Pricing

A friend and client was kind enough to point out a deficiency in my web site the other day.

“What about pricing, Chris? I can’t find anything about it on your site.”

Sigh.

All of us wise students of marketing know that Price is just one of the 4P’s (or 7P’s, or 47peas in a pod), and that it is the offering that our customers buy into. We know that the whole product is so much more than just the price, but we also have to set a price. At some point, we have to pin our colours to the mast and give a price; no vagueness, not a variable, but a definitive number. That is tough.

I thought I had better refer to one of the “great men” of modern management theory: Michael Porter. I duly looked up “price” in the index of Competitive Strategy and found a section entitled “Correct Pricing”. Only a “great man” could simplify the topic to the binary opinion that there is “correct” and “incorrect” pricing. Pah!

Your average management books (and maybe the less than average ones too) cover pricing with a number of different strategies. It is telling that you find it covered in Economics, Marketing, Strategy, Finance. Each approach tells us something about your Product Management and Marketing team.

So, for the first, and probably last time, here is the Effectivus guide to pricing strategies…

Cost

Cost Pricing is for the weak who think that there is some association between the cost of making a product and how much the customer will be willing to pay for it. Gold plate an internal component that will have no impact on function and expect the customer to pay more? I don’t think so. Those in software know this is rubbish because it costs millions to make the first copy of a software product and almost nothing to make the rest.

Others consider that profitability is a key consideration in pricing. They are wrong. If you are juggling pricing decisions based on whether you’re going to make a profit, you’ve missed the point because you should already know how the market will value your product. Your whole business plan should have had profitability as its key consideration.

Cost Pricing suggests that your Product Management team have only just learnt how to do percentages on their new fangled calculator-thingamajig, or maybe it was a Friday afternoon and their mates were going down the pub when you asked them to come up with a pricing strategy.

Demand

Those incredibly clever Econometricians came up with a terrific way of stating what appears to be the blindingly obvious; that more people will buy your product as you reduce the price. Or, the Price Elasticity of Demand (EoD), or:

[i]

The idea being that if you can model the EoD and your costs, you’ll find the perfect point in the curve where you will make most money. That’s the way Econometricians think about business; curves and elastic.

I accept that there is a relationship between price and demand, but my problem is that in my land of business-to-business technology companies, I have never seen it clear and deterministic. I guess if you sell FMCG then you can study this stuff.

I have seen customers who were unprepared to pay more than a certain amount, but that was often for reasons way beyond the product offering and our response was to show a bit of elastic. I have also seen sales situations where the price is simply not an issue and the curves were more important, but that’s Vegas for you.

Three econometricians went out deer hunting and came across a large buck. The first econometrician fired, but missed by a meter to the left. Then the second econometrician fired, but also missed, this time by a meter to the right. So the third econometrician simply put down his gun and shouted in triumph: “We hit it! We hit it!”[ii]

Competitor

This is for the creatively challenged and involves putting your price at the same level as your competitors because, after all, there is absolutely no difference between your products, is there? Hint: you might want to sack your marketing department at this point.

“There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this man’s lawful prey.” John Ruskin (1819 – 1900)

If you want to commoditise your market, this is the route. If instead you choose innovation and differentiation, don’t go there. Yes, your whole offering has to be competitive, but that does not mean it should be identical.

Either the Product Manager has had an offer from your competitor, or your product has no differentiating features. Either way if you are competing on price, you had better be the lowest and you’ll be needing the escape pod.

Premium pricing

Yes, it is true; some customers need the price to be higher in order to value the product. Please, do try to humour them.

To be successful with Premium Pricing you have to establish that your product has some astronomical value beyond anything else in the market. For example you may want to establish in the mind of the customer that your product will make them look years younger, richer, more powerful, and far better endowed than is practically possible. Consider how often you see short, fat, balding men at the wheel of Rolls Royces.

Dilbert.com

Premium pricing suggests that your marketing department is on serious hallucinogenic drugs. Whether this is the cause of your pricing strategy or the result of a successful one is less obvious.

Multidimensional pricing

Slicing and dicing is not just for the kitchen. Splitting the product or price up into various dimensions such as versions, options, delivery terms and repayment schemes. If you enjoy trying to book airline flights, balancing the best route with the cheapest fare, you’ll love this strategy. I don’t. One company I know, which must remain anonymous, had thousands of prices in their price list, but a turnover of less than £10m. No, they didn’t sell nuts and bolts individually, but expensive high-tech gear. You had to wear those 3D glasses and be able to think in 17 dimensions just to find the cost of widget.

Multidimensional pricing suggests that your marketing department has been talking too many MBA professorial types, or that you’ve hired a consultant.

Value

The only definition of a price in my book is what someone is prepared to pay for something. If you set it too high and no one will buy, it is not a price but an aspiration; too low and the customer may not buy because they simply no longer value your offering.

“Price is what you pay. Value is what you get”, Warren Buffett (1930 – ).

Smart man that Mr Buffett. Those naughty Econometricians have something confusing to say about this along the lines of Economic Value Estimation, but isn’t that their modus operandi: confusion?

I don’t think it needs to be complicated at all, not if you have a half-decent relationship with your target customers. You need to understand their business, the drivers, costs, where and how they make money. Then you offer them a product that helps them make more money. Prove it works, show them the math, let them share the savings and there is your price.

All the rest is either post-rationalisation, or The Emperor’s New Clothes.

Me, a cynic?

“What is a cynic? A man who knows the price of everything and the value of nothing.” Oscar Wilde (1854 – 1900)[iii]


[i] Wikipedia, don’t ask – that’s not the point.

[ii] Thanks to http://chiefpricingofficer.com/category/pricing-jokes/

[iii] Lady Windermere’s Fan, 1892, Act III

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3 Responses to Pricing

  1. Andy Ballingall says:

    This is the best pricing discussion I’ve read. Brilliant!

    Mention of ‘multidimensional pricing’ reminds me of Ryanair’s contribution to mankind. There must be someone sitting in Dublin pondering over the possibilities of a staggered charging system for seats, toilet paper use and method of access to the aircraft (‘economy access’ being a knotted rope dangling from the doorway)

    • Chris says:

      Thanks Andy.
      There is so much to love about Ryanair isn’t there? So, how did you get hold of their internal, and highly sensitive, strategy document “Time to cut the crap”?

  2. Pingback: The thorny issue of pricing | I Manage Products

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