Apr
16

Pricing Course for Product Teams

By on April 16, 2014 · Comments (2)

Price

Today, April 16, Pragmatic Marketing announces a new course called Price. As the lead content developer, I found the experience fascinating.

The course was developed to help product managers and product teams be more effective through pricing. The question I struggled with though, “what do product people need to know about pricing to do their job well?” The answer turns out to be “a lot”.

First, understanding how buyers use prices to make purchase decisions helps product people truly understand value. They understand which products have value and why. When product people clearly understand where value comes from, they are better prepared to create products that have more value.

Product teams are often involved in creating pricing strategies. Understanding price segmentation and the different ways to charge different customers different prices produce increased profits.

Product people also manage portfolios (at least they should). Pricing knowledge guides them in their abilities to create the proper versions and complementary products that drive profit to the portfolio and the company.

Product teams often are in the escalation path when salespeople are looking for better prices on specific deals. It turns out product people have the ability to help salespeople be more confident they can win at higher prices.

As you might imagine, these are the four main topics in the pricing course.

This really was a fun experience.  I got to work with a great team of marketing folks at headquarters.  They continually re-focused me on the topics that were most important to product teams.  In the end, I’m very proud of the final course and hugely grateful for their help.

If you’re interested in learning more about the class: pragmaticmarketing.com/courses/price

Categories : Announcements
Comments (2)
Apr
08

Fixed or Flexible Pricing? That Is A Question

By on April 8, 2014 · Comments (1)

Vegetable marketFrom a reader:
Dear Mark,
Currently, I carrying out a graduation project for a company in Ethiopia. The graduation project is the final part of my study BSc. Business Engineering which I follow at the Utrecht University of Applied Science (the Netherlands).
The pricing strategy of the products of our company (mainly fresh vegetables) is a main subject of this project. I find out if it is possible to use a fixed price for our products. My question for you is:
1. can you provide some scientific information about the flexible/fixed price topic?
2. what are your opinion necessary conditions for handling a fixed price?
I am looking forward to your response. If you require any further information, feel free to contact me..
Thank you in advance
Yours sincerely,
Harro

Hi Harro,

I’m not aware of any experiments or empirical data on fixed vs. flexible pricing.

I’m typically a strong proponent of flexible pricing. This makes sense because pricing is about charging customers what they are willing to pay, and different customers have different willingness to pay. That said, when would fixed pricing make sense?

When there is price transparency. In other words, everyone knows what someone else paid. Some companies who sell to government agencies face this because the information is available to the public. Not many other industries have this.

When there are many low value transactions. When you go to the grocery store, you don’t haggle prices over a bag of potato chips. You either buy them or not. In this case, the cost of paying trained salespeople to negotiate over little items exceeds what little additional gross profit we might make with flexible pricing.

When your competition does it. If everyone expects you to negotiate and you don’t, your customers will leave you and go to your competitors. To succeed without negotiating in these markets you would need a new and compelling business model.

Most B2C (Business to Consumer) business is done without negotiating. In fact there are very few examples where consumers negotiate here in the US. That’s not true around the world though.

The above are examples of when we don’t negotiate prices, but it doesn’t mean we always charge the same customer the same price. So what is your definition of flexible? In your case, selling fresh vegetables, I wouldn’t negotiate every transaction, but I would be flexible.  Here are two techniques to consider.

First, do you offer a volume discount? The more someone buys, the bigger the discount.

Second, you may want a different price on vegetables that are “ripe today” vs. “ripe tomorrow” vs. “ripe yesterday”. I would assume the “ripe yesterday” would be least expensive, but it lets you move the product while still serving those with very low willingness to pay.

It’s likely there are other techniques for you as well. Think about when customers are willing to pay more and what differentiates that situation.

Harro, if your definition of flexible means negotiate every deal, that gets challenging, as you can see by the examples above. However, even if you don’t negotiate every deal, you can have a set price list for different situations that truly captures more of your customers willingness to pay.

Hope that helps.

Cheers,
Mark

 

Photo by Rootology (Own work)

Categories : Strategy
Comments (1)
Mar
31

Pricing at Launch – A Myth Debunked

By on March 31, 2014 · Comments (0)

WeightlifterWhile talking with companies about how to set a price at launch, I frequently hear the following comment, “We need to start high because it’s harder to raise prices than to lower them.” In fact, this comment passes my ears so often it needs addressed.

First, it’s true in some situations. For example, if we have a recurring revenue stream, like DirecTV, nobody complains if we lower our prices (except our shareholders), but try increasing prices and we hear from far too many customers.

However, most markets are not like that. What if our product is such that people buy it once and don’t purchase again for a long time (say more than a year)? Those who purchased at one price may not remember the price they paid when they go to buy it again. But even more important, new buyers typically have no idea that you once offered the product at a lower price.

Customers won’t complain if they never knew about your lower price or if they don’t remember the price they previously paid. In these situations, which are far more common than recurring revenue situations, raising prices after launch is not hard at all. Of course, if you have a big splash product, like the iPhone when it first came out, your prices are reported all over news and many people are watching. Raising prices then is hard.

Now let’s revisit recurring revenue business. When we raise prices, it will likely cause pain with our current customers.  However, we don’t have to raise prices on everybody. What if we held the low price for everyone who signed up early, but raised prices for new customers. New customers rarely know there used to be a lower price. Even if they do, they are typically forgiving because they didn’t sign up earlier when those rates were available.

This is not an argument for pricing low at launch. In general I’m a huge fan of higher prices. However, this is an argument for not over-emphasizing the difficulty of raising prices later. You want to be forward thinking in your launch pricing decisions, just don’t limit your possibilities.

Categories : Strategy
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Mar
27

To Publish or Not To Publish … Your Prices

By on March 27, 2014 · Comments (0)

Publish open source

 

Here is a question I received via email.

Hi Mark – you were my instructor at Pragmatic Marketing in Vancouver in November 2013. Can you please remind me why you recommended that we keep our pricing on our website? My Sales VP keeps pushing me to take it off :-) and I just needed a bit more support. I recall you saying that if we took it off it could signal that we are too expensive… showing pricing shows transparancy…. Thank you so much!!

What an interesting question. Should you publish your prices or not? Of course it’s never easy. It’s a tradeoff.

Have you ever had the experience where you were interested in a pretty unique product so you went to the company website to check it out? The entire time you’re curious about the price. When you finally decide this product may be a good fit for you, you start searching for the price. After some period of time, you quit searching. Now you have a choice. You can either contact the company (or supply info to have them contact you) so you can ask about price or keep searching for another alternative. Most of the time when this happens to me, I keep searching. I just assume the reason they aren’t showing the price is it’s probably higher than I would expect.

Is this what you want for your products? When you don’t publish prices (or at least have a distribution channel that publishes prices) then many buyers simply keep searching, going to your competition. Many buyers don’t want to talk to salespeople, or even give up their email address or contact information, when just shopping. Here is a simple rule. The easier you are to do business with, the more business you will do. Hiding prices makes it harder for your customers to do business with you.

However, there are some circumstances where not publishing prices is appropriate. You may have conflicting distribution channels, where different channels sell at different prices. You absolutely cannot put a lower price on your web site than the highest channel price. You do not want to compete with your channel.

You sales VP is probably pushing you to take it off for one of two reasons:
1. They are able to sell at higher prices and publishing the price limits them.
2. The “high price” on the website scares off buyers before they get to talk to them.

If it’s #1, one solution would be to raise the list price to the highest anyone pays. Then offer discounts from there. That list price is what we publish on our web site.

If it’s #2, you have to trade off the loss of engagement because the price isn’t published with the loss of engagement because the price is published. My gut tells me that if you are selling to individual buyers and users then you show the price. If you only sell very large deals where a salesperson is expected to be involved, then you may be OK not publishing the price.

photo by OpenSource
Categories : Uncategorized
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On Thursday, March 13, Amazon announced they will raise the price of its Prime membership from $79 per year to $99 per year.  Let’s use our Pragmatic Pricing framework to look more closely at this and to make a prediction.

Amazon dot com price increase

First, Amazon Prime is a Will I? product.  Buyers don’t say to themselves, “should I buy Prime or someone else’s free shipping program?”  Instead, they simply ask themselves, “should I buy Prime or not?”  Since buyers are much less price sensitive when making Will I? decisions, the price increase should not significantly detract from the rate at which Amazon signs up new customers.  Emphasis on NEW customers. (See here for more on Will I? and Which one?)  New customers don’t see a price increase.  They only see the $99 price tag.

However, since Price is a recurring revenue stream (i.e. a recurring cost to current customers), customers will not like having their prices increased.  Put yourself in the shoes of a Prime customer. Several years ago, you evaluated whether or not Prime would be good for you and you said yes to the Will I? decision.  You paid $79 for the year.  The next couple of years at renewal time, you already made the decision so you won’t spend much time reconsidering it.  Now though, the price has increased.  Now you are more likely to rethink whether or not Prime is still right for you.

One big disadvantage to price increases with recurring revenue streams is it motivates your customers to rethink their decision.  Without the increase these decisions are often on auto-pilot.

However, notice how well Amazon mitigates the impact of the price increase.  In the articles describing the increase (e.g. CNNMoney), Amazon blames the need for the price increase on increasing costs of shipping and fuel.  Possibly the only excuse for raising prices that your current customers accept is increasing costs.  Check.

Also, the article explains that they considered raising it by $40 to $119 but only raised it by half that amount.  This makes the price increase feel like a discount.  That’s impressive.

Prediction:  Amazon will lose some Prime memberships over this, but probably less than 10%.  However, the customers they lose will be the ones who receive the fewest shipments from Amazon.  These customers get the least value from Prime, but they are also the least expensive for Amazon to serve.   However, the revenue from the 25% price increase on the customers that stay will outweigh the loss of a few customers.  Additionally this will not significantly slow down their rate of new customer capture.  Sum it all up and this price increase will be a very profitable move for Amazon.

 

 

Categories : 4. Pricing Dynamics
Comments (3)
Mar
02

What Role Does Price Play?

By on March 2, 2014 · Comments (0)

Acting

This blog has previously discussed the importance of Will I? and Which one?, the two decisions our customers make before almost any purchase. If you want to know more try this post Will I? Which one?.

Recently, while working with a company on their pricing strategy, I asked, “Do your customer purchase just after the Will I? decision or do they consider other alternatives (i.e. Which one?)?” They replied, “85% of our business comes after only deciding Will I?.” Hearing this, I suggested their customers weren’t very price sensitive and they could probably get away with raising prices.

They agreed with me, but then one clever person in the room asked, “But won’t that effect how many each customer buys?” He’s absolutely right! Although Will I? and Which one? are the two most common decisions our customers make, regardless of industry or business, often price effects other decisions our customers make. When we understand all of these decisions, we can then determine or at least consider how price effects each one.

Here are several examples.

How many? It is very likely when we sell more than one of an item to a customer, the higher the price the fewer they will buy.

Where? When we sell through multiple resellers, they compete with each other. Differences in their prices may influence where people buy.

Which channel? If we sell through resellers, direct on the web, and with a direct salesforce, many customers make a conscious decision on which channel they want to buy through.

When? Sometime customers wait for sales or other events.

How frequent? Similar to how many.

Which products to consider? Customers use heuristics and simple rules to make sense of the world and narrow down their decision process.

Your takeaway is to brainstorm about all of the different decisions your customers make. Then ask yourself, or even your customers, “what role does price play in that decision?”

 

Photo by Vancouver Film School

Categories : Uncategorized
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Feb
14

Do We Win or Lose Based on Price?

By on February 14, 2014 · Comments (1)

clueless

Of course we do.  But it’s not that simple.

Ask a salesperson why we lost a deal and you’ll hear one of two answers:  The price was too high or the product wasn’t good enough.  Ask him why we won and you’ll hear it was because he had a great relationship with his customer.  Of course all these things matter, but they are rarely the driving factors.

First, price is involved in every purchase decision your customers make.  Every time a customer buys from us, price was an important part of that decision.  Not the only part, but important.  Sometimes we price too high so yes we lose on price.  But that’s because we didn’t offer enough value for the price we were asking.  We should be striving to learn what our customers value and charging appropriately.

Here’s the important point today though.  Sometimes we lose a deal before the prospect even sees the price.  Then it doesn’t matter what price we charge.  Our prospects may eliminate us early in the buying process.  Maybe we didn’t make the first page of their google search.  Maybe we didn’t have good enough Yelp reviews.  Maybe our marketing wasn’t clear enough for them to understand we solve their problem.  Regardless, we likely lose many deals before price is even a consideration.

When we are talking to our market, learning why we win or why we lose, (you are doing this aren’t you?), make a special effort to find some situations where price wasn’t even considered.  When we lose very early in buying process something else needs fixed.  We need to know what that is.  Find companies who bought from our competitor when we didn’t even know they were in the market.  Ask, with sincere curiosity, how them arrived at their decision.  We have a lot to learn.

 

Photo by Lord Jim

Categories : Uncategorized
Comments (1)
Feb
03

Who Owns Pricing?

By on February 3, 2014 · Comments (2)

org chart bucketsThis is one of the most frequent questions I’m asked.  Should pricing belong to Finance, Product Lines (product management), Marketing, Sales Operations (deal desk), or even Sales?  What do you think?

My answer:  ”Yes!”  Effective pricing requires participation from all of these departments.

Finance must provide margin guidance and help with monitoring of actual results against the expected results.  Finance and other executives are often involved in crafting the right pricing strategies.  They run what-if analyses to help predict the results.

The product lines must understand the market and the value the products have to the market.  They must be intimately involved in setting the price.  They are also the last level of escalation to approve deep discounts for important strategic customers.  Since profit and loss responsibility typically lies with the product line, they must have a lot of say over pricing.

Marketing needs to understand pricing exceptionally well so they can communicate the value to the customers.  They need to create the tools that empower salespeople to win at the highest possible price.

Sales Operations or the deal desk quotes individual deals.  They are often the front line to the customer for price.  They execute the pricing strategies and levels so they need clear guidelines to follow.  They are often involved in the monitoring of the success or failure of pricing.

Salespeople are truly the front line of value communication.  They negotiate with the largest customers.  They MUST believe that the value delivered by our product is far more than the price we are charging.  Sales has a huge impact on whether or not the company achieves the prices set by the product line.

Back to the original question, “Who owns pricing?”  Every department owns a piece of pricing.  If you decide to bring on a pricing team, they need to have influence over every one of these groups.  That means one of two things:  1. You bring on a team of highly influential leaders who can lead and generate change without authority or 2. You put pricing in the most powerful department in the company, possibly even reporting to the CEO.

My preference is #1.  Hire true leaders.  Then it doesn’t really matter where pricing sits.

 

Picture by Colleen Simon for opensource.com

Categories : Execution, Strategy
Comments (2)
Jan
24

Independent Service Provider Pricing

By on January 24, 2014 · Comments (2)

Question everything

I recently received this question:

“Hi Mark, I’m a consistent reader of Pragmatic Pricing and try to apply each concept to my own business.  As a consultant, I take on projects and bill by the hour.  How can I apply Good, Better, Best?  Thanks, Bill.”

Thanks for the question, Bill.  Many people sell their time by the hour so you’re not alone.  However, you are right to notice that it’s very difficult to use a Good, Better, Best strategy when you charge for your time.  Instead, let me ask (beg?) you to consider charging by the job instead of by the time spent.  Then you have the ability to use price segmentation strategies like good, better, best.

Most people who charge by the hour do so because it seems fair to both you and your client. Also it’s hard to accurately predict the size of the job (number of hours).  Both reasonable answers at first glance, but let’s dig a little deeper.

Is it really fair?  The client wants the best job done at the lowest possible price, of course.  However, your incentives are not the same.  You are paid more the longer the job takes.  Once you finish this job then you have to go find another.  Why not drag this one out, at least a little.  Of course you don’t actually do this, but this is exactly what your client is thinking … “Is this detail necessary?”

Can you predict the number of hours?  Maybe not.  But it turns out many service providers who have been doing their job for a long time pretty much know about how long something is going to take. The more experience you have, the easier it is to make these estimates. Do you ever say to your client, “This should take about two weeks of work”?  If so, you do know how to estimate time.  You just don’t want to take the risk of being wrong.  Instead, you put that risk on your client when you charge by the hour.

What I really hate about hourly pricing is the price is not directly correlated with the value the client receives.  Instead, it’s correlated with your costs (your time).  It’s almost impossible to use value based pricing by the hour.

It turns out, your clients would prefer to pay a fixed fee.  Then they know they are getting value for their money and they don’t have to worry about the gotchas.  When you get your oil changed, would you rather pay by the hour or by the job?  I’d much rather pay by the job knowing that if something goes wrong they are responsible.

My suggestion is always offer fixed fee WHEN YOU CAN.  Many jobs you have done numerous times.  You have much more knowledge about how long it takes to do one of these than your customers do.  Figure out what the average time a job takes and then add a percentage (like 25%) since you are assuming all of the risk.  Then, you can offer your customer the following deal:  This is my fixed price.  If it takes much less time I’ll charge you less.  However, if it takes much longer I reserve the right to raise the price but only with your permission.  At that point you can choose to take the business elsewhere.  For normal jobs or jobs that really are fast, bill them 10% less and you’ll get tons of referrals while making a much higher hourly rate.

Back to the original question.  Once you’ve moved to fixed fee pricing, it becomes much easier to offer good better best.  Think of the different services or outcomes you could bundle together.  Then, you can create 3 packages.  One that’s barely acceptable to some of the market, one that hits the sweet spot, and one that offers a ton of service for a very high price.  This will help you win more deals and win some at much higher prices.

Hope that helps and thanks for the question.

 

photo by dullhunk

Comments (2)
Jan
03

Netflix Prices Right?

By on January 3, 2014 · Comments (1)


Netflix thumbs up

Bloomberg and others recently reported that Netflix is testing a price “increase”.  Congratulations to them!

I’ve been pretty harsh in the past with how poorly they handled pricing.  This time I think they are absolutely spot on.  Two things we should learn from what they are doing.

First, they are TESTING!  They aren’t announcing a large price change without thorough testing.  How often do we work ourselves up into a frenzy, believing we have the right answer, dive into the deep end and find out we made a mistake.  Pricing, like most customer facing decisions, can and should be tested.

Second, they are testing a strategy of price segmentation based on how much value their customers receive.  They are looking to create different packages and charge based on the number of users (or the number of screens).  This means that a family of 4, each watching separate streamed shows on their own devices, would pay more than a single person watching his/her favorite shows.  It makes sense that more users receive more value, so they would likely be willing to pay more. Not that they want to pay more, but they would be willing.

Some news agencies somehow got wind of this test and reported it.  Netflix has not yet created messaging since they are just in the testing phase.  This becomes extremely obvious when you read some of the comments readers of the article made.  They think Netflix is simply trying to raise prices to take more money from their subscribers.

My advice to Netflix.  When you announce the new “products” be sure to compare your new programs with Dish, DirectTV and the cable companies.  They all charge an additional monthly fee based on the number of set top boxes users have.  You can use this as a direct analogy.  However, you will want to test this message as well before rolling it out.

Nobody likes their prices to be raised.  Netflix needs to carefully position this price increase so as to not upset their customers.  That said, everything I see so far says they are doing this one right.

What should you take away from this?  First, test your price changes (and your messaging) whenever possible.  It’s not always easy, but it’s much easier than trying to appease an entire upset customer base.  Second, segment your pricing based on what your customers are willing to pay.  We’ve said this a hundred times in this blog.  Create new packages and offerings to segment your market and capture more of the value your customers receive.  Yes, we’re being repetitive, but are you doing it yet?

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