Best Practice Pricing

Gain returning customers… or not

2010-09-12T10:29:00.000-07:00

In this blog I’ve talked many times about the importance of using segmentation and up-selling to gain increased revenue - but there has to be some rhyme or reason to what you don’t get without paying extra. What I’m trying to say is -- don’t do what this man did to me yesterday.

On a short trip with out-of-towners in the hills above Malibu, we stopped at what looked like a small 19th century village: a very pretty and very quaint area of town. The 1850s “general store” turned out to be a wine store with tastings of local (mainly) Malibu wines. We were all in a good mood, finding this old village was a nice surprise and finding a place to taste local, and unusual, wine was too. But as we sat down in the very nicely decorated tasting room I asked the server (was it just a server or the owner?) to light the candles in the imposing candelabra just in front of the table. It would have further added to the ambiance and our good mood. Not an unusual request - just about every restaurant has candles or these little oil lamps because it adds to the ambiance, makes people happier with the experience and thus increases their likelihood to return. Pretty simple. And the guy said: “NO. We only light the candles for private parties as part of the “special lighting package”. What?!?! Here we are four people paying $15 each to get a few sips of wine and maybe buy a few bottles and the guy refused to light the candles because we did not pay for it! And as other parties sat down for tasting we heard the same question every time - and the same answer! Unbelievable!

This guy had it all wrong. He was trying to “add value” to the “special lighting package” by disallowing the lighting of candles unless you pay extra for it. But since the lit candles are “expected”, what he managed to do was to turn off customers. His “no” was such a snub that I will not go back and I could hear how other quite animated parties were subdued by the same “no” to them.

So as you are looking for ways to up-sell don’t remove from the minimum experience customers expect to receive from you when it comes to service or product functionality. It can backfire badly….

Salut!

Per Sjofors

AppleTV, iTV and content pricing

2010-08-25T11:16:00.000-07:00

The Apple rumor mill is in full swing again. This time is it about a (supposedly) soon-to-be-announced upgrade to the AppleTV, which is slated to be called iTV. Thus far, AppleTV has repeatedly been described by Apple execs as a “hobby”. But if we believe the rumors, soon, it may be turned into a real business.

The AppleTV, for those who do not know, is a small dedicated computer that allows the user to browse, download and play standard definition and high definition video and audio content from the iTunes store, YouTube and local computers with iTunes. And the entire system is controlled with a thumb sized remote control.

Here is one journalist’s take on the matter:

“Currently, TV downloads from iTunes cost an average of $1.99 per show—just high enough to annoy many customers who are used to getting TV for free, but low enough that people pay it. A 99¢ TV rental would obviously be a little closer to free and, if the shows remain commercial-free like the rest of iTunes, would be an upgrade from watching them on the boob tube or Hulu.”*

While the pricing strategy is a mystery to this particular journalist, for us in the pricing industry it is not. Apple, being the Pricing Champion they are, priced content on iTunes to maximize profit instead of demand. They know that early adopters are a smaller group, but they are not price sensitive. They buy because they want to be first. They want to know they are on the leading edge. Likewise, the AppleTV is not cheap at $229. You could almost afford a “real” computer at that price. But again, early adopters are not price sensitive.

So if the rumors are true, and Apple will introduce the $99 iTV and the cost of downloads does reduce to 99¢ it really just means that Apple now believes their little device is ready for prime time and expects it to be widely adopted. Some people call this strategy a skimming pricing strategy but I think it is just common sense. Think about this for a second. You develop a new product, created a whole new business segment, and you want to recoup your product and infrastructure development cost as soon as you can - so you price relatively high because you know the early adopters and not price sensitive. But as the product reaches the mainstream, volume goes up and price sensitivity goes up - so you lower the price. But this time the sunken research and development costs are already paid by the early adopters, so you can lower the cost and maintain profit margins. More often than not, just like in Apple’s case (if the rumors are true) a new version of the product is developed that is cheaper to manufacture and, because it is now a “different” product, it does not alienate those early adopters that are sooooo important for future product development.

The lesson to learn hear (no matter if Apple introduces this new product or not) is that what is a pricing mystery to some is common pricing sense for the rest of us. And that anybody who prices new groundbreaking products and/or services should not price low but should be aware that their marketplace’s early adopters are not price sensitive. In this context I could expand this article into a rant about the stupidity some people call penetration pricing, but I’ll save that for another time….

With warm August regards,

Per Sjofors

*The full article can be found at http://arstechnica.com/apple/news/2010/08/-more-evidence-for-99-itunes-tv-rentals-apple-tv-makeover.ars

Don’t overestimate your customers!

2010-07-19T11:41:00.000-07:00

In retail sales, it’s a well-known fact that consumers don’t know what things “should” cost, and apart from the products they buy every day, they don’t have a reference point for pricing and they don’t shop around. Think about this for a second. Do you know what a head of cauliflower “should” cost?

For those of us involved in the pricing industry, it is therefore interesting to be on the receiving end of grocery stores’ price manipulations. I do most of the cooking and thus most of the grocery shopping in my family, so let me give you two personal examples.

I don’t eat red meat, so I use ground turkey for burgers and any other meals where you would normally use beef. My local Albertson’s sells two brands of ground turkey; one of the brands is a 1 pound package at $4.99 and the other is a 1.25 pound package at $5.49.

Last week they had stacked the 1 pound package up to the ceiling (literally!), allocating almost the whole turkey section of the counter for the promotion, and surrounded it with big “buy 2 for $9.99” signs. A whopping one cent discount! I returned to the store about 3 hours later to pick up something I forgot - and they where sold out of the “discounted” turkey.

It is obvious that many shoppers thought the promotion was a bargain. They shop for ground turkey seldom enough that they don’t have a reference point and they don’t know what a pound of ground turkey “should” cost. Thus, they can be easily manipulated.

When you set your prices do you take this into consideration? You probably know what you are selling should cost - because it is your business. But do your customers?

The second example is from the same Albertson’s. Here in southern California, grocery stores always have a section devoted to Hispanic shoppers. In some cases, you can actually find exactly the same products in the Hispanic section - just much cheaper! Obviously there’s an assumed difference in buying power between the average Hispanic shopper and the rest of the shopping population and thus a different willingness to pay.

So do you consider differences in your marketplace’s willingness to pay? Do you segment the market? Do you provide versions of your products for the various segments you sell to, or are you trying with a “one size fits all approach”? If you do, do you know how much business goes to somebody else who has the same products and prices to capture a larger portion of the marketplace? If you are looking for a quick fix to your bottom line, considering pricing for uneducated customers could really make a difference.

With warm summer regards,

Per Sjofors

per@atenga.com

818 887 4970

Taking control of your own pricing

2010-03-24T10:43:00.000-07:00

One of the aspects of best practice pricing is to take control over what customers are willing to pay. Just today I found another example of this. General Mills, the food giant reported strong earnings growth. Here are some interesting numbers:

Revenue for its US retail business increased 9.1% while sales volume “only” increased with 3%. Thus, the company was able to increase prices, and/or direct consumers to more expensive products.

General Mill’s CEO Ken Powell said in the press release that they made a significant marketing reinvestment and will continue to do so. Thus - General Mills took control and influenced the marketplace, with marketing, to pay higher prices. A great example of what just about every company can elect to do - even when selling commodities like General Mills.

With best cereal regards,

Per Sjofors
Atenga Inc

iPad pricing comments

2010-01-27T14:35:00.000-08:00

- Apple followers are not price sensitive and typically want "the best", thus, a relatively high price of the 3G 64GB model is a way for Apple to quickly re-coupe the development cost. Recall how successful the iPhone was with a very high price for a phone.
- The "odd" pricing of the 3G modes ($629, $729, $829) is a way of framing to WiFi models too appear more affordable at their $499, $599 and $699 prices, thus they will easier penetrate a more price sensitive market segment.
- It is a stroke of brilliance to price (most of) the products considerable lower then the $1,000 that the rumor mill expected. And lower then Lenovo's and (I think) Dell's tablet computers.
- The iPad will not make a dent in the netbook market for some time; it is too different, too expensive and too much Apple. At current prices it appeals to Apple users who don't want the windows experience (like me) and therefore have not yet bought a netbook. As prices of the iPad will drop significantly over the next year to two - this will change.

Per Sjofors
Founder/CEO
Atenga Inc

Coming out on top!

2009-09-24T07:22:00.000-07:00

As we coming out of the recession, some companies are taking advantage of the increase in consumer confidence and correcting for the pricing mistakes they made as we entered the recession.

Restoration Hardware, the upscale furniture and accessory store, is one example.

Here are some excerpts from an interview with Ian Sears, Chief Marketing Officer of Restoration Hardware (courtesy of Advertising Age): “As the recession hit, we dropped our prices by 20%. When that happens, and you end up discounting as much as we did and as much as our competition did, you, over time, begin to create some level of devaluing your products,"

But Restoration Hardware has began taking corrective action. They changed their advertising strategy to focus on more upscale channels, created a new website with a more exclusive “feel”, increased the quality and design of its offering, and, they increased their prices between 20 and 30%. All of these actions were meant to work in concert with each other to provide concurrence between company positioning, product mix, marketing mix and price.

So what will you do now as the recession is slowly coming to an end? You probably also dropped your prices in response to the weak economic climate - but is now the time to increase them? Or do you want to be stuck with the low profits of the recession, and see your competition race past you both in profitability and competitiveness?

Do you know what your customer’s new willingness to pay is? Their new price elasticity? Their new decision and value drivers? If you don’t (and unless you’ve just finished a price optimization study, you don’t) how will you find out? What plans and programs do you need execute in order to leverage all the new money coming out there as the recession comes to an end?

With regards to a bright future,

Per Sjofors

per@atenga.com

818 887 4970

Apple and Dell - commodity and not

2009-07-26T17:32:00.000-07:00

I’m fascinated by the comparison between Apple and Dell, as loyal readers of my blog may have noticed before. In light of the release of their most recent financial statements I felt compelled to write about them again.

Apple, of course, has proven to be the master of de-commoditization. Historically Apple has never subscribed to the commodity mindset that besieges much of the technology industry. They have continued to find ways to keep their computer offerings unique. They where never lured into being like everybody else, and, now with the iPhone, they have managed to de-commoditize the cell phone too. With non-commodity products, Apple has the ability to “create their own weather”; they are in control of their own marketplace. And Apple does not miss an opportunity to use the pricing lever for their non-commodity products. Their products are more expensive than commodity products, yet they provide unique value for a small, yet significant, portion of the market. And when it comes to consumer satisfaction, in study after study Apple comes out on top.

Dell, on the other hand finds itself squarely in the commodity space. Their product offering is not particularly unique and, as with all commodities, buyers end up making their decisions on price alone. Dell faces stiff competition from a slew of like-wise commodity computer vendors, all vying for the product with the lowest price.

Now let’s have a look at the business results of these vastly different strategies:

	Apple	Dell
Last quarter revenues	8,337.00	12,342.00
Growth from previous quarter	2.1%	-8.08%
Last quarter profits before tax (EBT)	1,732.00	412.00
Growth from previous quarter	1.1%	-10.9%
Percent profit	20.7%	3.3%
Market cap	$143.32B	$26.38B

So what does all of this mean? It means that the company who chose the non-commodity business strategy, and successfully executed on that strategy has ended up with larger profits and higher shareholder value.

There is, of course, nothing wrong with pursuing a commodity strategy. It is a safer choice and it requires a very different corporate focus and skill-set than choosing a non-commodity strategy.

But most companies are not like Apple or Dell. They are in-between the two. Most companies have some products that are commodities and some products that are unique. And most companies have simple pricing schemes; like cost-plus, where every product gets the same standard margin; 15%, 50%, 200% - whatever is deemed to be common in the company’s industry.

These companies lose out on profits they would rightfully earn if they priced their unique products differently than their commodity products. So, a quick fix for a company like that is to analyze and document what products are unique and thus have pricing power, and consequently increase prices on these products.

Another risk almost every company faces is to be forced into believing their products are a commodity when in fact they are not. The reason this happens is simple - buyers tend to ground down salespeople in their quest to get a lower price, and a better deal. All but a few salespeople can resist this force for a long time. Eventually they succumb to believing that whatever they are selling is a commodity, and they resort to selling on price alone. This only helps to enhance whatever downward pricing pressure already exists in the marketplace, zapping away at profits a company rightfully should earn. The fix here is training. The sales people must know the true value of their product delivery to the buyer and must be trained on how to defend that value. When the salespeople start spending more time explaining to their management that prices must drop than they are spending convincing customers no additional discounts are available - then it is time to send them off to training on how to sell value!

So, the moral of the story is: Differentiation and uniqueness provide pricing power - define it and use it to increase profits - for the whole company or just the unique products. Never fall into the commoditization trap!

With hot summer regards,

Per Sjofors

Founder/CEO

Atenga, Inc.

www.atenga.com

What goes up, unfortunately also may come down...in a hurry.

2009-05-18T14:15:00.000-07:00

Most of the time I’m writing in this blog about how a lack of pricing processes and/or discipline leads to underperforming businesses, and how a focus on pricing can rectify this. This time, the subject gets more serious.

In a commodity business the product or service you provide is not valued by your customers more then any of your competitors, and your only way to compete is on price. Since the low price will win the business, the only way a commodity-based business can be profitable and provide good shareholder returns is by focusing on costs and operational efficiency. We all know this.

On February 12th, Continental flight 3407, operated by Cogan Air crashed on approach to Buffalo, NY, and killed all 49 passengers onboard and one person on the ground. In the aftermath is has transpired that it was pilot error which caused the crash. So what does this have to do with pricing? Nothing directly, but it has everything to do with commoditization.

Over the last 20-25 years the airlines have accepted, and even accelerated, a death spiral of commoditization; they failed to differentiate their offering and continued to detract value from their services by selling on price alone. They very quickly taught their customers to use the yield management systems (which coincidentally were once touted as the industry savior) to pay even less for their tickets. With revenues going south, and no efforts to fight commoditization the whole industry had to cut costs. We’ve seen this through all the various bankruptcies and industry consolidation. Another strategy the airlines adopted was outsourcing, particularly on short haul commuter flights like flight 3407. The large incumbents cannot fly these routs profitably, but the likes of Cogan air can. Their operating cost is lower.

So lets introduce another concept: “You get what you pay for”. We all know this. Sometimes what you “get” by paying more is tangible, and sometimes its intangible. But in all cases, when you pay more, you pay more because you can defend the additional cost, at least for yourself.

When Cogan Air hired the pilots on the doomed flight 3407 they also got what they paid for:

The captain, Marvin Renslow was 47 years old, had flunked 2 FAA flight certification tests, and earned a “whopping” $55,000 a year.
The co-pilot, Rebecca Shaw was 24 years old, commuted back and forth from Seattle to New Jersey, and had, in fact arrived on a red-eye that day, and earned an even more “whopping” $16,300 a year. On top of that, she also had a second job to help support herself financially. Sleep deprived anyone?

The NTSB has concluded that neither of these two followed required practices, neither was well-trained or experienced on the aircraft type and both were most likely fatigued as neither had the required sleep or quality rest period prior to that day. Unfortunately, this lack of quality ended up leading to dire consequences for the people in the back seat, who had trusted their lives to these individuals.

Keeping the belt tight on costs is all fine when your “commodity” is grain, sand, or oil. But if the service you provide ultimately affects peoples lives, where staff mistakes can become fatal, should you allow your cost control focus to affect the quality of your staff? Piloting is a highly complex job, which requires years of training. Yet, Rebecca Shaw eared as much as a burger flipper. Marvin Renslow would have made more money as an Operations Supervisor at McDonalds. Where they the best in their profession? Probably not - as history unfortunately shows they where not even qualified to do their job.

So how does all of this tie back to price? It is the tremendous failure of the airlines to fight commoditization that ultimately is the cause of this tragic event.

Their failure to differentiate their offerings,
Their failure to hold prices steady
Their failure to understand that they were training their customers to use the yield management systems to their advantage
Their failure to operate profitable businesses where they can afford to pay their most valuable and critical employees a reasonable wage, where they will attract “the best” staff, where employees can afford to live close to their base, and not commute sleeplessly across the country before going to a full day of work.
There failure to have an industry where not meeting certification standards still allows an individual to be employed

With all of these failures, it’s no surprise the airlines continue to find themselves in bankruptcy court, fighting to keep their companies afloat. The saddest part about this story, is that if more attention had been paid to pricing, they never would have found themselves in this mess.

With sad regards,

Per Sjofors

Founder/CEO

www.atenga.com

per@atenga.com

818 887 4970

Beginners guide to price elasticity

2009-04-17T20:05:00.000-07:00

I promised that I would report back to you, the reader, the results of the price increase at iTunes. And after the first week, the results are in:

Of the top 100 selling songs, 33 were increased to $1.29 while 67 remained at the old price of $0.99.

Sales of the 33 songs at $1.29 where down 12.5%
Sales of the 67 songs at $0.99 where up 9.9%
Leading to an overall a drop of 0.5% sales volume
Resulting in approximately 9.5% increase in revenues

It certainly appears, from this first week, that the labels and Apple did the right thing, Worries that the price increase would force people to migrate to file sharing sites appears to be unfounded as overall track sales (not only the top 100) where up 3%.

Remember that this price change was forced by the labels, which thought that the $0.99 price was too low and did not fully maximize their revenues. With these results, Apple and the labels made an additional $450,000 in just one week on this price change.

So… do you know the price elasticity of your product or service? If you don’t, there’s no way you can know if your prices are optimized to maximize revenues or profits. You may well be leaving significant money on the table, and you are definitely shooting in the dark.

With whistling late Friday regards,

Per Sjofors
Founder/CEO
Atenga Inc
per@atenga.com
818 887 4970

Stirring the music download pricing pot

2009-04-09T10:40:00.000-07:00

The music industry has been stirred up once again this week. After years of pressure from the labels, Apple finally gave up on its one-price-fits-all strategy for iTunes and introduced a three tier pricing model -- with downloads now available for $.69, $.99 and $1,29.

So among the three largest sellers of downloadable music, it creates an interesting competitive environment:

Apple, the clear market leader with a premium product, with the highest priced downloads, a claim to better sound quality, and complete integration with iTunes and iPods
Amazon.com, with a single price of $.99, “standard” high bit-rate MP3 files and an application that can integrate with iTunes and therefore iPods
WalMart.com, with a $.05 lower price per song than Apple’s pricing scheme ($.64, $.94 and $1.24) and “standard” high bit-rate MP3 files.

So it will be interesting to follow:

Will Apple lose some of its market share to Amazon - thus proving that a lower one-price-fits-all approach is the preferred consumer way to buy downloads.
Or, will Amazon follow Apple and WalMart with three-tiered pricing?
Will WalMart’s strategy to copy Apple’s tiered approach (but at a lower price) pan out? Will they gain market share?

What will the three-tiered pricing strategy do for the business results of Apple and the big music labels they’ve partnered with? Will it drive more revenue and profits or will consumers migrate back to the illegal file sharing sites that created the digital music market in the first place?

I will keep an eye on these developments and be sure to report back to you soon.

>>Update at 2pm 4/9/09: It did not take long. Amazon just introduced some songs at $1.29

With singing regards,

Per Sjofors
Founder/CEO
Atenga Inc
818 887 4970
per@atenga.com

It’s the Autobahn...or the Highway

2009-04-01T11:12:00.000-07:00

Anybody who’s missed the current woes of the US car makers is either living on a different planet or not living at all.

With emergency life support in the form of billions from taxpayers and bankruptcy likely in the near future for both GM and Chrysler the car industry looks like a sure bet for losing money.

But wait! What if I told you that you can still run a profitable car business despite the global recession and the precipitous drop in automobile sales? Impossible, right? Well, not at Porsche. Let’s compare the first 6 months of Porsche’s sales data for 2007/2008 and 2008/2009.

Financial Year: 07/08
Total Number of cars sold: 46,600
Revenues from operations (Euro): 3.5b
Average Selling price (Euro): 75,107
Profits from operations (Euro): 1.658b

Financial Year: 08/09
Total Number of cars sold: 34,266
Revenues from operations (Euro): 3,04b
Average Selling price (Euro): 88,718
Profits from operations (Euro): 0.5b

So what do these numbers tell us? It is obvious that Porsche is not insulated from the global decline in car sales, and sales are down considerably. But, as opposed to almost every other car manufacturer out there, they have been able to fight back and increase the average selling price of their cars. As they say in their financial press release from March 31st:

“The substantially better development in revenue compared to the development in sales is primarily due to a changed model mix.”

So what can we all learn from Porsche? I think the following:

1. Ongoing discounting that is used by most other car manufacturers (especially the “Big Three”) detracts from the perception of value of the product and creates downward pricing pressure. Prospective buyers also quickly learn to buy on regular promotions (Presidents Day Sale!) and delay their purchase for some time. To my knowledge, Porsche never discounts its products, never runs “employee pricing” schemes, or anything of that nature. Thus, they never suffer from self-inflicted value perception wounds.

What do you do? Do you train your customers to buy at the end of the quarter or end of the fiscal year? Do you always discount to close the deal?

2. Porsche has done a spectacular job of increasing the average selling price of its products, raising their average sale price to €88,718 from €75,107. An 18% increase - in this economy!

It is a demonstration of how changing the product mix can be a powerful way to increase your revenues.

Have you thought about what you can do to change your product (or service) mix to drive your customers to a more expensive or maybe just more profitable mix? What programs do you have to have in place? What knowledge of your customers purchase decision behavior will ensure these programs have the maximum success rate? Can you do as good a job as Porsche? In this economy? Why not?

With speedy best regards,

Per Sjofors
Founder/CEO
Atenga Inc
818 887 4970
per@atenga.com

Maintain your customer base by offering better service

2009-03-29T11:55:00.000-07:00

In my suburban neighborhood of Los Angeles, I have a reasonably wide choice of restaurants that I visit with some frequency. Most of the time, these range from “casual”, to “semi-fine dining”. Some of these are the larger, more familiar chains and some are restaurants with a single location.

As the economy worsens, and competition for customers increases, restaurants are taking different approaches to survive and hopefully maintain their profit margin. Let me review what I have found, and how it’s changed my dining choices.

Large chains

The large chains appear to focus on cutting cost by increasing the choices of “cheap” food and in some cases reducing the portion sizes while keeping prices the same or even slightly increasing them. Staff turnover also appears to have increased, maybe another effect of cost cutting.

These are actions that make sense from a business point of view, but overall, as a guest, it creates a less appealing restaurant experience.

Single location restaurants

While the strategies of the large chains are all pretty similar (as can be expected from companies run by professional mangers) single location restaurants have employed extremely variant tactics.

One group goes to the extreme in cost cutting - much lower quality food and significant price increases - at the same time.

The other group focus on creating a better overall restaurant experience; the food quality is maintained, the number of staff and the service level are both increased. Prices are not decreased. Examples of service increases may be that the manager may greet you in person, or you may get a free appetizer or dessert, or maybe when you order take-out you get a free drink while you wait.

It is quite easy from the above to figure out how the different strategies these restaurants have adopted have driven my behavior. The single location restaurants who both increase price and decrease quality have lost me as a customer forever. And this, sadly, includes some of my all time favorites.

So, now let’s look at what’s ends up driving my dining decision-making. On one hand I have large chains who provide a “reasonable” restaurant experience for a “reasonable’ price; compared with a segment of single location restaurants that offer an “excellent” experience for a little more money. In this scenario, the dynamic of “value for money” has changed to favor the single location restaurants even though they are somewhat more expensive then the large chains.

OK, so why has this story made it into my pricing blog? Well, it is here to show you that there are always different options, even in this economy. There will alway be a portion of buyers who make their purchase decisions based on low price and brand - and in this example will continue to visit the large chains. But, likewise, there will always be a portion of buyers who will be wiling to pay somewhat more for something better, in this case better service, higher quality food, and overall, a much better dining experience.

The trick for your company, of course, is to know what services and what quality improvements you can employ cost-efficiently that will add value to your offering, that will maintain your customers while attracting new ones at the same time… in this economy.

With not so hungry regards,

Per Sjofors
Founder/CEO
Atenga Inc
818 887 4970
per@atenga.com

Some people never learn….

2009-02-04T13:31:00.001-08:00

Remember when Microsoft launched their new operating system -- Windows Vista -- 2 -3 years ago. Not only did the public and media complain about how incompatible it was with existing hardware but they were also befuddled by Microsoft’s decision to have, if my memory serves me right, six different versions of the product with prices ranging from less than $100 all the way up past $350. A quick price check today indicates that the range has widened, as you can now buy versions of Vista from $97 up to $800. Today there is Vista Starter, Vista Home Basic, Vista Home Premium, Vista Business and Vista Ultimate. Then there are versions of these with or without a Service Pack at an array of different prices along with upgrades from older Windows operating systems at another realm of different prices. Basically, what we’re looking at here is a discombobulated pricing mess.

Now don’t get me wrong, segmenting the market and having different versions of products to meet different levels of customer requirements is paramount in Best Practice Pricing, and it’s something we put into practice with our clients every day. But if that’s the case, you may be wondering why I’m complaining about what Microsoft is doing. The answer is simple. When you segment your market with different versions of your product or service, at different prices, it is crucial that the segmentation make sense for your customers. If it does not, they will feel they are being nickeled-and-dimed into paying higher prices for something that they do not value. So for example, Vista Home Premium does not have the “protection of hardware failure” feature while the Vista Business edition does not have the user-friendly DVD-burning feature. So if you, the customer, want both of these features, you have to buy Vista Ultimate - which comes at a substantial price premium to either of the other two versions. In Microsoft's case, this segmentation did not make sense to a large number of customers -- which led to reams of bad press, customer frustration and dissatisfaction. In fact, Microsoft can only get by doing this because of their monopolistic stronghold on the market. Any other company that would have attempted to quell the same outrage Microsoft did at the Vista launch would have been forced to change their product and price practices immediately to avoid complete failure.

While Microsoft is still going strong, they did not come out of this adventure unscathed. What’s amazing though, is that while they are waiting for the bruises to heal from their Vista experience, they have gone ahead and developed a new version of their operating system known as Windows 7. The product will be launched later in 2009. Hopefully, it will be better technologically than Vista, but when it comes to pricing, has Microsoft learned anything from its past mistakes? No, not at all, in fact, they have indicated they will do the same unnecessarily complex pricing again! They will launch five or six versions of Windows 7, at a bevy of different prices, creating the same confusion and the same outrage again!

So, while you should segment your marketplace and your offering to meet the needs and willingness to pay for each segments, you have to do this carefully to avoid alienating your customers -- even if you are an industry behemoth like Microsoft.

With non-monopolistic regards,

Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com

When it comes to pricing, tech writers are in the dark

2009-01-20T15:05:00.001-08:00

So I’m reading this story about how Amazon.com dropped the price of a one-year Microsoft Xbox Live Gold subscription from $50 to $30. This subscription gives the user 12 months of Xbox Live service which includes online multiplayer gaming access, video chat, game and video downloads as well as Netflix's online streaming video service (though a Netflix subscription is required for that).

The journalist makes the statement that this is not good enough and that it should be offered for free. Why does he think Microsoft should give away a service for free? Because a prime competitor, Sony, does not charge anything for their similar on-line game service, so Microsoft shouldn’t either. And then he goes on telling us that the XBox 360 outsold the PlayStation3 by 8 million units -- 28m to 20m.

So why on earth should Microsoft give away their on-line game service when they don’t need to? Just because a journalist says so? Both Microsoft and Sony are in business to make money and in this case, Microsoft found a way to unbundle a portion of their product in such a way as to increase their revenues. This unbundled service can capture a higher portion of their customers willingness to pay, and, especially when compared to a free service, bring in much higher revenues. I assume that Microsoft did not make the decision to charge for the on-line service by gut feel or winging it – as many companies do. Instead, they must have used research, sound analytics and behavioral market simulations to test several things:

Is a charge for the on-line service acceptable?
For what percentage of the market is it acceptable?
What price for that on-line service will maximize revenue while not affecting market share?

With more than 10 million subscribers to the Xbox Live service, Microsoft pockets another half billon dollars a year, which, even for a gigantic company like Microsoft, has a significant impact on their bottom line. So for your company, what services can you unbundle from your product? Or if you are a service company - can you unbundle services from your current offering and charge extra for them? How will it affect your sales level? Your revenues? Your profits? Do you know how your customers will react? Have you tried it? If you have not tried it, it is probably because you are worried it may backfire. That’s where research and market simulations come in to play. With the help of an independent, third party firm, you can find out exactly what will happen in the marketplace without taking on any of the risk that a price change may cause.

So you can have your cake and eat it too.

With sunny Southern California regards,

Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com

As we enter a recession that probably will be long and deep, smart companies fight back with - pricing!

2008-11-07T10:20:00.000-08:00

Many companies feel the need to improve their “competitiveness” in a downturn, and they think the best way to do so is to drop their prices. Wrong! Sure, in a recession your sales will drop, but if you also drop your prices, your contribution margin will drop even further, making your company less profitable and possibly resulting in a loss of profitability altogether. If you do, it means you have given up, and taken the easy road. You need to fight back. You need to utilize the recession as a way to improve your long term business results. Pricing champions do!

Pricing champions find ways to increase their prices, or increase their price realization. They fight back. They become even more successful and they increase their competitiveness by adding cash to their war chest, and improve and invest in product and market development.

Let’s take a look at two price champions:

Dow Chemicals, one of the largest chemical companies in the world, reported Q3 revenues that where up 13%, while volume went down 9%. In anticipation of the recession, the company increased prices by an average of 22% across the board.

Here is what Andrew Liveris, chairman and chief executive said:

“The company's ability to take protective measures has helped the company ward off the effects of the current economic downturn. The company has initiated two broad-based price increases and implemented aggressive cost controls.”

Dow is not giving up. They planned for the recession and they used pricing as a strategic weapon for that purpose.

The second pricing champion is a relatively unknown company called Parker-Hannifin, a diverse manufacturer and number 279 on the Fortune 500 list – probably the largest company people haven’t heard of. On October 16th they reported last quarters’ results - a 10% increase in sales over the previous quarter, and a 9% increase in profitability compared to a year ago.

So let’s see why. Here is what Timothy K. Pistell, EVP, CFO said in the prior earnings call, July 31, 2008

“Part of our “Win Strategy” is strategic pricing. We think we have done a very good job through this last fiscal year. The fact is that the gross profit margin improved in ’08 over ’07. Right now, we forecast our price increases will stay on pace with our cost increases.”

What they both have in common is that they do not drop their prices in a recession. They plan for price increases and cost control. They don’t give up. Certainly, they see a recession as a difficult time, but, they also realize that these difficult times are what weed out the long-term winners from the losers.

So you have a choice. You can follow the lead of the pricing champions, and use this economic downturn to your advantage or you can give up. What will you do? What long-term effect will strategic pricing have on your business? What will you do with all that extra profitability?

Again, the choice is yours.

With positive and "do-the-right-thing" regards,

Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com

The top 5 reasons for implementing Best Practice Pricing Strategy in an economic downturn.

2008-10-06T09:38:00.000-07:00

If you are like me, the financial turmoil and imminent recession is worrisome. How will it affect my business? How will it affect me personally? But I’m also thinking, “How can I use the current situation to my advantage? How can I grow my business despite the circumstance?” Well, in fact, Best Practice Pricing Strategy is a tool you can use now to gain the upper hand in your business. Here is why:

1 - Leverage: According to consulting firm McKinsey and Co, pricing has greater impact on your company’s profitability than any other strategy; three times greater than cost cutting; twice as much as sales volume increases.

2 - Competitive advantage: Only about 1% of companies have implemented and executed a pricing strategy based on an in-depth understanding of its customers’ decision drivers, perceptions and willingness to pay.

3 - Long term growth: Companies who implement best practice pricing strategies grow at approximately twice the rate of companies with simple pricing practices. As your competitors falter, your company should use pricing strategy to come out on top!

4 - Speed: A best practice pricing strategy can be implemented and executed in two months or less.

5 - Now is the time: With the financial market in turmoil and recession looming, if you have not yet implemented a best practice pricing strategy (and chances are significant that you have not) – now is the time that you need its benefits more than ever.

I hope the above points give you something to think about. You can see this economic downturn as a bump in the road or (I hope not) a disaster. Or you can see it as an opportunity to grow, to increase your revenues and profits, to increase your competitiveness. To come out on top.

Remember that the choice is yours.

With positive and hopeful regards,

Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com

You're dead! - No I’m definitely not! - Yes you are, you just haven't stopped moving yet.

2008-09-30T13:14:00.000-07:00

Financial Times ran an interesting, if improbable, pricing story today. It teaches us that with the right price, you can sell anything.

You may remember the High Definition DVD format war from last year. Two electronics giants were offering their own formats for cutting-edge High Definition DVDs. In one corner we had Sony with its Blue-Ray technology, and in the other corner was Toshiba with HD-DVD. While each format provided identical image quality, and both were burned on the same size and type of disc, each format also has its own pros and cons when evaluating the technology and the manufacturing of the discs themselves.

In a re-cap of the Betamax vs VHS format war of the 1970s, in the fall of 2007, both proponents embarked on comprehensive and expensive advertising campaigns trying to get consumer pull while at the same time working to form exclusivity arrangements with the major film studios. From early on in the war Sony had been including a Blu-Ray player within its popular PlayStation 3 game console. This lead to a much higher installed base of Blu-Ray players, albeit not in standalone devices, but in the PlayStation 3, leading to higher sales of Blu-Ray movies. This eventually tipped the scale in favor of Sony, and on February 19, 2008, Toshiba admitted defeat and announced it would stop making HD-DVD players.

HD-DVD is dead. Long live HD-DVD!

So what Financial Times report today, surprisingly, is that sales of HD-DVD are up! Sales of both HD-DVD hardware and movie titles are actually increasing. But how can that be? Well, HD-DVD players, that also play regular DVDs, can now be bought for less than $60 while the cheapest Blu-Ray players are at a higher price point of around $250. Furthermore, while the movie selection on HD-DVD is limited (and no new titles are being released on HD-DVD) they are much cheaper than their counterparts. Blu-Ray titles can cost up to $40, with typical prices around $25, while the typical price for a HD-DVD is only $9.95.

With no new movie titles coming out on HD-DVD, there is obviously no long term future in the format. Sooner or later all the HD-DVD titles will have been seen by the people who want to see them. Yet, a number of quick moving entrepreneurs managed to see that there was a segment in the market, an HD-DVD bubble if you will, that are extremely price sensitive. They are so price sensitive, in fact, that they are willing to ignore that HD-DVD is dead . . . and are instead focusing on the fact that it has not stopped moving yet.

So how does this relate to your end-of-life products? Can you find new market segments for them? If so, are these segments price sensitive or not? Many times they are not, and you can instead, believe it or not, increase your prices. No matter what strategy you take, it’s important to realize that just because a product has been declared dead doesn’t mean it can’t have a few last breaths of profitable life.

With still warm late September regards,

Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com

But I know what my market will bear….

2008-09-27T07:54:00.000-07:00

This blog is supposed to comment on pricing stories and pricing news. I follow the media closely, but have not seen anything really interesting lately. Maybe most journalists are following the financial meltdown and the few who are not have been assigned to the election. So, in their absence, I hope you’ll bear (sic!) with me as your source for another true story…..

One of the most common objections we hear about value based pricing is individuals (typically founders, CEOs or CMOs) saying “I have 10 – 20 - 30 years of experience in this market and I know what the market will bear”. Are they right? I don’t think so. First off, in my experience, individuals making these kinds of comments are rarely working at the market leader, rarely at a market innovator, or even at a fast-growing company. No, a response like this almost always comes from an executive from the lagging company, the runner-up. They think they know but they don’t. Sure, they have all the “right” answers, but can’t seem to find success in their chosen industry.

So are they right? Of course not. If you are in a stable market and you have lots of experience in the market, your prices are typically within 15% of the optimum market price. Not a big deal, you may say. But think about it? 15%. What could getting that additional 15% of optimization do for your company? Will it really make a substantial difference?

Let’s look at a real world example to find out. One of Atenga’s recent clients wished to determine the optimum price for their consumer electronics product. Before retaining us, they had been selling the product at $200 because it felt like a nice round number, and it drove a retail price of $399.95 They were considering dropping their price to $170 (for a retail price of $339,95) to try and improve sales volumes and profitably. We examined the market preferences and buying behavior, and concluded that this company’s marketplace (with in +/- 15% of the current price) had a price elasticity of 1. This means that a 1% change in price will result in a 1% sales volume. So with that information it becomes easy to plot a number of different price points and conclude the results. Here is what our research concluded, both for their lower price point, as well as for the optimum price we discovered.

Example A: Lowering Price to Gain Market Share:

Cost of your product: $100
Price of your product: $200
Gross margin per product: $100
Price elasticity: 1
Sales volume: 10,000
Revenues: $2,000,000
Overall gross margin: $1,000,000
New lower price: $170
Gross margin per product: $70
Sales volume: 11,500
Revenues: $1,955,500
Overall gross margin: $805,000

-or-

Example B: Raising Price to Optimum (based on independent market research)

Cost of your product: $100
Price of your product $200
Gross margin per product: $100
Price elasticity: 1
Sales volume: 10,000
Revenues: $2,000,000
Overall gross margin: $1,000,000
New optimum price: $230
New gross margin per product: $130
Sales volume 8,500
Revenues: $1,955,500
Overall gross margin: $1,105,500

So in the first case, lowering the prices by 15% -- a typical quick-fix solution at struggling companies – and where the company planned to move the price - the sales volume will go up, but the result will be an almost 20% decline in margin. In the second case, market research shows that raising the price 15% to the optimum will instead result in a 10% improvement from the original margins. (For this company, the per-unit cost did not change much depending on volume). And just as important, a nearly 40% rise in margins from the company’s “we know that the market will bear” strategy to lower the price. Not bad! Just a little bit of market research, and now everyone at this electronics firm can see that huge holiday bonus coming right around the corner.

Consider the huge difference this will make, compounded over multiple years. Where do you want to be? Using your experience, your gut feel, your “I know my market” strategy. Or, do you really want to find out with hard, independent, unbiased data where the optimum price is? In looking at the data above, the answer’s pretty clear.

With warm late September regards,

Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com

The lost art of raising prices

2008-08-28T14:16:00.000-07:00

For many years, as inflation was low, corporate gains in efficiency, cost cutting and outsourcing exercises made it possible to maintain or increase dollar-for-dollar profitability. Unfortunately, under current economic conditions, this is no longer possible. Amidst a rise in inflation, the cost of raw materials, and the cost of transport and energy, companies face, for the first time in many years, the dread of increasing their prices.

Sales people dread price increases because they forgot how to defend them a long time ago. And as their customers are no longer accustomed to “the annual price increase”, sales people believe they will face strong resistance.
Executives dread the price increases because they think their competitiveness will suffer.

But there are several positive aspects of price increases.

Share price:
For example, yesterday, Chemtura Corp., a global producer of specialty chemicals and polymer products announced a price increase of approximately 15%. The result – shares immediately gained 2.8%, and have continued to raise today.

You deliver results:
Furthermore, your customers are doing business with you because you deliver results. Your product or service provides value to your customers, and the vast majority of your customers want to continue to do business with you. They want you to take care of your business so they can continue to gain value from what you deliver to them.

Stronger customer relationships:
Announcing a price increase also gives you the opportunity to remind your customers about the value you provide, and have provided for a long time. And, by telling customers all the things you’ve done to avoid price increases until now, your relationship can grow stronger. But this is a message your salespeople are not used to delivering, and they will need the right ammunition and training to do so effectively and successfully.

Revisit your pricing strategy:
As you revise your pricelist, it is also a good idea to look for methods through which you can tweak your prices in such a way as to drive customers to buy more profitable products or services from you -- ways in which you can change the product mix you are selling to become more profitable overall.

So there are several aspects to a price increase – and when it comes down to it, they are mostly positive. But a successful price increase needs to be carefully planned; salespeople need the appropriate training and you need to ensure you plan thoroughly to convert the looming price increase into a positive opportunity for your company to gain further profitability.

With warm summer regards,

Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com

Update on Dell and Apple - Drop your margin 3% and lose $14b!

2008-08-28T13:34:00.000-07:00

I thought it is appropriate with a update on my Dell and Apple story from July 22. See below.

Dell on Thursday reported a fiscal second-quarter profit of $616 million, or 31 cents a share, on $16.43 billion in revenue. During the same period a year ago, Dell earned 33 cents a share on revenue of $14.77 billion. The result was an immediate -1.8% drop in share price.

Per Sjofors

The AppStore, a microcosmos for understanding price elasticity

2008-08-13T12:08:00.000-07:00

On a number of technology blogs, a bit of grumbling has started over the price of software bought from Apple’s AppStore. So let me just explain what this is.

I’m sure you are aware of the iPhone, one of the hottest consumer electronics products in the last 12 months. About a month and a half ago, Apple introduced an updated version of the product, the iPhone 3G. As the phone is basically a small portable computer, Apple also introduced what they call the AppStore, a section of iTunes where iPhone users can download small software applications. The AppStore has been a huge success, with hundreds of these iPhone applications available, selling more then $30m worth of software in the first month despite the fact that a majority of the apps are available for free.

Each developer set his or her own application price, or decides to give the app away for free, though most chargeable apps sell for $2.99 – $9.99. And on various technology blogs, I'm starting to hear about one of the world’s most common pricing mistakes. Developers are complaining, to whomever wants to listen, saying things like “I used my gut feel to price my app at $9.99 and it did not sell very well, so I dropped the price to $2.99 and sure I’m selling more but I’m getting less revenue”. This is a classic example of the perils of price elasticity. Price elasticity is a fancy name for how the demand of a product or service changes with the price. If the demand changes little with the price, then the price elasticity is low (or inelastic); if it changes a lot, price elasticity is high (elastic).

Once the elasticity curve is known, it is easy to generate a revenue curve. The revenue curve points out the best or optimum price, where the combination of price and demand generates the maximum revenue. If your market is elastic, and most markets are, selling your product at the optimum price point is crucial for the business results of your company, and can easily mean the difference between market leadership and marginalization.

These AppStore developers have a very unique advantage in the way they can discover the price elasticity curve for their product by simple trial and error. An advantage virtually no other company has. They sell software, so revenue max is also profitability max, they promote their product to a “closed” marketplace as they only compete with other software companies in the AppStore, and they can change the price as often as they wish.

So an AppStore developer can start with a price of, say, $9.99, wait a month, note the demand, change the price to $6,99, wait a month, note the demand, change the price to $4.99, wait a month note the demand and so forth. After plotting 5 to 6 demand points, all with prices taken out of thin air, it will be easy to set the optimum price, the price that will give the developer maximum revenue and profits. Of course, during this process, the company is losing revenue; leaving money on the table to define the lower-than-optimum demand points and forsaking sales volume to define the higher-than-optimum demand points.

Any company can do the same. Whether you are selling farm equipment, data storage, shovels, or boxed software the process is identical, but, because you don’t have the advantages of easily changing your prices on a platform like the AppStore, the process will be longer – probably a few years. And chances are that by the time you are done, your marketplace will have changed so much it will be time to start the process all over again. Not to mention that in the process, you will give up millions in lost revenues and margin.

So when you priced your product, did you use some combination of “gut feel”, “I know exactly what the market will bear”, or the all-too-frequent “our cost plus x % markup”? If you did, what are the chances that by sheer luck you will hit the optimum price point? If you were one of the very few who found that price point by luck, you probably have revenues beyond your wildest dreams. But if not, chances are much higher you are struggling to meet the numbers. If your company is like 99% of companies out there, you can easily gain 10% – 20% in revenue, double your growth rate, and double profitability by knowing the price elasticity of your product, and optimizing your price accordingly. Think about it. What would price optimization mean for your company?

And if experimenting with different price levels and seeing how they affect demand is not a realistic possibility at your company, as the cost in lost business is too high, how will you be able to define the optimum price?

With warm summer regards,

Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com

Tivoli Radio: Sweet Sound, Steep Price

2008-07-29T12:00:00.000-07:00

There is a great pricing story that I ran across at TheStreet.com today. For those of you who are not familiar with TheStreet.com, it is a website for financial news and investment advice, and, as with many other publications of its ilk, it also covers topics like life style and technology.

Gary Krakow is TheStreet.com’s senior technology correspondent, and today he wrote about the Tivoli Internet radio. Tivoli Audio has been around for only a few years, but entered this fledgling market with a great pedigree – its founders are legends in the higher end of the home audio industry.

So the story is about this Tivoli Internet radio and what Gary is saying is that it is darn expensive – and worth every penny! In addition to this Internet radio, Tivoli sells a range of tabletop radios and music systems. None of them are cheap. So what Tivoli has done is to monetize its pedigree, to provide products with a perceived value higher than other tabletop radios and tabletop music systems and price them higher as a result. A quick web search shows that the Tivoli Internet radio costs two to three times more than other similar products, yet, according to Gary, it is worth the extra expense. So let’s expand on why that is so.

Firstly, it is likely that experiences of the founders of Tivoli ensure that the product exceeds the actual quality of other products in the category; it may be better designed, better built and may use higher quality components. Secondly, the price of a product is part of the marketing mix and the messages the company communicates to its prospective customers. Thus, the higher price causes the customer to expect a higher quality, better product, something that Tivoli can deliver on. But, as pricing also drives the perception of value, the psychology of pricing says that the customer of the premium product are more likely to be satisfied with his or her purchase. For as simple a reason as paying the premium price, they come to expect a premium experience. And where it gets interesting psychologically, is that regardless of the actual quality, many times the customers will convince themselves they have had a premium experience – resulting in high customer satisfaction.

Thinks about how you communicate with your customers and how your pricing fits you’re your overall message. Also think about how you can leverage the psychology of pricing for your company. What messages can you deliver to your customers that increase their perception of value, that you can then capture in pricing actions to increase your profits?

For those who like to read the article here is a link: http://www.thestreet.com/story/10430699/1/tivoli-radio-sweet-sound-steep-price.html

With warm summer regards,

Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com

Drop your margin 3% and lose $14b!

2008-07-22T08:48:00.000-07:00

Apple Inc. (NASDAQ:APPL) is a price champion. It provides products that, while really being commodities, command higher margins and higher prices than any other computer maker. Apple never sells on "low price" and never discounts. Instead, Apple relentlessly works with its marketing and messaging to increase the perception of value of its customers, and in sales, to capture that higher perceived of value. With higher perception of value comes higher prices and higher margins.

Yesterday, however, Apple announced an unspecified product transition for the next quarter, indicating that its average margin will drop as low as 30%. Compare this with 33% in last quarter. As a result, shares dropped around 10%, shaving $14b of its market cap, but are now recovering slowly.

Then consider Dell (NASDAQ:DELL), who focuses all its marketing on the "low price, value for money" value. Dell operates at a 5.4% margin.

The consequence of these vastly different strategies is that Dell has revenues 2 1/2 times that of Apple, yet, the company has a market cap roughly one third of Apple’s! ($47b for Dell vs $134b for Apple).

Nearly every business faces these same choices. The company can be a value brand (Dell) or be a premium brand (Apple). The premium brand always has a higher valuation, but it take a concerted corporate effort to get there; to know and leverage customers value perceptions, to know how to build value in marketing as well as design, development and sales, to make the effort to learn their customers’ willingness to pay, and to optimize prices accordingly. Apple is doing a spectacular job of this - even after the coming slight margin decline.

Think about it - even if you are in a different industry you must choose your mindset and execute it relentlessly. Do you have the Apple or Dell mindset? What will it mean for your shareholders?

With warm summer regards,

Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com

A shrink for your pricing?

2008-07-18T15:15:00.000-07:00

The other day I started a book by Peter Jenkins called “A walk across America”. It is about Jenkins who, as a young disillusioned man, in a post-Vietnam, post-Woodstock era, sought to find himself during a coast-to-coast soul-searching walk together with his dog.

It is an old book, first published in 1979.

Jenkins does not just take off; he prepares meticulously, he exercises, he talks to other people with experience from ultra long walks, and he carefully plans the equipment he will need to carry as he walks from upstate N.Y. to California. It is with his preparation where this story connects with pricing. Jenkins, with very limited funds, says that he selected one brand of tent, backpack, sleeping bag and so forth, because “There were more expensive companies, but this was the best I could afford”.

Thus, what Jenkins demonstrated was one of the cornerstones of value pricing and pricing psychology. He believed that the price of the goods he needed was directly correlated to the “bestness”; in his case the comfort, quality, durability and weight of the product. The higher the price, the more “bestness”.

While in many cases there are correlations between price and “bestness”, this correlation is not certain, linear nor exact. It could well have been that a different brand, 15% less costly had a better “bestness”, that a brand, at the same price, or maybe 10% higher was twice as good, or half as good. In fact, the book explains how Jenkins made the brand decisions primarily from reading catalogues. He based his value perceptions solely on the marketing messages of the various brands. Thus, he selected a brand based on its messages and his derived perception of its value The basis of his choice was the perception of “bestness” these messages inferred, rather then the actual “bestness” of the product. In the end, however, the products met his expectation, he was a happy customer, and we cannot know the true facts on how these products really would stack up.

Another example of the psychology of pricing, this time from Atenga’s case files, is this company that came up with a new and innovative nail-gun. The nail-gun could be used by DIY homeowners and professionals; construction workers. The company had initially priced the product at $172; it was a price taken out of thin air, but the management team all felt was “the right price”. In fact, it was higher then the assumed price used in their financial plans, so their business plan numbers looked better then everybody had hoped. The product is a true innovation and does not have serious competition, and the company had a good PR agent. So they were rather well publicized in newspapers and magazines for both DYI folks and professionals. Yet, the business was just not going anywhere.

Just as the example of the camping equipment, where Jenkins believed (as do most of us most of the time) that he price of a product is a good indicator of its quality, its “bestness”, so did the customers of the nail-gun. There are ways in which price specific market research accurately can assess the optimum price for a set number of attributes, a set quality, a set “bestness.” In this case, research showed that professionals said that the price of the device was much too low. They said that it was “too cheap – can’t be any good.” Thus, the price of $172 was to them a message of inferior quality. In fact, research showed that any price less than $205, would indicate to a majority of prospective professional customers that the product must have inferior quality and not be worth buying. This same research showed that at $288, the product would be too expensive, and the benefits it provided would not be worth the price. The optimum price for this product was $242. At that price, the majority of prospective buyers said that the product met their payment expectations, and the business took off; it generated a 40% increase in sales volume in only two months.

So what do we learn here? Well, we learn that the price of your product or your service is also part of your marketing mix, just as communicative and just as important as your marketing messages, and your positioning statements. Your pricing must all be congruent and relevant for the marketplace you have selected. In the case with the nail-gun, the marketing messages of the company built a value and expectation of price that the $172 price completely disrupted, also disrupting the buying process, and left the company struggling.

But this also means that you can affect the marketplace’ perception of value, perception of “bestness” and therefore their willingness to pay - many times without changing the product! The better you understand the psychology behind your customers’ purchasing decisions the better you can influence the perception of value your marketing message builds, the better you can increase the congruency in the marketing mix and the better your company will perform. Many companies, unfortunately, forget that price is part of your customer communication; it can communicate value, "bestness", or the lack thereof. The choice is yours. You need to, and you can, take control of price as part of your marketing mix. You need to understand the psychology of pricing for your company, your product or service, and for your marketplace. Be the pricing shrink! Enjoy!

With warm summer regards,

Per Sjofors

Founder, Managing Partner

Atenga Inc

www.atenga.com

Yield Management System Crashes Airline Industry

2008-07-08T10:12:00.000-07:00

Being a very frequent flyer (several hundreds of thousands of miles flown every year for the last 30 or so years), I cannot help but to follow the woes of the airline industry. Unfortunately, I do this with some considerable amount of schadenfreude – they did it all to themselves!

Hailed at the time as the industry savior, the yield management systems of the mid and late 80’s provided a significant, but relatively short-term, revenue and profit boost. After a while, it completely commoditized their offering and drove profits deep into negative territory. Even before 9/11, airlines were in financial trouble. The consequent recovery (supported by dips into chapter 11, in many cases) was only temporary. The ongoing deterioration of the industry is just hastened by the current oil price shock. America Airlines' then-CEO, Robert Crandall called yield management “the single most important technical development in transportation management”. How, then could it be the most significant reason for the current industry problems? Well, here is why:

Yield management systems change the price of the airline seat based on the number of seats available. So, the simplified theory is that, say, 3 months before a flight, when there are many seats available, so the price per seat is low. As the plane fills up, the price of a seat increases. If sales of seats are slow, prices are kept low to increase demand. If there are still unsold seats near the date of departure, those seats are discounted heavily as, in the view of the airlines, at that point, every dollar is a good dollar. This sounds like a good theory, and it is, except for that little nagging fact the airlines forgot; they are transporting humans, not cattle, not pigs, not chickens, not packages, but people – people with the ability to think and to change behavior based on experiences and external inputs.

I’m sure you, the reader, have been seated with somebody paying a fraction of what you paid, for exactly the same uncomfortable, crammed seat with lousy service. Or maybe it was you who sat with me and bragged about your bargain ticket, 70% lower than what I paid! Thus, it did not take very long for travelers to be thoroughly trained by the airlines to exploit the theory and shortcomings of yield management systems. Because airlines offered no meaningful differentiation between themselves and between a cheap and expensive seat, passengers shopped around for the best price only; found the cheapest airline, regularly booked their flight earlier, or, if their schedule were flexible, they waited to the last minute. (Meaningful seat differentiation could possibly be: the cheap tickets are for the back of the plane, mid seats only, expensive seat in the font with extra legroom and a free drink - only consumer market research could find out.) The advent of the internet, with easy price comparison and ticket auction sites further accelerated the commoditization of airline seats to the point that no airline made any money on any flight (with a few exceptions).

So transposing this scenario to other businesses, what can be learned? The key words here are “meaningful differentiation” and “every dollar is a good dollar”.

If you are in an industry where your customers meet and talk, you cannot sustain a policy of selling your product or service to different customers at a different price unless there is “meaningful differentiation”. This means that you must be providing something meaningful, or valuable, to those who are paying more and not providing it to those who are paying less. When I say “meaningful”, I mean meaningful to your customer, and not necessarily to you.

Furthermore, the notion of “every dollar is a good dollar” must go away – even if you are in a commodity business with high fixed cost (like the airlines), you must keep firm on a cost based floor under which you will not sell your product or service. If you (like the airlines), train your customers that they can buy at pathologically low prices – they will – and your business will enter a death spiral from which recovery is almost impossible. The trick for you is to de-commoditize your offering, and find segments of your marketplace where you can add unique value and be meaningfully different than your competitors.

Warm summer regards,

Per Sjofors
Founder & Managing Partner
Atenga, Inc

The $300,000 Watch That Doesn’t Tell Time

2008-06-29T08:39:00.000-07:00

I'm intrigued, and cannot stop thinking about, this limited edition Swiss watch launched back at the end of April 2008 for a whopping $300,000 - it sold out in 48 hours. So while this is a very extreme and unusual consumer goods/luxury goods example, what is there to learn here for companies selling product or services in the business to business space? Well, what it means is that if you or your company are able to identify a segment of your marketplace with needs and desires something you can exclusively meet, you have pricing power; you set the price; you don't discount; you don't negotiate - you increase your profits.

One of the objectives of best practice pricing is just to identify such a segment, to understand that segments' willingness to pay, and leverage that knowledge into higher profits.

Now, in this case, was $300,000 the optimum price? Probably not. If the vendor sold out in 48 hours it really means they were too cheap - how ever odd that sounds for those of us who would be reluctant to spend that kind of money on a watch. It also means that the vendor guessed "the best price" as opposed to useing one of the several methods available for companies to accurately define willingness to pay. The vendor could have optimized the price and thus captured the maximum of that willingness to pay, but did not. As a result they lost several millions of dollars in real profit.

Your company have the same choice - use guesswork, often expressed as "I know what the market is willing to pay for this new product" or do the work to discover the actual value of your product or service, and capture the profits you are entitled to!

With warm summer regards to the reader,

Per Sjofors

Founder, Managing Partner

Atenga Inc