April 30th, 2010

Is Pricing Your Friend or Foe (Part 2)?

In the last blog entry, we examined the roles of commodity vs. differentiated products, elasticity of demand, and relative market share play in pricing strategy. Now I would like to look at three more areas – your sustainable price premium, the use of product configurations, and participating in relevant price bands.

Your Sustainable Price Premium

Your ability to use pricing to your advantage is tied to what people are ultimately going to pay for your products. If you are highly differentiated, have a premium brand, deliver a great product, customer experience, etc., you should be able to charge a price premium for your products. The opposite is true as well. Technology examples of premium priced products include HP printers, Apple PCs, and Intel chips. Now let’s look the opposite situation. You can’t charge a price premium. In fact, you may even have to discount your products relative to average market prices. Can Kia charge as much a Toyota? Can Budweiser charge as much as Heineken? Can Lexmark charge more than HP? Even in the best situations, charging more than 10-20% higher than your nearest competitors (as a share leader and/or premium brand) is extremely difficult. There are notable exceptions. If you are a market niche player or luxury product with extreme product differentiation, and control distribution you may be able to sustain more substantial price premiums. Examples include Bose, Louie Vuitton, and exotic cars like Maserati and Ferrari.

The Use of Product Configurations

As a supplier of a product or service, your goal is to get the highest price per unit the customer is willing to pay. In technology marketing, products with attractive low base prices and options (multiple configurations) that contain additional features and accessories bundled together are typically used. The option prices are set up so that the sum of the parts of the bundle are less expensive to buy than buying them individually or are otherwise unobtainable features (if you don’t buy it in a bundle you can’t upgrade your product later for that feature).

See these two examples:  

Apple’s iPad Pricing

HP’s M4345 Multi-Function Product Pricing

It is an art to decide what features should be included in the base product vs. the options. Customer-centered marketing insights will lead you to the right answer. But the net goal is to have attractive, entry-level price points on the base products then build such an attractive portfolio of options that people, based on their needs, will more than likely purchase a more expensive option.  In addition to this product/pricing approach, there need to be compelling up-sell and sell across marketing communication, tools, and promotions to wring out these higher average selling prices.

Participating in Relevant Price Bands

Based on the above, you should be able to triangulate on your pricing, relative to industry averages and nearest competitors. It is helpful to calculate average selling prices or revenue per unit and compare your performance to that of the competition. Many third party companies track this data (like IDC or GfK for printers and PCs). Equally important is the concept of price bands.

 As a company, you ideally want to sell products at all relevant market price bands (or customer- appreciated price points) – whether they are higher or lower. Why? As mentioned earlier, participating in more price bands opens up broader market access. Over time as a product category matures, lower price bands grow faster than higher price bands and there is a mix shift to lower price bands. This follows the trend of classic technology productlife cycles. This becomes important when you are managing your market share. For example, let’s say 50% of your market is priced over $300 per unit and 50% if your market is below $300 per unit. You don’t currently play in the less than $300 market because it is less profitable, cheapens your brand, etc. Let’s say you have 50% market share in that >$300 market.  That would give you 25% market share in the total market (50% x 50%). Let’s assume you are gaining one share point of market share every year in the >$300 market and the <$300 market is growing 2X faster than the >$300 market. In this scenario, even if you gain market share in your traditional segments of the market, you are losing market share in the overall market. That may or may not be OK, depending on your business strategy. If you are the market share leader for the price bands you participate in as well as the overall market, chances are you will want to hold on to your share and keep prices as high as possible. But as new price (probably lower) price bands emerge, you will need to decide how to respond to them. There are ways to respond (but that will be another blog entry).

Equally important to this conversation is to develop the appropriate tracking mechanisms to measure and respond to your industry’s unique pricing dynamics. Appropriate measures can include revenue share, unit share, price premiums vs. average selling prices, market leadership indicators, brand metrics, and coverage of market price points and bands. Looking at these factors and carefully considering your pricing approach will yield better decisions and help you make marketing a more strategic, value-added function.

Often times, companies will make broad statements – that they would like to grow revenues, profits, and market share – all at the same time. Unless you are starting from nothing, this is almost impossible. At best, only two out of the three variables in play can be optimized. You need to make sure you wisely chose the best ones for your business.

So is pricing your friend or foe? It is you friend if it helps you grow revenues, has neutral or positive effect on market share, and helps you manage your overall profitability to goals. It is your foe if pricing decisions drag down your revenues, gross margins, profits, and market prices. While there are no easy answers to pricing decisions, a framework like this will greatly increase your odds that you are making excellent pricing decisions.

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Posted By Vince Ferraro

April 23rd, 2010

Is Pricing Your Friend or Foe (Part 1)?

Here is the scenario. It is the end of the quarter and your company is not making its numbers. With one month left in the quarter, your VP of Sales calls you up and pitches to you that the quickest way to recover sales is to cut the price of your most popular selling unit. Why not? After all of all, of the available marketing P’s, pricing is certainly the easiest lever to pull when time is short. Sure you can manipulate the other elements of the marketing mix – product, promotion, distribution, etc. But successful implementation of all of these other marketing levers takes time. No wonder many companies spend more time driving pricing decisions than all of the other elements of marketing mix combined.

While pricing is certainly a powerful motivator of demand, it is not always a good predictor of success. In order to successfully execute the pricing lever, there are a number of factors that need to be considered. I am not talking about specific pricing strategies, but factors to consider as you deploy your chosen pricing strategy.

Commodity or Differentiated Product

If you are selling commodities (say a bushel of corn), your ability to differentiate your pricing is severely limited. Typically, commodities will differentiate their prices based on grade or scarcity. For example, let’s look at food products. If you sell eggs, you can differentiate your prices based on grade and size or some other differentiating factor (free range, organic). If you sell maple syrup, you differentiate on grades based on the color of the syrup (medium amber, dark amber) and perhaps where it was produced (i.e. Vermont). If you are not a commodity product, then presumably you are in a market that has a product with some ability to differentiate. It may be a lot or a little depending on the type of product or industry.

Elasticity of Demand

To borrow an economic phrase, if you cut the price and you can increase demand, presumably there is elasticity of demand. If you have a differentiated product, one assumes that some incremental demand will be realized with lower prices. What is important here is that the price change generates incremental revenues. If you cut prices by 10% and your demand goes up by 5%, you will see decreased revenues and profitability. Demand is rather inelastic. If you cut prices by 10% and volume goes up 15% demand is elastic. Growth and new categories often show more elasticity of demand than mature product categories.

The formula is PEoD = (% Change in Quantity Demanded)/(% Change in Price)

In mature product categories, growth is mature and the only way to drive incremental demand is to take market share from a competitor, which is difficult to do. Often times, marketers will try to work the margin, meaning holding the standard price constant and offering discounts or rebates for incremental demand. Bid deal (bid desk pricing) pricing follows this approach. This is easier said than done. Many companies cut price only to find that they cut revenues as well.

Relative Market Share

If you have a product with low market share, “buying” market share by aggressively lowering prices (vs. prevailing competition) is a successful strategy for growth. Dell did it in PCs, Samsung did it in printers, and AMD did it in microprocessors. It is a strategy that can work. You “buy” market share because it is all upside. If you are a legitimate brand and have 0% share and you price aggressively, it is likely you will get some share. You “pay” for it with aggressive pricing. On the other hand, if you have higher market share, your goal is to keep it. To keep it, you have to fend off aggressive competitors who want to take it from you. If you have relative market share of 3-5X the market share of your nearest competitor, you can bask in the fact that you have true market leadership and that responding to competitors’ aggressive pricing must be very specific and surgical. You don’t want to take market and street prices down and trash your revenues and profits just because an aggressive competitor is coming after you.  If you have less than 2X the market share of the nearest competitor or you are not the market share leader (less than 1X), a more aggressive pricing response may be needed to drive/sustain share. When looking at market share, it is important to look at both unit market share and revenue market share. Rarely are the two the same. Revenue share is often a measure of channel clout. If you sell to Best Buy – what would be the best position to be in as a vendor that sells to them?  25% unit share and 50% revenue share, 25% revenue share and 50% unit share, or 50% revenues and 50% share?

It is important to note that an aggressive competitor can create new (usually lower) price bands that will expand the market size. Depending on your pricing strategy you may or may not choose to participate in these price bands. For example, if the price range of a given product is $200-500, what is likely to happen if a respected company decides to compete with a decent product at $100? Two things will probably happen. First, the market will expand overall. Second, it is likely that some customers that bought a $200 product will be happy with the $100 product, so a mix shift in pricing (and share) will occur. This happened when PC manufactures introduced the net book as an alternative to the notebook PC. When Asus introduced a net book in 2007, it created a whole new product category. Notebooks became more affordable so global demand for portable PCs went up but product mix skewed more to lower price points as people who previously bought more expensive notebooks found their needs satisfied by net books. The same thing is going to happen with e-readers and next generation tablet PCs.

In Part 2, we will examine the roles that price premiums, product configurations, and price bands play in pricing and how pricing can be your friend or foe.

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Posted By Vince Ferraro

April 14th, 2010

Putting the “S” Back into Your Marketing Communications

I know a great many people who do excellent marketing. Ask them to write a data sheet, deliver a positioning statement, key product messages, brief an agency, customer story, etc. and they will rise to the occasion by delivering excellent work. Their messages will be prioritized and on target, the positioning will clearly differentiate their products from the competition, and the agencies will have what they need to create compelling  advertising, PR, and other elements of the marketing mix.

So why am I writing this blog entry? It’s simple. Often times, the communications are missing the sizzle and snap that differentiates excellent marketing communications from best-in-class. If you eat Rice Krispies  - nothing happens until put the milk on them. Then (and only then) do you hear the snap, crackle and pop. The milk is the activator of the crackling sounds. As a marketing person, this Kellogg differentiation has always fascinated me.

Likewise in marketing – something needs to be poured on the marketing communications to give it that something extra – an activator or catalyst. I call it the “S” or sizzle and snap. Others might call it the Wow factor, the Pixie Dust, the Secret Sauce.  You get the idea.

Kay Ross wrote and interesting article about creating more effective marketing communications that I like a lot. At the end of the day, the role of marketing is to “sell more stuff, to more people, for more money”, said Sergio Zyman, the former CMO of Coca-Cola.

So on one hand, I think there is a bunch of tactical things you can do to improve the effectiveness of your marketing materials and communications. You can have strong calls to action, features and benefits expressed from a customer point of view. Equally important is to ensure that the products and communication strategy reinforce the strategic pillars of your company. This is especially true in PR and analyst relations. Unless you are Apple, sophisticated press does not want to hear about your products. What is more valuable to a company are communications that 1) outline the company’s strategy, 2) is explicit about the pillars of its strategy, and 3) uses products, solutions, and partnerships, alliances, acquisitions as proof points of its strategy. And in the messaging of all of this, there needs to be something tangible and sizzling to hang on to and get interested about. This is where your marketing creativity comes in.

For example at HP, we introduced the HP 1018 as the world’s smallest laser printer. While you might think that was a small story (no pun intended), improving the customer experience of the space a printer occupies on a desktop is important, which plays into the larger strategy and a proof point that HP delivers a great customer experiences.

Another example was the recent announcement by Cisco that it was improving the ability of small businesses to connect, secure, and communicate. The products, features, support, and services were the proof points of its ability to deliver on the strategy.

What doesn’t work as well? Here are Sony’s product-centric press releases.

Tie your product or services messaging and marketing collateral around your business’ strategy and strategic initiatives. The net result is that you will build more industry momentum, improve the company’s image and reputation, and educate customers who will really see the differentiation and value your products bring to the market.

Now – go out there and start sizzling!

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Posted By Vince Ferraro