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