24 Factors to Consider in Pricing your Product, Service or Solution.

We have a treat for you today. It’s a guest post from the highly respected global expert on customer centricity, Alan Hale of Chicago.

He writes about the importance of getting pricing right and generously shares twenty-four (!) factors to consider when pricing your product, service or solution.


Over the past several decades, I have managed over 250 projects, and am currently serving as the President of Consight Marketing Group. During that time,  I have noticed that some of these clients experienced customer erosion or profit sub-optimization due to poor pricing practices. The following article discusses some of the issues seen, as well as other pricing challenges described in other marketing journals and textbooks.

  1. Pricing needs to cover your costs. Pricing needs to cover COGS (cost of goods sold), and contribute towards an allocation of fixed costs like rent, utilities as well as profit. Selling a high volume of products does not guarantee a profit. “We will make it up in volume” does not make sense.
  1. It is related to capacity, the economic supply and demand. If you have strained capacity like oil pipelines, prices are substantially raised. Conversely, if a contractor has no backlog, they might be willing to discount prices. For you econ majors, it is the intersection of the Marginal Revenue and Marginal Cost curves.
  1. Price according to the Market Lifecycle. Early adopters in the growth stage pay more than laggards in a mature or declining market. A major computer manufacturer used to price their line of PCs 10% higher than the competition due to their brand, perceived status and support. As PCs became more commoditized, the pricing premium came down. If you have a well-known brand name with a high amount of loyalty, you can charge a premium. If it is a mature/commodity item it is difficult to charge more. Would you pay 50 cents more for a pack of nails on the retail shelf?
  1. Price insensitivity is positively correlated with ROI. Cost is not as important in the business arena if there is a high ROI. Look at ERP (Enterprise Resource Planning) systems that can cost millions upfront over the first few years with consultants and implementation. But it saves the organization tens of millions over many years.
  1. Pricing depends on the amount of the cost of the components versus the total cost of the product. Bottling companies fill bottles with cola or other liquids. These polypropylene bottles are significant to the costs, and contract prices are negotiated heavily every year or contract period.
  1. Pricing is dependent on selling to the MRO (maintenance repair and operations) channel or OEM (original equipment manufacturer). Because of volume OEM’s can demand much lower pricing. Car manufacturers can buy tires at a much lower price than the customer off the street for example.
  1. Pricing is related to value. I have been privy to many research and consulting proposals. Some companies do a cost-plus calculation, the labour will cost so many hours, at an average cost plus markup for profit is the price for the proposal.
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Are you Jeopardising your Customers’ Loyalty? Or is it Going to Disappear Anyway?

As you have no doubt already noticed, my Blog posts and those of many other Bloggers too, are often prompted by real-world experiences. This week is no exception.

I want to share with you some examples of how companies jeopardise the loyalty of their customers and also seriously limit their chances of getting repeat purchases. But manufacturers aren’t the only guilty party; there have been some interesting comments on retail loyalty as well these past few weeks, so I will touch upon that too.

Promising More than the Customer Gets

This week I bought a new br and of bacon; I fancied a real English breakfast for once. When I opened the pack up, I was shocked to see that under the first three or four deliciously lean slices, was a pack of rather fatty, poor quality meat. Now why would a company do this? To make the sale of course. Seeing such great quality you would rightly expect the pack to contain similar meats to the front slices.

Another example which uses a similar ploy involves packaging. How often have you been enticed into buying a new product because of the picture on the pack? Or perhaps it was in an advertisement showing a delicious-looking meal or an amazing improvement to the skin or hair? Sometimes the pack content or product result may be acceptable, but when it’s not, you’re disappointed rather than delighted, aren’t you? (I previously wrote about one such experience in a post on br and honesty here) Again, why would a manufacturer set themselves up to deceive the customer into buying – once?!

Are such behaviours customer-centric? Certainly not! They are deceitful tricks used to sell customers less than they were led to expect. Yes you may get the sale, but you won’t get repurchase and certainly not loyalty. Which do you want? One, several or long-term purchases?

Raising Prices without Saying so

Most major markets have seen low rises in their CPIs (consumer price index) in 2014 with Switzerl and actually in the current situation of a deflation! However that hasn’t stopped several manufacturers from increasing their prices. Or should I say decreasing the content of their packs, as that seems to be the more usual response of many of them? This is not a very customer-centric approach to pricing.

The shopper is buying the same br and at the same price, but the contents, which the consumer rarely verifies, have decreased. If the reduction is significant, consumers may notice that the pack is significantly larger than the contents inside, which may then prompt them to check the actual weight they have bought.

A recent article in the UKs “The Telegraph” talked about some of the most noticeable offenders, including Birds Eye (Pirmira’s Iglo Group) and Twix (Mars) c andy bars. However many categories were using the same method of hidden price rises.

A survey of 1,257 UK’s Which? members found that over half (58%) said they would rather prices rose than packs got smaller.  Continue Reading

This is Why your New Products “Crash & Burn”

Last month I invited readers to share some of the problems and challenges they need to address in 2014. I offered a free consultation to one lucky winner who asked the most interesting question, which could also be of interest for me to answer for other readers.

Well, the winner is Jean-Francois (JF) who has just started working with a start-up in the tech and app areas – I feel that’s more and more of us these days, don’t you? His question was:

“I would like to commercialize a new XXX; what would be the right approach to identify the consumer need and then the market potential, considering that the company has very limited financial resources?”

This is a great question and a reminder that not every organisation has access to large market research or marketing departments and extensive budgets. In fact, in many companies these roles are being h andled by one and the same person with very few resources; is that your case? If so then you will definitely find this post of interest, but even if it isn’t, I’m sure you will still find value from the ideas shared.

As I had promised, I gave Jean-Francois a one-on-one consultancy which ended up lasting several hours, as he had planned well for our session together. He also happens to be really passionate about his innovative idea, as well as in finding solutions to all his challenges.

The product JF and his team want to launch doesn’t exist on the market today, although there are some products which are unsuccessfully trying to address the perceived customer need. The proportion of product launches which fail every year is generally “accepted” to be about 95% – although why companies continue to accept such levels is beyond me! With such odds, I think it is incredibly courageous to start a whole company based around just one new product idea, but that seems to be the norm in many areas today.

Let’s start by taking a look at some of the reasons new products fail and identify ways to reduce if not completely eliminate them for your next launch.

  1. New product Process wheelThe process itself: Innovation is by definition a creative process, but many organisations use a well-worn, restrictive and uncreative process to develop their new products. They are at best most likely to come up with renovations than true innovations. The solution is to introduce some creativity into the process, and why not include potential customers in the process too?
  2. Meeting company quotas: It is surprising that with such miserable statistics concerning the likely success rate of new products, that so many companies – and which shockingly include many of the largest CPGs around – fix quotas on the number of annual new product launches. How crazy is that?! It just encourages too many new products to be launched too early, and almost guarantees failure! I believe it would be much better to seriously limit the levels of acceptance amongst all new product ideas proposed in any year, then only the best would get through.
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HELP! Your Customers don’t Value you as much as you do!

Have you noticed how extra “freebies” are always suggested to have an extremely high value, sometimes close to the level of the product you’re thinking of buying? Last week I spoke about the best 10-step process for following and developing your br and / corporate image. This week I want to speak primarily about value, an important area of any image.

I have just returned from another trip to the US; the Americans are, amongst many other things, the champions of exaggeration (apologies to all my American friends, but it’s true!) Here are a few examples I saw during my recent trip – thanks to my jetlag and my late night TV binges – of valuations of extras offered for free with the sale of various products:

  • Three additional CD’s are valued at $59.99, when the proposed product’s asking price is 3X $39.99 or almost $120
  • A set of plastic measuring cups valued at $39.99 and a recipe book valued at $79.99 are offered free when you purchase a $129.99 express cooker
  • Mini samples of other products when you buy a “starter kit” of cosmetics, valued at twice (!) the price of the product you are buying – which is incidentally already grossly overpriced.

Do the companies making these offers really believe that people will purchase the product they are advertising because of the value of the “free” extras? Or is it me that doesn’t underst and their motivations? We have all become used to the exaggerated claims of the products offered on TV in these infomercials, but have you noticed how they are now creeping into online offers too?

This post was in fact prompted by a recent email I received from what until then I had judged to be a serious resource for tips on social media best practices. If I signed up for a bi-weekly newsletter service, I was offered two “free” eBooks totalling 130 pages between them and valued at $157! Come on, be serious! How many books do you know that are worth almost $80 each? Even those filled with lots of glossy colour photos are usually on sale for less than that. And to make matters worse, with the explosion of self-publishing, many excellent books are being offered at below the Kindle royalty threshold of $9.99 these days.

My reaction was to immediately cancel my subscription to the person’s newsletters; if he can claim such prices for his eBooks, perhaps his tips were just hot air claims too. I do get upset by companies which are stupid enough to think they can fool their potential or even current customers into buying something because of an over-valued freebie. So let’s talk value and look a little more closely at what customers think about the value of your own products / services.

Setting the Price

Setting your price to reflect customer valueWhilst you can put a price on your offer – in fact you will certainly do this before launch, with or without the help of your customers – it is only once it is on the market that customers will confirm its true value. Continue Reading

Are you Happy with your Market Research?

Next week is the official start of Spring in Europe, although in the US you have already moved your clocks forward by an hour.

Therefore, this seems to be a good time to review what market research we are running and spring-clean our toolbox in line with our new company objectives. If you would like some help in doing this then please read on for some original ideas on how to make it all easier.

In order to decide on the tools you need, it of course depends upon the maturity of your market, the size of your budget, as well as the position of your br ands in their life-cycles.

Last Spring, we used the 5Ps of marketing as a basis for the review of the market research toolbox; if you didn’t see it or would like to re-read it then you can find it here. This year I will be taking into account the three elements mentioned above and looking at how you might adapt the tools in consequence. Whatever stage your br and is in, however, there are some metrics that you will always want to follow. These include awareness, usage, product performance versus competition and advertising & communication (including pack and web) effectiveness.

 

Market maturity

Are you competing in a mature category or is it still growing strongly? Mature markets tend to change more slowly; consumers have their purchase habits settled and in some cases choose from amongst a portfolio of br ands, between which they switch depending upon current promotions.

If you are competing in such a market, then you can probably manage with monthly or bi-monthly or even less frequent data about stocks, pricing and shares. Unless a newcomer is launched onto the market, many mature categories have br ands that are being “milked” by their manufacturers, with perhaps little investment in communications. Therefore it is price that usually dominate share changes and can to a large extent be predicted.

In terms of market research needs, retail audits, price tracking and promotional monitoring are all important metrics to gather. Br and Image studies are also important, but can be limited to every few years, when real changes are more likely to be recorded. Too frequent measurement of a static market is likely to show only noise from sample error rather than true shifts in image. If you are in a service industry, then loyalty and satisfaction (NPS) metrics are also useful. (If you’re not quite sure what NPS is or how to use it, then HubSpot did a great Infographic a few months back that I recommend reading)

If however, you are competing in a new or strongly growing category, you will need far more frequent data in order to make informed decisions. In these cases, retail chain data, shares, stocks, out-of-stocks and pricing will be vital to follow, ideally on a weekly basis. Br and Image data should be gathered annually, but everyone should underst and that in a fast moving market, things can alter rapidly, so the ratings are merely snapshot comparisons versus competition. Continue Reading

Is your Br and Worth Paying More for?

This week’s guest post is from C3Centricity partner PhaseOne. Terry Villines, their senior vice-president shares some of the learnings from analysing the marketing communications of thous ands of premium br ands. Whether you work in the Luxury Industry or not, wouldn’t you like your br and to be worth more?

Every product category has at least one – a br and that costs more than the competitors; a br and that, even though it costs more, is successful at building the business; a br and that has been successful at convincing their target that they have a premium offering and are worth the extra cost.

For example, Rolex is clearly seen as a more premium br and than Timex or Fossil, and consumers are willing to pay more money for a Rolex even though all of these br ands provide those who wear them with accurate time. 

How are br ands ableto convince audiences that they are worth paying more for – regardless of category?

PhaseOne has mined over 1,000 pieces of marketing communications to identify guiding principles for establishing a premium positioning.  The key is to:

“Credibly promise that consumers will get more of what they want most from the product, promising more benefit than competing br ands”

Six specific types of benefits were found among the messages PhaseOne analyzed.  The inclusion of these benefits was associated with strong Premium Positioning.

#1.  Product innovation – your br and brings an enhanced benefit or a new benefit to the category.

#2. Human Worth Factor –  by tapping into the target’s self-esteem, a br and communicates how  the target is worthy of the more costly br and – “I’m worth it / You’re worth it”

#3.  Unique Production Process – the way in which the product is made results in delivery of a more significant benefit.

#4. Premium imagery – associating the br and with other things that are also premium in nature.

#5. Higher performance than competing br ands.

#6. Endorsement by a credible authority.

Interestingly, some of those things that we have readily accepted as contributing to Premiumness did not prove to be effective:

  • Claiming superiority alone does not confer Premiumness.  Positioning a br and as superior does not equate to the br and being worth more.
  • Having an abundance of features or advantages does not make a product worth more.  Features and advantages may contribute to a Premium Positioning, but they are not sufficient to establish the positioning on their own.
  • Marketing messages that contain breakthrough creative elements and premium production techniques do not translate into Premium Positioning.  Such techniques can reinforce a Premium Positioning, but they cannot create it.

We’re confident that these benefits can be tapped for virtually any product / service category.  Yet, it is likely that the weighting / emphasis given to them will vary.  For example, in a just completed study of the advertising for 16 Luxury watch br ands, PhaseOne found most messages cluster into only 3 of the benefit clusters:

  1. Premium Imagery – br ands focus on the visual aesthetics and the watches role as a fashion accessory
  2. Human Worth Factor – br ands add a layer of specific personal or lifestyle interests to suggest for whom the br and is most appropriate
  3. Unique Production Process – br and communications emphasis that the watch is made of high quality materials with precise craftsmanship.
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6 Ways to Offset Low Customer Dem and

Last week I spoke about how companies can become more customer centric, but in ways that will differentiate them from their competitors. This week I want to give some more concrete examples of actions, inspired by the latest results of McKinsey’s recent survey on the economic outlook.

As their chart below shows, whilst sovereign-debt defaults, economic volatility and geopolitical instability are considered to potentially be the biggest threats globally, low consumer dem and continues to be seen as the greatest barrier to business growth at a local level.

McKinsey economic threat chartThis has been the case in the last six months of results, so I thought it would be a good time to share some thoughts on what organisations can do to offset this (potential) threat to their renewed growth.

# 1 Customers

This should be the starting point for all strategy and plan development, but is so often only an afterthought. Tough times have a nasty habit of showing up an organisation’s incomplete or total lack of underst anding of their target customer. If there are any areas of your customers’ life of which you do not have a deep underst anding, including how they are likely to react in turbulent times, then this must be what you start to investigate, before going to the other five points.

Are your customers pretty resilient to price? Do they often switch br ands, products or outlets? Are they portfolio purchasers or highly loyal? The answers to these questions and more, will help you to be better prepared for tight times and to know how to respond to their specific needs better than anyone else.

# 2 Value

Many companies have reacted to lower sales by reducing price and increasing promotions. In most cases, this has been a waste of time, unless they have always been selling at a price higher than their value. If you don’t know what your customers believe is your true value to them, then you need to run some research urgently to find out, and only then, if your value is below your current price, should you consider either of these actions.

# 3 Offer

In an attempt to maintain pricing, some other organisations have been reducing the size or quality of their products and services, usually without making this clear to their customers. Whilst this might work in the short term, your customers eventually look at the details of the pack content or their service agreement, and realise they are no longer getting what they thought they were. This will both annoy them and make them lose trust in your company; you are at risk of also losing their business too, sometimes forever.

Instead of making reductions in your current product, why not empathise with your customers by offering smaller packs or reduced services for a lower price. In this way, should they decide to switch, it will at least be to another of your products / services, so they can remain loyal and hopefully return to the offering they previously purchased, when times become less difficult. Continue Reading

Time to Spring Clean your Market Research Toolbox

This week we are officially into Spring in Europe, so we all now start thinking about spring-cleaning the interiors of our houses and apartments. Of course living in Switzerl and, where people seem to be born with duster and brush in h and, I can imagine that there is not much work for most of my neighbours, but I have to admit that for my place it is a slightly different matter!

This is the reason why today I want to speak about YOUR interior, however I am not talking about your home, but about your Market Research Toolbox. When was the last time you took a look inside? Isn’t now an appropriate moment to review the tools you have in there? Some may be a few years old and need updating, whilst you may now notice that some others are missing that you really need. If this is the case, then this post will help you to do your toolbox spring clean.

In order to decide on all the tools you need, I suggest you start by taking a look at your br and essence. What do you want your br and to st and for in the hearts and minds of your target customers and your stakeholders? Who is your target customer; what attributes describe your product or service; what is your br and’s personality and character, and finally what benefits can your target customers expect from your br and? Once you have these identified, you need to agree what measures you will use to ensure that you follow them effectively and efficiently.

The 5Ps of marketing have been around long enough to assume that many people still find them to be useful, so we will base our review of your toolbox around these five topic areas, keeping your br and essence in mind of course.

Here are some questions I came up with, to help you to identify whether or not your toolbox needs some cleaning or updating:

People:

Who is your br and or service targeting? To underst and, you will need to gather representative data on your users, current, past and potential, and not just demographics, but as much information as you can gather about their habits, attitudes, preferences, values and motivations.

Price:

Are you pricing your br and based on cost or value? What do your current, past and potential customers value and what price estimate do they place on your offer? What are the psychological price barriers for your category and br and? Where is your price in comparison to your competitors’? If it is higher, what additional value are you offering to warrant the difference?

Promotion:

How effective are your communications? What tools do you have to help in their development and to test their performance; not just at the end before airing, but also early on in the process of their creation? What do your category users talk about online? Are you gathering information on and responding to these discussions? Continue Reading

Are You Sure You Know Who You Really Are?

Earlier this week I was discussing with a client about Br and Image and Equity. “Oh we don’t need to worry about that!” he told me confidently. “We know exactly who we are and what we st and for; look, here is our br and framework” he continued, h anding me a very impressive sheaf of paper. 

Whilst I was certainly impressed with the organisation of the document and its contents, I had a niggling doubt in the back of my mind. “This all looks really complete” I responded, “Is this what you want the br and to st and for, or is this what its image is currently?” I asked. “That’s the same thing isn’t it?” he responded!

OK, OK, so you saw that coming didn’t you? But it still amazes me how many companies spend time developing these frameworks, including relevance and differentiation, br and promise, br and personality, etc. etc. but in fact have never measured whether or not their content is actually what they st and for in the hearts and minds of their customers! Therefore, I thought it would be useful to summarise what you need to know about your br and and not just what you have decided you want your br and to be.

 

1. Awareness

If people don’t know about your br and or service, then they can’t buy it, so you need to start by measuring how your awareness is moving. Hopefully it is growing, but you need to look at top-of-mind (first mention), spontaneous as well as prompted awareness, and amongst your target audience, not (just) a representative sample of category users, especially if yours is not a category that everyone buys.

Of course if you haven’t even identified to whom you are selling, then stop reading and go to the post on targeting that we published a while back; you can find it here. Awareness should be measured regularly, as it will be impacted by your marketing actions, promotions, communications, events etc.

2. Image

Once you know how many people have heard about what you are offering, you need to measure what they believe it is. Whilst you may have identified what you want your br and to be, this may not be the same as what your customers perceive it to be. They will have made up their own minds based upon what they see, what they experience and what they hear from friends, families or your own communications, as well as those of your competitors.

Whilst it is a good idea to measure the attributes with which you want to be associated, it is important to also measure some attributes you believe are particularly relevant for your major competitors, as well as those of the category itself. These latter metrics will help you identify the “price of entry” into the category and whilst not providing any competitive advantage, can seriously harm your br and if yours is weak on any of them.

Although image can fluctuate a little, in line with your marketing actions, your base image is slow to move, certainly slower than most marketers would like it to. Continue Reading

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