One way NOT to raise prices is to follow Bank of America’s example…increasing prices for a regularly used item with little or no concern for the impact.  The fallout for B of A has been catastrophic, ranging from members of Congress telling people to get out of that bank, to being denounced on the Jay Leno show as “screwing one American at a time.”  Masspirg has even put up a page on How To Close Your Bank of America Account: https://secure3.convio.net/engage/site/Advocacy?cmd=display&page=UserAction&id=3316

In today’s environment, buyers want and are demanding more.  You can raise prices if you offer more.  For example, what if Bank of America had done one of the following 3 things:

1. Offered to pay the fee at any ATM machine for a monthly fee of $5.00, on an opt-in basis.  I think the majority of B of A customers would have gone for this, as the convenience of being able to use any ATM at any time for a minimum cost is significant.  The cost to B of A in today’s electronic world…extremely small.  Plus the concept of offering something new and better would have differentiated them from their major competitors.

2. Borrowed from the phone companies, and instituted a volume plan, i.e., your first 10 ATM transactions a month are free, over 10 we charge your account $3.00, over 20 we charge $5.00.  Customers are used to rate plans and work with them.  While this may not have raised as much revenue, it would be acceptable by all, preserving the bank’s image.

3. Tied the $5.00 charge to a bundle of other services, i.e., your account now costs $5.00 a month and includes no charge overdraft protection, 3 credit reports a year, 50 free checks and your ATM card.  Here the impression is that there is a bundle of goods and services that differentiate the bank’s offerings from others, and have a perceived value to the customer.

The lesson learned from the Bank of America debacle is that you must know your customer, and fill their needs.  Today’s customers are value conscious.  They do not appreciate the arrogance of banks (who they feel were bailed out while the bulk of Americans are suffering) who arbitrarily raise prices with no value add.

In all likelihood your customers reflect the mood of the general population.  At the same time, as CMO you are probably being asked, along with your engineering and manufacturing counterparts, to increase profitability.  In pricing your products consider the buyer and give them more real or perceived value than they expect.  In doing so, you will be able to raise your prices without the severe backlash that has engulfed B of A.

RHM  10/6/2011  

The Fed has promised to keep interest rates low for the next two years.  The housing “bubble” and foreclosures are keeping the housing market down, unemployment is now projected to be around 9.0%+ through 2012 and some are projecting a double dip recession.

Clients are asking for advice on Marketing strategies if we enter into a deflationary period.  In this context deflationary means that the buyer feels that the product/service he/she is going to buy will be cheaper in the future, so the right economic decision is to hold off on the purchase.  (In inflationary times, the opposite holds, they buyer thinks that the product/service will be more expensive in the future, and the right decision is to buy now.)

There are four main strategies in this race to the bottom.  One is to price your bundle of goods and services at the level of your fixed costs, which should result in a significant price reduction.

Pros – This action will drive added volume to your business with appropriate gains in market share and potentially thought leadership.

Cons – You will be seen as the price leader, which is often not equated to quality.  Additionally, if you are truly pricing at the level of fixed costs, you will have no flexibility if one of your competitors has a lower cost basis and matches your prices.  And, going forward you may have difficulty raising prices when the economy turns around.

A second strategy is to first unbundle all your goods and services, pricing them on an individual basis.  Then provide some of the goods, features or services on a no-cost basis. 

Pros – Greater flexibility in pricing; the value of each of you components can easily be seen and it will be easier to raise prices in the future.

Cons – A price leader could gain significant market share if you delay implementing this strategy.  And, this strategy requires an obvious, quantifiable value to the various pieces.  If this is not present, then the strategy cannot be implemented. 

Some fully integrated software products and computer “appliance” vendors may have difficulty in following the second strategy. In these cases our recommendations have been to revamp their product offerings into the classic “good, better, best” offerings, with visible and quantifiable differences between the three.  With this structure, the good product can chase the price leader down, while the better and best products are available for quality comparison.  Of course the expectation should be that the “good” product will be the volume leader.

A third strategy is to offer financing terms, i.e., volume discounts, trade-in/trade up programs, delayed payments, etc.  A working assumption is that you can afford to carry the cost of financing your sales.

Pros – Financing programs add to the “stickiness” of your sale, helping to ensure that the customer stays with you for a longer period.

Cons – Too many or complicated programs can confuse the buyer, making their comparison with lower priced alternatives more difficult, resulting in your offer being rejected.

A fourth strategy is to focus on the values delivered by your product, i.e., faster greater ROI, ease of installation, ease of use, etc. as compared to the lower priced competition.  This differentiation strategy requires that your values can be quantified and easily understood.

Pros – This strategy takes the conversation away from price to value which, if it can be quantified in your favor, should move the buying decision to you.

Cons – Competitors will rapidly close the value difference, either by introducing new products/features or lowering their prices, so continuing investment in product innovation and new product introduction has to be part of this strategy.

Looking at the Japanese experience and our previous periods of stagflation, a period of deflationary activity can be expected.  Understanding your buyer behavior and planning accordingly is the key to long term survival.

As CMO, do you know what your fixed costs are and the true unit costs of each of your product offerings and have you thought through a strategic approach for deflationary times?  Having this will allow you to have in place the right strategies when your competitors start a race to the bottom.

(This is additive to the article I wrote last year about the same subject.  See: http://firealarmmarketing.com/2010/07/22/deflation-and-pricing-6-suggestions-for-the-cmo/ dated July 22, 2010.)

RHM  8/25/2011

If you are considering selling your product or service via an indirect channel (when you sell your product or service to an intermediary or middleman, who then sells it to the end user) there are numerous considerations that you must examine. As I have said in other postings make sure you have an overall strategy and ask; will this channel selection support this strategy?    Most people think that companies select indirect channels because they are less expensive to use and support than having your own direct sales force (your product or service is sold by your sales people directly to other enterprises or end users). Again, depending on your strategy, you might use indirect for sales coverage, augmenting your product line, or augmenting a technology you don’t have or to improve your brand awareness. In any case understand the main objectives first.

As for other considerations, be prepared to have thoroughly thought-out the following items (not a complete list but a good start):

• What are your partner programs (things like engagement rules, incentives, joint marketing, financials, etc)?
• What are your criterions for selecting partners (territory, skills, products, and name, just to list a few)?
• What products or services will the partners carry for you; do they already carry your competitor’s products or services?
• How will the partners and your direct sales force interact (will they compete or augment each other)?
• Is your product or service too complex for certain types of partners to handle?
• Financially, will you and your partners make any profit (Do you have sufficient margin built into your product to support this channel)?

Let’s explore the last item (financial considerations) in more detail, because at the end of the day, most companies are in the game to make money and if this can’t happen then the rest is academic (there are cases, particularly in a start-up mode, where getting your name out there is initially more important than making a profit, but let’s look at the other situations).

To go indirect, which can be two or three tier (you and a reseller or you, a distributor and a reseller) each company wants to make a profit.   So a key question for you is, is there enough margin to “share” it with your partners.  Example, let’s say you have a product that cost you $20 to manufacture and the average sell price (ASP) is $50, thus a profit of $30 and 60% margin ( in reality there are other costs ,but for discussion purposes we will keep it simple). In the direct model you will enjoy the $30 and show a profit. 

In the indirect model, each intermediary will want to have some profit also. Depending on the overall situation the intermediaries will ask for a percentage off the ASP so they can sell the product at a profit. The range varies greatly, but it is not uncommon for it to be anywhere from 20% to 60% off of ASP or list.

So with you are two tiered, can you afford to give, let’s say 40% off of the ASP in this example? Is a $10 profit okay for your company?   Now about the three tier situation.

Usually one assumes that the intermediaries have to sell the product for less than the manufacturer (unless they have some unique value propositions).  So given this assumption, let’s see what the margins look like now.              

                                Reseller sells for                               $45.00

                                Reseller buys for                              $40.00                   Reseller Margin                12%

                                Distributor sells for                          $40.00

                                Distributor buys for                         $30.00                   Distributor Margin           25%

                                 Manufacturer sells for                     $30.00

                                 Manufacturer cost                          $20.00                   Manufacturer Margin    34%

 Critical point is does one have enough margins for everyone to go indirect.  As you can see going with the indirect model poses some unique considerations and if they are not explored in detail not only will you lose money, but your creditability and customers.

If you would like more detail on areas of consideration for indirect or any other channels; give me a call (508-838-1073) or visit our Contact US.

RHL 02/08/11

Product:   the “thing” manufactured by a company and sold to the buyer.  Note: service and software are now products and secondly, differentiation and value propositions (not the only criteria) are required to keep your specific product or service selling.  Suggested modification here is to incorporate for B2B solutions not just products, because buyers are looking for solutions that address their “pain points” or applications and this requires a combination of products and services.

Price:   the amount proposed for the product or service, not necessarily the actual sold price.   I would suggest that value might be a better criterion here than price but that is for another discussion.

Place:  where the buyer can actually purchase the product or service.  Historically this was a store or a distribution channel but mainly someplace that one went to pick up or the process by which the product was delivered.   With the introduction of the Internet, today buyers do not even have to leave their home to buy almost anything!

Promotion:  the methods used by marketing to promote their product or services.  Like anything else there are numerous methods to pick from in promoting a product, the real challenge is defining the appropriate mix.  And again with the introduction of the Internet, there are more possible selections and thus more considerations.

Wikipedia suggests that there are three (3) additional P’s to consider.  People - those who consume the product, and thus the topics like market segmentation and data gathering should be added to the marketing activities.  Process- the flow of activities by marketing, or as I like to think about it,  the overall campaign and how to make it a completely integrated process in order to obtain maximum impact. Physical evidence- part of the marketing strategy that addresses some form of customer satisfaction.

I would suggest adding the fifth category called Public and here is why.   First of all, Bob and I have stated that the selling process has changed, the buyer is now in control and the potential buyer is doing research long before the selected vendor even knows about it.   Again the Internet and now social media are providing massive amounts of information (granted not all of it is factually correct) about companies and their product and services.   Therefore Marketing must, as a minimum, monitor what is being said about their company and its products and services.  Even though the comments may not be from potential buyers, they will have an impact on the image and opinions of others, thus companies need to be aware of the public and their perceptions (perceptions are real) and integrate this into their overall marketing activities.

Are you adequately monitoring everything that is being said about your company and your products and services?

RHL 12/14/10

Before you answer the question, have you done and do you understand the following issues in determining your selling price?

1-      Are your current product price objectives in line with the corporate objectives (profit oriented, gain market share, etc)?

2-      Do you understand the values (quality, serviceability, ease of use, etc.) customers put on your product/service?

3-      How is your cost method derived (sell price minus margin to arrive at cost or is it a combination of fixed and variable cost)?

4-      Do you understand the competitor’s strategy (gain market share or market entry) and their cost structure (initially a loss leader or penetration)?

5-      Are there any legal issues regarding price reductions( some cases like market monopoly/oligopoly)

6-      Does this price reduction impact other products in your portfolio?

For more details on pricing, see our Pricing Guide.

Given the above, here are some considerations you should consider before you react.

A-     If you react with a price reduction will it be less then preventable sales losses?

B-      If you react will the competitor just reduce their price again

C-      Where will multiple reductions lead you ( margin issues or sales loss impact)

D-     If you react, how will it impact other products/service?

If you have good product/service differentiations, then I would suggest stressing your benefits and value proposition via marketing messages to your customers in some form of a campaign.  Also look at the competitor’s pricing strategy, cost structure and past record regarding price changes.

Third, look at the market with regards to new potential technologies, customer’s experiences with your competitor’s product and any past or present technical issues.  Use the results to combat the price changes.

In most cases responding to a price reduction by matching it results in disaster.

George Cressman Jr. & Thomas Nagle of the Strategic Pricing Group state “Pricing is like playing chess: players who fail to envision a few moves ahead will almost always be beaten by those who do.”

Cressman and Nagle recommend the following:

1-      Never participate in a competitive engagement you cannot win.  Fight from strength NOT your weaknesses.

2-      Compete from an advantage position ( example, value differentiation), do not compete by using the competitor’s rules

In summary,

** Know your overall pricing objectives and know your competitor’s objectives and position.

** Project the possible next steps (what if scenarios).

**Engage from a competitive advantage.

**Consider actions such as improved warranties or including some form of service.

** Use price reduction as a very last resort!

RHL 8/3/10

Pricing is one the four “P’s” of Marketing.  The right price drives margin, profit, and to some degree perception of the product.  But it appears that a fixed price is rapidly going the way of the buggy whip.  If this is true, has the CMO lost one of his key tools?

It is an axiom among hi-tech buyers that negotiating a price in the last week of the quarter will result in a cost savings over the “quoted” or “regular” price.  Whether the cost savings are a lower price or are expressed as additional features at no cost, extended warranties or something similar, the result is the same…lower margin for the seller.

On the other side many Sales Managers, backed by Management, tell their sales force, “Don’t let price get in the way of closing a sale!”  This is communicated to the buyer, either directly or indirectly, again resulting in a pricing concession and lower margins.

The offline and online business press has been buzzing about deflation, often drawing parallels to the Japanese experience of the past 15 years.  In a deflationary environment, buyers wait to the last minute to make their buying decision, and then seek the lowest price for a product that meets their needs.  Sellers, with inventory on hand or needing to meet a goal, recognize that something is better than nothing and compete for the business based on price.  After repetitive downward rounds marginal vendors go out of business, leaving larger players who are still forced to compete on price.

Assuming that deflationary pricing is a fact of life through 2011, how should a B2B CMO price his/her product?  Some suggestions are:

1. Emphasize the value proposition of the product/service to the buyer, highlighting the unique differentiating features that will save the buyer time and money, allowing him to be more profitable using your product.  This can be communicated via:
   1. Use cases
   2. Testimonials
   3. Blogs/Tweets
2. Motivate the sales force and buyers to make a decision earlier, thereby blocking out competition.  If there is tacit acknowledgement that closing the sale in the last week of the quarter results in a 5% price reduction, offer those monies as an incentive to close the deal earlier in the quarter.
3. Increase the price of add-ons and service.  If these are normally “thrown-in” in order to close the deal, make their perceived value higher so that fewer concessions have to be made to show a price reduction.
4. Provide an estimated ROI based on purchasing the product.
5. Modify the financial terms of the deal; lower payments for the first six months, lower interest rates, lower cost service contract, etc.
6. Lower your costs by working with Management and purchasing to ensure that your margins remain constant under the downward pressure.

There are other tactics that can be applied, depending upon each company’s specific situation, i.e., price leader, price follower, etc.

Can you share how you are planning to price your products in a deflationary environment?

RHM  7/22/2010

 1-     Understand the goals and go to market (GTM) strategy for the enterprise and /or the SBU (Strategic Business Unit).  Example: is it “price skimming” – entering the market with a high price with the intent to capture a piece of the market and drive revenues, or penetration, initially pricing low to gain volume/market share or attack the competition?

2-     What is the financial pricing philosophy?  Is it cost plus (internal costs plus some factor to get to a selling price) or is the objective to have a certain margin (price minus cost).  While I am not a fan of “cost plus” because it does not consider what I call the “surrounds” (buyers value, market advantages, competition, economic factors, etc.), it is critical to know ALL the costs that go into a product/service.  There are the fixed product costs (material, labor), possession costs (storage, transportation) and user costs (installation, training), as well as the variable costs (marketing, distribution, corporate overhead, etc.)

3-     What is the competitive situation?  Do your competitors have the equivalent product and equivalent features? While this is important, I feel what is more important is a view of the competitor.  What is the competitors’ goals and strategy, what is their GTM strategy, what do their financials look like? What market segments is the competitor focusing on?  How will the competition react to your product introduction? All of this can have a major impact on pricing your product.  An example would be, if the competitor has little margin, then pricing your product just below his could lead to capturing his market share. One last comment, whatever you do, do NOT get into a pricing war. These usually lead to both parties losing.

4-     As I have repeatedly stated before, know the customer (enterprise in this case). Is there a demand in the segment(s), and if so, the value(s) might be different for each segment.  Is there a major void with no current solution?  What value-added benefits might the enterprise see from this product introduction? The benefit can be a unique or new feature, it can come from an operational feature such as reliability or quality; it can be from a financial factor like total cost, or even from a buyer department guideline, i.e., providing minimum risks or outstanding support.  If an enterprise sees benefits and value (value is quality relative to some price), then your price can have a premium over the competition.

5-     Does the product or service have a unique feature that the competition does not have or the market does not know about yet? If so you have a price advantage!

6-     Is there a service that must be attached to the product?   A strategy might be to lower the product price and recoup profits from the service.  This is especially a good approach if you “control” the service and the enterprise sees value in the service.

 7-     What impact will this product introduction and its price have on your other products?  Will this new product’s price and features replace another one or negatively impact your current revenue stream?

8-     Channel considerations: who will sell the product?  If it is your own sales force, then you may have some margin movement.  If it is a reseller, they will usually want some form of discount from list, and thus the margin (therefore the price) has to be such that you and the reseller both make a profit.

9-     Legal consideration:  there are laws regarding price setting and discounting. For example the Robinson – Patman Act addresses unlawful price discrimination, requiring the seller to take into pricing into account when there will be multiple channels re-selling the product.

10- Lastly, once you have launched the product, monitor the situation in the field to see if adjustments need to be made.

 Like any guide there are risks in general statements, but the recipe is usually the same, it is the ingredients that vary. So adjust each step relative to your product. Start with a well thought out strategy, decide on a pricing strategy that supports your enterprise’s goals and objectives. Know your competition, and know the channel(s) and their characteristics.  Truly understand the benefits of the product/service and their related values for both the buying enterprise and their end users.  Most importantly, understand that pricing is NOT a standalone task, but a multi dimensional – interrelated function.

 In today’s tough economic times are your prices being forced down by cut-throat competition?  Do you know how to escape from a price war?

 RHL    4/6/10