The Minimum Pricing Debate

The weak economy, as I mentioned in my last post, is encouraging cutthroat pricing wars between retailers trying to make the most of this slow year. However, manufacturers are hurting as well and trying to protect themselves with minimum pricing agreements.

This issue is currently gaining a lot of attention. As pricers we can see all sides of the issue, especially as most of these debates are centering mostly on commodity products rather that high value offerings.

As a pricer, where do you stand on the issue? How is this debate affecting your current pricing operations? More to come - Warmly, EM

The Wall Street Journal Reports:

"WASHINGTON -- Hoping to roll back a Supreme Court decision that allows manufacturers to set minimum prices on products, opponents launched a campaign that will include use of eBay Inc.'s popular Web site to garner consumer support.

At a closed-door meeting whose attendees included representatives of auctioneer eBay and discount retailer Costco Wholesale Corp., opponents decided to lobby for a bill now pending in Congress that would make minimum-pricing agreements a violation of antitrust law."

"Discounting, of course, remains a fixture on the retail landscape -- particularly in this year's holiday shopping season, due to the weak economy. MAP agreements don't cover all products and sometimes manufacturers grant exceptions. Typically the agreements apply to high-end goods, electronics and new product lines that manufacturers don't want to see tarnished by immediate discounting."

"Minimum-Price Foes to Use eBay in Effort"

"Manufacturers have been racing to enforce minimum-pricing policies since last year, when the Supreme Court ruled them to be legal, and not a violation of antitrust law. EBay and a group of other retailers and antitrust advocates are meeting Thursday in Washington to craft a strategy to overturn that ruling.

Manufacturers say minimum-pricing requirements are good because they protect a brand's image from being tarnished by discounting, while helping retailers make enough profit to pay for customer service. Consumer advocates argue that minimum-pricing deals hurt shoppers by keeping prices high and diminishing consumer choice."

"Discounters, Monitors Face Battle on Minimum Pricing"

More Online Pricing Wars: Black Friday and Automobiles

With the economy uncertain, consumers have been increasingly less likely to spend money as freely as in recent past. This is a problem for retailers who depend on these six weeks to fix their profits for the rest of the year. Retailers are vying for the business of a shrinking consumer pool with shrinking funds, and the competition is as fierce online as in brick and mortar stores (where a Wal Mart employee was trampled to death the day after Thanksgiving by eager shoppers looking for the cheapest prices on high demand electronics):

"According to CNBC, Amazon's strategy is to use very low prices as a way of stopping competitors like eBay (NASDAQ: EBAY) dead in their electronic tracks. This Christmas season, retailers, whether online or not, may find themselves in a no-win situation. They have to lower prices to encourage people to shop. But quality growth in top-line sales is questionable. When managements see the bad news flow about the global recession, they become scared and want to become even more aggressive in terms of pricing. The strategy may work and it may not. It's a vicious circle."

"Will Amazon win with its pricing strategy?"

In the vein of PriceSpider, a new website just launched which aggregates car prices around the country and helps consumers find the best deal:

"The founder of Autobrag.com, a website that searches for the best car prices, says he can help the ailing auto industry by pointing his customers toward the lowest-price deals.

Autobrag.com has amassed a database of 9,000 dealers nationwide that offer no-haggle pricing. The site uses the data to tell users what they should expect to pay for cars. When a user enters a make and model, Autobrag lists the no-haggle price and dealers offering the model within a certain radius of their zip code.

The service, launched in March 2006 with 140 dealers, now attracts 12,000 unique visitors a month, says CEO Danny Chan. And starting this week, Autobrag users can make bids on the cars through a new service, "The Braggler."

"Car Pricing Web Site Trying to Find Road to Profits"

Any retail pricers out there employing creative pricing strategies in this crucial time of year? Share your thoughts and experiences! Warmly, EM

NFL Follows Airline Pricing Examples

The San Francisco Giants will be the first NFL team to employ "dynamic pricing" strategies to increase ticket sales in this down economy. Prices on a certain number of tickets will rise and fall each week based on demand.

The team will employ a pricing software to determine prices right up to the day before the game. See the following articles:

"The San Francisco Giants are taking a page from the airline industry and the theater. This spring, they will be come the first ball club in the country to offer a limited number of tickets with prices based on demand. It's called "dynamic pricing".

With the help of new software, the Giants will become the first team in the nation able to adjust ticket prices for a limited number of seats for walk up sales. Giants' President, Larry Baer, says this could be just the deal you're looking for if you want to see a ball game, but find your funds limited."

"Giants to Try Out Dynamic Pricing"

"Having the ability to adjust prices like airlines do can be an important tool for us in the long run," said Staci Slaughter, the team's senior vice president of communications.

"Alas, the helter-skelter nature of airline-ticket pricing often infuriates customers, as people in adjoining seats might pay vastly different sums for the same flight. The Giants recognize that, which is why the 2009 experiment will cover a small portion of seats in the vast reaches of the upper deck and the back of the bleachers that largely go unsold."

"Giants expand variable pricing: Goal is to capitalize on demand"

How will this plan work out? Will the team be successful in capturing customers who would otherwise be less likely to attend in the current economy? Will the NFL have a better time with customer reactions than the airline industry?

Add your thoughts! Warmly, EM

Pilgrim’s Pride in Bankruptcy …. Amazingly “Bo” Pilgrim Still Doesn’t Get Pricing

Thanks to our contributing pricing expert, Tim Smith, PhD, for this enlightening guest post.

Cost of chicken feed is up, but the price of chicken is flat to down. What went wrong? Marshall's scissors alone would predict the current profit failures in chicken production.

Though branding and quality issues can provide price differentiation within the chicken market, the core price level of chicken is set by the willingness of producers to supply and consumers to buy. At some level, chicken is a commodity. Even where it is not, the price differential of "good" chicken to "acceptable" chicken may increase the price of the "good" chicken over "acceptable" chicken, but its total price of "good" chicken is dependent on the price of the "acceptable" chicken. The basic value approach to pricing dictates: the price of "good" chicken = price of "acceptable" chicken + price differential. Thus, if you increase supply of "acceptable" chicken while demand is flat, the market clearing price of most all chicken will go down.

Lower prices of chicken may not be all bad if the producers have sufficient economies of scale that increase with increasing production faster than prices fall with increases in supply, but such economies aren't sufficient for chicken producers today. Today, the cost of producing chickens is going up. Roughly two-thirds the price of chicken is derived from the cost of chicken feed, and during the past two years chicken feed went up from $2.40 a bushel to $7 a bushel before recently declining to a more modest level near $4 a bushel.

When marginal costs go up, prices need to increase. With increasing prices, supply will need to decrease. Simple application of Marshall's scissors.

But, instead of cutting back production, in all of Lonnie "Bo" Pilgrim's wisdom, he has decided to use the bankruptcy protection to maintain production. He seems to have an unbounded faith that somehow demand will increase and he will make a profit. He may have faith, but I will trust the science of economics – which predicts the market clearing price of chicken will continue to remain below marginal costs to produce until supply adjust appropriately to market demand. Thus, for now, Bo Pilgrim is "strategically" destroying profits.

Let's hope his bankers ask this octogenarian to step aside for someone who is using his brain intelligence rather than his faith intelligence. In the meantime, I feel bad for Tyson Foods, a competing chicken producer, as they have to deal with a nasty industry wide challenge. As is true for other industries, pricing power is subject to the actions of the stupidest competitor.

Tim Smith, PhD is an Adjunct Professor teaching Pricing at DePaul University and Managing Principal of Wiglaf Pricing. www.wiglafpricing.com.

How is today’s economy impacting company pricing plans?

How is today’s economy impacting company pricing plans?

Your pricing department activity and staffing issues?

Well the Macro-economic news is overwhelming. Good time to connect with you and about your micro-economic issues of the day.

To what extent is your company responding to downward price pressures? How much more or less is the company turning to your department for price and profit help?

Perhaps your company is the exception and plans to thrive with pricing in 2009.
Look at McDonald’s who just reported an 8% sales increases, despite huge currency impacts. They credit lower pricing, more frequent promotions and a healthier menu to their success.
For example --my McDonalds now offers free coffee every workday morning ; so guess who switched out of Starbucks for Mickey D? ( right me!-and “I’m lovin it”)

Please Share with the pricers what seems to be working / or not in your pricing world. Eric Mitchell Founder PPS

SaaS Pricing Model Expands as Economy Tightens

As more and more businesses are tightening their belts and preparing for more economic uncertainty in the near future, software providers are increasingly moving to provide SaaS (software as a service) solutions and pricing models. Fewer companies are budgeting for the capital expenditures needed for enterprise system purchases or upgrades, and are instead opting for Web-based platforms that are easy to integrate and don't require the purchase of additional hardware.

Another recent SaaS pricing model announcement:

Sunrise Software, a leading independent provider of IT Service Management software, today announced a new subscription pricing model designed to help organisations budget for ITIL in a tougher economic climate. The offering combines the benefits of on-premise, hosted software and Software as a Service (SaaS) models for Sunrise's range of IT Service Management (ITSM) and ITIL software solutions. The introduction of Sunrise Software's subscription pricing model means that although customers will rent the appropriate software, it will remain hosted and maintained at the customer site.

Under the terms of Sunrise Software's new subscription pricing model, customers can benefit from the lower capital expenditure of a SaaS model, but still enjoy the complete control and configurability of an on-premise model. There is just one upfront payment for project and training costs, followed by an annual subscription to the software.

Tom Weston, Chairman of Sunrise Software, commented: "We believe this new pricing model represents a particularly attractive package for those organisations under pressure to improve their IT cost/performance ratio. With the new subscription model, it is now even easier for potential customers to reap the rewards of ITIL, without having to compromise on functionality and flexibility to meet stringent cost requirements."

Read the full story: "Sunrise Software's New Subscription Pricing Model Broadens Reach For Best Of Breed ITIL Tool."

Does your company provide or use an SaaS solution? If so, do you feel that the pricing models are fair? Do they make it worth the investment vs. purchasing new in-house systems? For providers, how are you modifying your pricing structure in the current economy?

Holiday Pricing Search Engine

Move over Google spider - there is a new spider in town.

PriceSpider.com, a search bot that scans retail sites online for consumer price comparison, in expanding and advertising its benefits to consumers this holiday season:

The advantage of PriceSpider.com is its active search engine technology that continuously scans for pricing and product information. Holiday shoppers can utilize the PriceSpider.com Gift Guide to find the perfect present for the gadget-minded on their list. Shoppers can also create and share lists with their friends and family to peek into their wish lists. Additionally, the tool can be used to access the lists of the gadget savvy to help make the best gift-giving decision.

Read the full article: "PriceSpider.com Helps Consumers This Holiday Shopping Season"

How will pricing professionals in the retail industries be affected by this spider (if at all)? How will pricing strategies adjust? As always, we welcome feedback from pricers!

Six Things To Improve Your Sales And Price Position

Here’s a pithy article by Robert Imbriale, a Marketing Consultant
and author of The Business Hotline, and another favorite from the Professional Pricing Society Archives. In this competitive and slowing economy, any strategy you can capitalize on to give you a cutting edge will be important, and applying proven, best practices is always a smart approach. Cheers, EM

Six Things To Improve Your Sales And Price Position

#1 Add More Value To What You Sell
Have you ever heard a customer ask you, "Is that all I get for this price?" Chances are you have. It could mean that you are not offering enough value for what you are charging, or it could be a misinformed client. What can you do to add value to your products or services? Try adding value by including items that cost you very little or even nothing at all. Think of creative ways in which you can add value to your base product or service offerings.

#2 Offer Items Of Complimentary Importance With Each Purchase
This is one of the most profitable things you can do to increase your average unit of purchase. You accomplish two things by offering complimentary products or services. First, you add value to your products or services by offering items that you know your customers will need to buy at some point. And you are saving them the trouble of having to go to another business for these items. If you sell cameras, offer batteries, film, protective cases, and other useful accessories at the time of purchase. In a service business, you can offer products that enhance your service.

#3 Sell Upgrades
Upgrades differ from complimentary products in that they are generally a better version of the same product as opposed to a complimentary or "add-on" product. In the computer industry, this is done all the time. There is no reason that you could not apply those same.

#4 Use Risk Reversal
Here's a really powerful way to increase your sales, but you have to think this one out carefully. Offer your products or services as risk free as possible to your customers. You may offer a full money back guarantee, as opposed to most companies that offer only 30 days. The rule of thumb is to keep the risk to your customer as low as possible. Returns on quality products have proven not to increase proportionately with sales, so don't worry about being overwhelmed by returns, it won't happen!

#5 Create Special Offers To Past Customers
The most profitable market is your past customers. They have already participated in business transactions with you and have developed trust in your operation and in your products. Why not take full advantage of this fact by developing specials for "preferred customers?" If you negotiate a special deal for some product or you are planning on carrying an entirely new product line, why not let your preferred customers know about it before the rest of the world? Go a step further and offer them special pricing on those products or services if they act before a specified date.

#6 Market Payment Terms
Do you offer your customers various payment options? The more flexibility you have, the better off you will be. Leasing is an easy option to set up with the large number of leasing firms in business today. Offer as many payment options as possible so that you totally remove payment as a barrier.

These and numerous other pricing resources are available to members in the Professional Pricing Society archives.

Christmas Pricing Wars

Here are a few stories from Forbes covering retailers who are slashing prices to encourage high toy sales among Christmas shoppers despite low consumer spending and current economic conditions.

Wal Mart, not surprisingly, took the first step. Forbes reported on October 1:

Wal-Mart Toys With Xmas Strategy: Retailer will target cash-strapped consumers with low-priced playthings for their tots.

"Wal-Mart took the holiday-season initiative on Wednesday, announcing that it would be cutting prices on several toys in 3,500 American stores as a way to draw shoppers for the important year-end period. Wal-Mart (nyse: WMT - news - people ) said it made the call after conducting a survey that showed consumers will start Christmas shopping earlier this year in order to stretch their holiday dollars. Though Wal-Mart caters to low-income shoppers, retailers have been hurt by sluggish spending due to rising food and energy prices, the housing slump and a generally weak economic climate. (See "Trouble On The Street For Retail.") The industry doesn't see a quick fix to those trends and is anticipating a subdued holiday season."

Read the full article: "Wal-Mart Toys With Xmas Strategy."

One day later, KB Toys strikes back. From Forbes:

"Retailer matches Wal-Mart's $10 pricing strategy.

KB Toys said Thursday that it would be cutting prices on more than 200 toys to $10 or less in an effort to draw consumers to its stores and to compete against the large discount retailers. Wal-Mart (nyse: WMT - news - people ) made a similar move on Wednesday. (See "Wal-Mart Toys With Xmas Strategy.") The discount store has been able to fare the rough economic climate better than most as people flock to it for one-stop shopping. But smaller retailers like the privately held KB Toys have been having a hard time of it."

Read the full article: "KB Toys Strikes Back."

So how black will "Black Friday" be for retailers? And how will these pricing wars pan out? We welcome comments from our readers and will be keeping track of developments.

Tips From a Software Pricing Guru

Pricing and negotiating software deals has never been easy
and every situation is different. Anyone trying to do a good
job of pricing and negotiating knows it takes experience,
insight, courage and wisdom. These tips come from the real
world experiences of Professional Pricing Society Board
Member Jim Geisman, President, Marketshare, Inc. The
complete brochure can be purchased at www.moreshare.
com. E.M.

1. Learn Your Customer’s Business

2. Value = Benefit - Cost

3. Reinforce Value with Price List

4. “Meet the Competition” Pricing

5. “Pre-emptive” Pricing

6. Use Credit Instead of Price Cuts

7. Use a Team to Set Pricing

8. Get the Support Pricing Requires

9. Take the Time to Resolve Pricing Up Front

10. Put Pricing and Discounting Together

11. Price List Must Fit Sales Comp

12. Make Easy-to-Use Price Book

13. Run the Numbers

14. Develop Standard Discount Policies

15. Product Bundle Discounts

To read the full article: Fifteen Pricing Tips from a Software Pricing Guru

Fundamentals of Pricing Strategies and Tactics

A timeless article on pricing strategy that I wrote more than 20 years ago. Notice how pricing strategies have long shelf lives. Warmly, EM

The following five factors should be considered when establishing a pricing strategy:

Competition: Who is your competition? How many competitors do you have? The number of competitors you face can often be more important than who they are,especially when involved in a bidding process.

Customers: Should you differentiate pricing according to customer class instead of service or product? This practice is more and more common as most businesses have several classes of customers, some of which are price sensitive, while others are not.

Financials: What are your gross margins on products and services?

Perceived Value: Do your customers perceive a difference between your services and those of your competition? If so, are they willing to pay for the difference you offer?

Marketing Objectives: What are your primary and secondary objectives? Obviously, some of your objectives will conflict. It is your role to resolve these conflicts by determining and communicating primary and secondary objectives. You instinctively know which objectives are most important, but your people require constant direction to maintain their focus. In addition, quantify your objectives whenever possible.

Click to read the full article: Fundamentals of Pricing Strategies and Tactics

4 Steps from Pricing Competency to Pricing Leadership

Here is another favorite from the PPS pricing articles archive. The subject is highly relevant, especially in today's environment of an uncertain economy and fluctuating prices on products and services. EM

Pricing Leadership is the ability of the corporate team to agree on the strategically sound pricing plan, implement it, and succeed in the marketplace. For the pricing professional to help the team reach a position of Pricing Leadership, he or she must develop the softer skills of business to complement the analytical capabilities. Pricing Leadership has a component of thought leadership, yet its true effectiveness is unleashed through motivating and orientating other individuals towards a common identified goal. To progress from Pricing Competency to Pricing Leadership, you must take four critical behavioral steps!

Step 1: Pick Your Battles
If you fight every little issue, people will consistently perceive you as arrogant or out-of-touch. In the end, this reduces your potential role as a pricing leader who helps create company strategy to one who at best, might provide technical pricing analysis. Pricing Leadership requires discretion; select in advance those issues you can champion, and which ones you will openly and proudly defer to the judgment of others.

Step 2: Explain, Don't Proclaim
Pricing Leadership implies that people willingly choose to follow an agreed pricing plan, not begrudgingly accept the restrictions of it. Teams will champion a plan when they understand the rational behind the decisions which formulated the plan. Authoritatively proclaiming your pricing plan is the right one ensures that others will find reasons to disagree with it.

Step 3: Understand That Pricing Is About Guidelines, Not Laws
Real life market situations will result in customer price transactions that are far different than those prices you developed at the strategic pricing level. In the end, the strategic pricing plan is just that, a plan, not a mandate. Good pricing plans are living creatures. They are flexible and evolve with time.

Step 4: Realize That Sales Is Your Ally, Not Your Enemy
Pricing professionals and sales teams have a common goal, to create customers and capture profitable revenues. As a Pricing Leader, you must find means to work well with the sales team. To the customer, the salesperson is the corporate advocate. To the corporation, the sales team is the customer advocate. As a pricer, please recognize their dual role and the unique insights they gain from being the conduit between the corporation and the customer.

Read the full article here: "Four Steps from Pricing Competency to Pricing Leadership."

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."

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."