The following question was asked on the LinkedIn group Pragmatic Marketing Alumni. FYI, Rhoda, who asked the question, works for a large company that sells information products.
Global Pricing – Fact or Friction
No. It isn’t a typo. I really mean friction. Lately I’ve been thinking a great deal about how readily we do business on a global basis. Yet, working for a company that has been around for over 170 years, we’re faced with many traditions. In some cases, it is those traditions which have made our brand recognized around the world as being trustworthy and accurate. We’ve continually adapted and changed with the times.
With physical products there are clearly reasons for pricing differences based on geographies, but with software (or in my case, data), I’m not so sure. With the current trends of transparency, do we create more buying friction by having geographic pricing differences?
I am not a pricing expert, so I ask the group membership to weigh in on this topic. Are differences in pricing based on geography a leftover, unnecessary legacy or are companies justified in charging a different price for the same product or service in different countries?
Hi Rhoda, If we could boil all of pricing down to a single concept (which we can’t) it would be “charge what your customers are willing to pay.” Pricing based on geography is typically based on the fact that customers in some regions are willing to pay more than customers in other regions. For example, many hardware components (e.g. semiconductors) sell for less in Asia and for more in US and Europe. This isn’t about cost to serve, this is about willingness to pay.
Two cautions, which may be causing your angst. First, we have to be careful of arbitrage. Can someone in one region buy at a lower price and resell at higher price in another region. As a digital information product, you have this problem even if you charge the same price to everyone because typically there is no cost to your customers if they replicate your information. I’m sure you have means in place to minimize people pirating your information.
Second, sometimes customers in one region get upset that they have to pay more than another region. This only happens when they are aware of what others are paying. Most companies who charge different prices by the region try to not let anyone else know what prices are actually paid. The easiest way to do this is to publish a single worldwide price and then offer discounts to the geographies who you think have a lower willingness to pay.
Now you face the problem of large multi-national organization that get quoted different prices for the same item across regions. This is extremely hard to deal with. You either get to try to justify the price difference (support costs?) or offer the same price for the large multi-nationals regardless of where the information is consumed. My preference is usually to be a true partner to your multinationals and give them your best price regardless of location.
Of course there could be many nuances, but these three points should get you started in the right direction:
1. Charge what your customers are willing to pay
2. Avoid arbitrage across regions.
3. Hide your best prices from those who pay more when you can.
Most people don’t know pricing, and most people don’t know they don’t know pricing.
More and more companies are building pricing departments in recognition of these two “facts”. I’ve seen several different ways of organizing pricing, but one seems to stand out, especially for large corporations.
These effective pricing departments essentially act as internal pricing consultants. They understand how to apply pricing concepts, they understand the pricing systems used within the company, and they understand the corporation’s objectives and how pricing contributes to achieving those goals. However, pricing departments do not understand the unique value proposition offered by each individual product.
Given that, pricing departments have several critical roles. They provide pricing expertise to product lines who ask for it or need it. This often looks just like a consulting role, coming in to learn as much as possible, helping clean up the situation and then leaving it to the product line to do the continuing execution.
Pricing departments also help define, resource, and implement new pricing tools and processes. Pricing touches on almost every other department within a company. It certainly effects sales, marketing, and finance. Everyone seems to have a strong interest. Pricing is the role that can balance all of these interests in creating company wide processes and systems.
Finally, pricing departments take a lead role in monitoring pricing effectiveness. They usually set up the systems to collect the right data and share that information with the product teams. They frequently build in alerts to notify the product teams when something interesting changes.
Ironically, one thing pricing departments rarely do is set prices. They don’t know enough about the specific products to do so. Instead they work closely with product managers or product specific pricing people to make sure they know how to determine the right price.
Of course, it’s never as simple as this, but as a general guideline this structure for pricing departments within large corporations works well.
Graphic by Pixabay
For hardware products, we typically charge per unit. When you make hamburgers, you charge for the number of hamburgers people want to buy. (Of course it is more complex, but that’s for later.) This is typical because your costs of manufacturing are directly proportional to the number of units purchased and … buyers assume firms use cost plus pricing. So it’s natural.
For software product though this is very different. The marginal cost of the next unit of software is close to zero. What does it cost Microsoft to download the latest version of Office to you? Almost nothing. That’s not to say there isn’t development cost, but the cost to manufacture the next unit is minimal.
In software, buyers can’t use cost plus buying. Instead, they have to decide if the product is actually worth the price you are charging. Therein lies the clue. When pricing software, we want to charge for the items your customers get the most value from. In pricing literature these are often called value drivers.
The goal is that the people and companies who receive the most value pay the highest prices.
Many enterprise level software companies charge by the number of users and the number of modules implemented. For example, Saleforce.com does exactly that. The more salespeople and support people using Salesforce, the more value these companies receive, the higher the price. Similarly, the more options companies enable in Salesforce, the more value they receive, the more they pay.
The hard part is determining your value drivers. For them to be effective they must differentiate customers with different willingness to pay, they must be actionable, and they need to seem fair to your customers.
Let’s keep exploring Salesforce.com as an example. What else might they be able to charge for that differentiates willingness to pay? How about companies that currently have horrible sales processes vs those that have great sales processes. The horrible ones would surely get more value. Yet, that isn’t very actionable. It’s difficult for Saleforce to set a price based on the starting conditioning of their customers. (Although not impossible by any means.)
Maybe Saleforce should charge based on the revenue of the companies they serve. Companies with higher revenues surely get more value from closing deals through salesforce than those with low revenue. However, as a general rule, companies don’t see this as fair. Simply charging a portion of revenue is frowned upon. It’s not a “feature” in their software they can charge for.
Another wonderful example is LinkedIn. Recruiters get the most value by far from using LinkedIn. So, LinkedIn created a set of features that are valuable to recruiters and they charge a lot for them.
If you are selling software, the key questions to answer: What drives value to your customers? How do you charge for that value?
Photo by Pixabay
You’re on the edge of closing a huge deal. Your salespeople have done a great job of selling value. They have convinced the buyers and the users that yours is the right solution for their company. All is on track. Then, of course, purchasing gets involved to get a better deal and mostly a lower price.
Purchasing agents are well trained negotiators who know every trick in the book. They do this multiple times a week. Most importantly, they are very patient. There is no sense of urgency on them to close the deal.
Your CEO, on the other hand, wants to know why this deal hasn’t closed yet. It should be done by now. He says “take me in there and I’ll close this.” And of course he does. The purchasing agent says “all we need is another 3% and we can close this.” The CEO says “Deal!”
The CEO has the authority to close any deal. He is often impatient to have the contract in hand and he certainly doesn’t want to spend a lot of time in front of the purchasing agent. Besides, he looks like a hero when he succeeds and he looks feckless if he fails. All factors point to the CEO closing too early at too bad of a deal.
Negotiation training firms will tell you when they run pre-training exercises, executives typically perform the worst. Not that they are dumb or incompetent, but more that they are over-confident and impatient.
Of course, sending the CEO in to negotiate makes it more likely the deal will close. They will typically do whatever it takes. This means sales people are thrilled to invite the CEO in. The salespersons biggest goal is closing the sale, perfectly aligned with the CEO closing impatiently. And purchasing invites this as well. Purchasing agents often ask to have an executive come negotiate. Why wouldn’t they? Bringing in an impatient executive with the authority to give in is a surefire winner for the purchasing agent.
This means it’s you, product and pricing, against sales, purchasing and the CEO. Not a very comfortable position. The solution, have these conversations when you’re not in the throes of a big negotiation. Share this blog with them. Talk to whichever company provides negotiation training to your sales team to corroborate these claims. (I’ve heard it many times so you will inevitably find the same.)
Don’t forget, small improvements in price can lead to huge improvements in profitability. Focusing on who negotiates and making sure they are well trained is an easy way grow profits.
Photo by Pixabay
Here is a recent question by email.
Thanks Mark for great blog and insightful book. I’m currently working my way through a Kindle edition, learned a lot about pricing that’s for sure and will definitely recommend to clients. One thing I didn’t see you talk about on your blog is the 9 vs 7 pricing gimmick. In the real world, most prices will end with a 9 or 5 occasionally (9.99, 99, etc.). But, online and especially with info products, there has been a trend to end price with a 7. For example, most ebooks and programs are 17, 27, 47, 67, 97, and so on. What’s your expert opinion on this? Have you seen any credible research that clearly shows which one is better? I know why we use 9.99 instead of a 10, but how effective is 7? Thanks a lot!
This question hits me close to home, particularly because my dissertation was on why firms use 99 cents as their price endings. Although I’ve blogged on this before, here is a quick review.
The driving factor behind the effectiveness of 99 cents is that was are bad or lazy subtractors. For example, a product that normally sells for $400 on sale for $299 feels like a much better deal than a product that normally sells for $399 on sale for $299. The same happens when people are choosing between our product and a competitors.
That driving factor has led products that end in 99 to look to people like a good price. The opposite of that is we have learned to associate prices that end in 00 with higher quality.
However, none of that answers the question posed above. And unfortunately I don’t know the answer. First, after searching on Amazon and iTunes, I still found that most prices end in 9 rather than 7. Please feel free to share sites with prices that predominately end in 7.
I searched the academic literature and didn’t find anything either. If you know of something, please share.
I found a couple discussion sites on software on this topic, and the conclusion was you should A/B test it to see which works for you. In other words, there wasn’t a conclusion.
Don’t forget that many retailers use the right hand digit of a price to indicate the state of the product. For example, Costco uses prices that end in 7 to indicate that the price has been marked down from the regular price (which ends in 9). Gap and Old Navy use prices that end in 7 to indicate they are the final markdown, the lowest price they will go. This means to me that they don’t think any psychological effect is very big, so they use the digit for internal communications.
At this point, I’m not satisfied with any answer. If you have an answer, or evidence, or research, please share it. We would all like to know.
Photo by thebayentrepreneur
Last week, the least expensive paperback version of my book on Amazon was $236 even though the cover price is $20. Wow. The Kindle version was reasonably priced at $9.99. But $236? And it wasn’t just one company. There were multiple vendors offering my book in that price range.
You may or may not know there are software applications vendors can use to automatically reprice products on Amazon, eBay and other online retail sites. These applications monitor competitors’ prices for products and then adjust the vendor’s prices up or down based on the situation. As examples, check out Appeagle, Feedvisor, and Repriceit.
First thing to know, about a year ago Amazon ran out of stock of my book and the publisher decided against a reprint. Amazon no longer has stock. The only new paperback versions you can buy are the ones in inventory at some smaller resellers.
Even with limited inventory, no sane person would price my book for $236 (even though it is surely worth it.) Instead, every Amazon reseller that has inventory of my book is also using one of these these software repricing applications. The software, without human intervention, slowly worked their price points up to unreasonable levels.
When I saw this, I decided to sell what small inventory I have just so more people can have a reasonably priced book, and because I wanted to watch what happened. I priced the book at $22 plus $3.99 for shipping and handling.
(As a quick aside, it was very easy to set up an Amazon reseller account.)
In the week since I listed my book at $22, the other resellers have started slowly lowering their prices. As of this writing, the next least expensive vendor now sells it for $118.50. It would not surprise me if within a few weeks other resellers have undercut my price. That would actually make me happy both because I was able to manipulate other vendors’ prices and because more people will get the chance to read it.
The lesson: Is it possible to use some algorithm to constantly adjust your prices relative to competition and the market conditions? If so, it is probably a better bet than using the set it and forget it strategy (i.e. never change your price). However, even if you can use automation, you should still monitor the prices for ridiculousness. Although I’d like to believe that the information in my book is worth way more than $236, I doubt anyone buys it at that price.
A student recently asked, “when does it make sense to use two-part pricing?”
First, let’s define two-part pricing. It is when you charge one fee up front, and then another fee as the product is used.
For example, popular bars have a cover charge and then charge for drinks as the night goes on. Health clubs have initiation fees then charge monthly rates. Country clubs have large initiation fees with monthly or annual dues.
In each of these examples, a customer cannot access the facility or the product without paying the up front fee. This works because customers get two different pieces of value, both of which they are paying for. For example, they get value from going to the bar and they get value from the drinks. They get value from having access to a workout facility and they get value from working out. They get value from saying they are a member of a country club and they get value from using it.
Of course this only works when you can control access to your facility or product. People who have not paid the upfront fee cannot purchase the other products.
Two part pricing can also be used as a technique for price segmentation while building loyalty and increased demand. Amazon Prime is an upfront fee that gives you free shipping as you buy goods from them. But you don’t have to use Prime to buy from Amazon. Amazon gives you a choice.
Infrequent buyers or people who are not price sensitive probably will not purchase Prime. However, heavy users who are price sensitive will pay the fee to join Prime. Once these people have joined Prime, they are more likely to shop from Amazon than elsewhere.
So should you try two-part pricing? Sure, if your market conditions allow you to meet one of these two scenarios. Do you have a popular product that provides a lot more value to your customers than just the use they get? If so, you may try charging an up front fee, just like a country club.
Do you have a product that is frequently purchased and you have some users who are heavy users and price sensitive? Then try imitating Amazon Prime. You don’t have to force everyone to go this way. Let the targeted segment reveal themselves.
Photo: “Cycle Class at a Gym” by www.localfitness.com.au
Those of us not in sales often make fun of salespeople, well … because it’s fun. Our first gut reaction says of course we can’t give pricing authority to sales. They will only sell on price and we’ll be giving huge discounts to too many clients. Unfortunately, a lot of salespeople do sell on price. Besides, every customer asks for a discount and it’s easiest for sales to give them one.
However, who better to figure out how much a customer is willing to pay than sales? They have the relationship with the client. They have direct knowledge. If only we could find ways to keep salespeople from selling on price and instead use their close knowledge of the customer to discount when it’s needed.
The hard part is balancing these two opposing forces. The trick is to provide incentives and tools to help the sales people sell value instead of price. Here are four tips to help.
- Distribute authority throughout the sales hierarchy. You may give your salespeople the ability to discount 5%. Your sales managers can go to 10% and your sales directors down to 15%. Anything lower than 15% off has to be approved by headquarters. (The numbers are an example. Use what makes sense for your sales team.) The good thing about this is that one salesperson alone can’t do a lot of damage.
- Monitor, on a salesperson by salesperson basis, how much discount they tend to give away. Report it. No salesperson wants to be on the bottom of any list. Hopefully those salespeople who discount less can help the rest of the team learn how they do it.
- Talk to your sales team about NOT jumping to the maximum discount. Instead, start small. Every percentage can have a big impact on company profit.
- Create an incentive program that rewards the salespeople with the smallest discounts. We often hear the saying, “salespeople are coin operated” meaning they do what they are paid to do. Let’s pay them to not discount.
Finally, it is our responsibility to make sure sales has the right tools to be able to sell on value. Take a hard look at what you give your sales people and how that helps them sell value.
When we give sales the tools to sell value and the incentives to not discount too easily, we maximize our chances of winning business at the highest possible prices.
Picture by 92Five
This past Thursday I taught the first fully released pricing course for Pragmatic Marketing. The day was better than I could have hoped. The students were energized, asked great questions, contributed their own stories and I’d like to believe they all walked out with a smile on their face and several action items to help them in their pricing endeavors.
However, about three quarters of the way through the class, I put up a slide and to emphasize its importance said, “this is my favorite slide.” A lady in the front decided to make fun of me by asking, “how many favorite slides do you have?” Embarrassingly, I had to admit that I’d said that line many times during the day. And it’s kind of true. There are so many great concepts in pricing that can help companies be more profitable. So many concepts that aren’t obvious and produce aha’s in the students. Many of these concepts seem to be my favorite.
But it did prompt me to think, “what should be my favorite slide? What is the most important concept in pricing?”
The answer: The most important concept in pricing is to price based on what your customers are willing to pay, not your costs.
I teach that concept first thing in the morning. Companies must use Value Based Pricing. Charge what your customers are willing to pay, not costs. There is a little pushback at first, but soon everybody nods their head and has accepted the concept, almost. Throughout the day, students sometimes make reference to why they needed to use costs to price. Of course I’d have to correct them. By the afternoon, they were catching themselves whenever they were about to mention costs again. It’s amazing how ingrained pricing based on costs really is.
What about you? You may nod as you read this, agreeing with me, but then do you go talk to your company about costs and pricing? It is fascinating that pricing based on costs has penetrated us so deeply that it’s hard to let go. That’s one reason I think Value Based Pricing is the most important concept.
The other reason though, if you don’t accept value based pricing, then you lose the power of all of the pricing strategies that come with it. There’s no need to segment pricing based on willingness to pay if you only price based on cost. You can’t take full advantage of a good-better-best strategy if you only price on costs. There’s no reason to think of pricing portfolios if you only use costs.
Yes, value based pricing is without a doubt the most important concept in pricing. But that doesn’t mean I can’t have more “favorite” slides does it?
Photo by Valerie Everett
Do you like Freakonomics? I sure do. Levitt and Dubner’s latest book, “Think Like a Freak”, is a fun read which I highly recommend. But I had to think hard about chapter 7, “What do King Solomon and David Lee Roth have in common?”.
If you haven’t read that chapter, you should, but here’s a very quick synopsis. (spoiler alert) Both King Solomon and David Lee Roth used game theory to create separating equilibria. This essentially means they set up a “game” so that people inadvertently reveal their true identities.
One of their examples was why David Lee Roth used to ask for M&M’s with all of the brown M&M’s taken out. At first glance this seems like another wacky, self-absorbed superstar demanding eccentric treatment. However, David Lee Roth added this requirement for a very strategic reason.
When they were touring, they had a wild show, with pyrotechnics, lights, complex stages and heavy speakers. If the stage was not set up exactly as the contract specified, someone could get hurt. So how could Roth know which venues carefully read the contract and set up the stage according to specifications? He needed a separating equilibrium where he could tell the two different types of venues apart.
So Roth buried a clause deep in the contract stating he wanted his special serving of M&M’s. When he showed up at a site, if his M&M’s were there, without brown ones, he was more confident that the contract was read and followed carefully. If not, they assumed the contract was not read carefully so they had to carefully check the entire setup.
Why is this a separating equilibrium? Because two different behaviors indicated two different “types”. Venues who didn’t read the contract carefully wouldn’t serve the M&M’s properly. Those who did read it would. Just by looking for M&M’s he was able to tell which group read the contract and which didn’t.
After reading this, two questions came to mind. 1. How do we set up our own separating equilibria? and 2. What does this have to do with pricing? Sorry, but I haven’t figured out how to answer question 1, but question 2 is what prompted this blog.
Is there a mechanism which produces a separating equilibrium whereby we can distinguish customers with high willingness to pay from customers with lower willingness to pay? Yes. Think coupons. Only people who are price sensitive go through the hassle of finding, clipping, storing, carrying and remembering to use coupons. People who are not price sensitive don’t.
We can use a similar concept to create more separating equilibria. In essence, anything that offers a discount for effort (or anything negative) would be a separating equilibrium. Imagine when you get to the grocery store checkout, the clerk offers you a discount if you let her stab your arm with a thumbtack. Some people, who are very price sensitive, might say yes. Most of us would not. That is a separating equilibrium.
Okay, maybe that last example was over the top. Besides coupons, are there any other separating equilibria in use in pricing today? Sure. Think about who shop at stores like Macy’s, who have frequent sales. Some people just walk in and buy what they want when they want it. They are not price sensitive and usually end up paying full price. Others wait for Macy’s to have a sale and then shop. Only price sensitive people are willing to wait.
Many stores, including Macy’s, will offer you a discount on a full price item if you ask. However, only price sensitive people have the gumption to be willing to ask for a discount. In January 2014 NPR’s This American Life (available on podcast) had a fun story on one of their producers trying to get the “good guy discount,” simply asking for a discount. It certainly doesn’t always work, but it does sometimes.
You never know when or where we can learn pricing lessons, but it’s certainly fun learning them from the Freakonomics guys.