The Price is Right

In response to my Partner Ken and his post “Raising Prices – Are You Nuts?” I think he’s not certifiable but may be pushing the envelope. The topic of pricing is one of the least quantifiable functions management deals with due to the large number of open-ended variables involved, many of which are unknowable.

As a game show, guessing the right price is fun and rewarding. In business, guessing wrong about the impact pricing has on trade and consumer behavior has major influence over a company’s business viability. Have you ever been in meetings where the pricing strategy discussion includes debates about cost plus, matching competition, or pricing to customer benefit are all central to the topic of correct pricing? Have you tried to estimate competitive response to price changes? Have you argued pricing structure across different classes of trade, such as retail and Internet?

Bad guesses have major consequences. But the key to increasing prices, once a company has settled on a corporate pricing strategy, is to combine multiple objectives from both the account’s and the company’s perspective to achieve real revenue and dollar profit gains.

Retailers and manufacturers (brands) rarely share the same strategic objectives.  While the goals of increased revenue and profits are universal, it is the question of whose revenue and whose profits where there is usually disagreement.  Thus the role of the manufacturer is to understand the intersection of common goals. Remember the clash between Wal-Mart and dominant market share leader Rubbermaid in the 1990’s? Rubbermaid tried to increase prices in order to pass along raw material cost increases to the consumer rather than suffer a margin decline, a move resisted by the massive retailer. Wal-Mart changed suppliers and Rubbermaid was forced to merge with Newell to survive. Talk a about a bad guess about who had market strength.

Turning to the strategy of increasing prices, it is critical to understand your key accounts’ accounting and merchandise management compensation structures. In addition, a solid strategic basis which supports the key accounts’ own growth strategies is essential. Writing a universal equation is impossible but we can describe a pathway for understanding how to approach price increases:

  • Product margin alone is often not how retailers measure profitability. For example, co-op advertising, broadcast & Internet advertising, promotion spending, allowances for damages, markdown money and returns all enter into the equation at the merchandising level. Frequently there are “puddles” of margin in the financials that are not visible to the buyer teams. On the other hand retailers’ financial officers often do not focus on how much a brand spends on support.  
  • Retail brand marketing and sales teams need to find these “puddles” and reallocate spending, with a clear eye to increasing sell-through and building market share, while enabling the buying and merchandising executives to hit their MBOs. These objectives usually include increasing number of catalog pages sold, exclusive promotion events and even special sizes, packs etc. while demonstrating to their management that a price increase along with larger open-to-buys makes solid business sense. 
  • Price increases combined with reallocated spending by the manufacturer, supported by a sound strategic basis and communicated clearly to the buying team, should avoid trade alienation, a euphemism for losing support from your account(s). 
  • In short, one price increase strategy is to find “puddles” of margin that of are no financial, strategic or executive award value but still represent lost manufacturer margin. By reallocating the balance of support and working closely with the category buying team, manufacturers can increase prices and generate additional funds which can be used to increase short-term spending. 
  • In turn, retailers’ brand marketing teams need to recommend this strategy to their management on the basis of increased dollar margin (volume increases at lower margin) for longer-term share gain and increased profitability in both dollars and percentages mid- to long-term.

We are working with two product marketing and sales teams to affect this strategy, starting with a very clear understanding of key account accounting practices and executive awards programs.

What price strategy does your company use? How have you approached increasing prices? Please let us know for shared learning.

A

This entry was posted in Brand, Financial Management, Leadership, Management Practices and tagged , , . Bookmark the permalink.

2 Responses to The Price is Right

  1. What’s the process when you are both the manufacturer and retailer such those offered online?
    We’re currently launching a new online services company where we are both in an emerging marketplace. As such, we don’t have enough data to establish prices based on competitors or demand. Our pricing strategy is being derived through: looking at the few competitors (some whom offer some level of service for free); studing similar services in parallel markets; survey beta clients; and building feature/benefit lists that highlight the values that we expect customers are willing to pay fees. We generally find that the online marketplace expects a “freemium” model, where you get a base offering for free, but after you get hooked and want more features, you’ll be willing to pay a premium to get them.

    Eric

    • WE (Cal) Calligaro says:

      There are at least three components within your comment. First is the issue of being a manufacturer and retailer. The key for me is to price at the high end of the “equivalent quality” curve then leverage the advantage of being a retailer affords. That advantage is the extra margin enjoyed by having costs at the manufacturing level and pricing at retail, which should offer nominally a 100% advantage of manufacturing – only profitability.

      The second component is creating a new market. Pricing is mostly an art here if there are no statistically significant data points. Again my bias is to price high and promote until there is sufficient experience to standardize pricing or if competitors begin to achieve critical mass before you with similar service offerings / quality of service equivalents but a different pricing model. Developing new categories or markets is a marathon, not a sprint, so patience is needed and endurance.

      The last component is the assumption of “freemium”. That trend seems to be fading a bit, but still not an irrelevant consideration. My recommendation is to fashion a plan that gives away knowledge. The other adage along side the freemium one is that information wants to be free. The key for me is positioning. Contemplate moving your knowledge offering from the customer viewpoint of vendor to one where you are the expert. Those that take the information and do not reach back would probably never be a paying, profitable customer, but your knowledge reinforces your brand. Those that do are better prepared to engage experts and bring along a higher probability of accepting a premium price for working with the market leading expert.

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