, as has been the case for several years with movies from Disney and Pixar? Food for thought. Warmly, EM
Read the full article here.

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