pricing

Pricing Strategy . . .

Short Summary: Most price resistance is actually the result of weak marketing and promotion. Here are some pricing strategy concepts to help you improve margins.

Where costs + branding effort = margins

The zeitgeist issue of the week is pricing strategy, and how to price products for acceptance in the market. This is an issue all my clients confront. For software clients, pricing strategy differs depending on the platform of the offering (packaged software versus downloadable media). For publishing clients, digital publishing has turned all content delivery theory on its head. And for jewelry clients, there is a constant struggle between the inherent value of the materials (gold, diamonds) and the artistry with which those materials are assembled.

In fact, pricing strategy is the bane of most entrepreneurs. It's never just about how much things cost. It's much more about how much added value is perceived through your offering, and the values of the buyer/company perceiving your products' value.

Here are a few important concepts relative to pricing:

1. How you market and brand will largely determine how much you can get for your products. I know products that get 20X markup and others that struggle with 2X, and the only significant difference between the two extremes is the brand perception of the lines and the people to whom they market. Brand perception is in the presentation you make, the story it comes with, and the confidence with which you pitch the price.

2. Buyers who perceive your product is a commodity will never step up to a higher price point. The person who buys gold jewelry after looking at the day's gold market, the car buyer who could care less about the model they purchase "as long as it runs," and the ambivalent software buyer who believes all software is created by $1/day Chinese programmers will simply not see value in a more expensive alternative. You simply can't change the mindset. So unless you are equipped like Wal-Mart to strip all possible costs out of your production and pay yourself and your workers nothing or next-to-nothing, don't go after commodity buyers. It's not worth it.

3. Buyers often purchase goods not according to their desires but according to their risk tolerance. In the case of retailers (if you are wholesaling your product), this also translates into the type of clientele they have cultivated as a result. Whatever you do, do not let the cost-conscious, risk-averse clients influence your pricing strategy. They are not capable of perceiving the product at its ideal value. Make sure that your pricing strategy is related to the proper target customer and not to the convenient customer.

4. Only reduce your asking price if you firmly believe you have pursued the ideal customer as hard as you can and that dropping your price is your only option. It's not just a matter of whether or not you can make enough on a lower markup. The question is, do you want to run a business where you settle for just making enough. You can bring your prices down, but it is extremely different to bring them back up again. So be sure if you reduce your prices that it's for the right reasons.

5. Which competitive products are you comparing yourself to? Be sure to compare your offering to high end comparable producers to see the relative prices. If you find you are priced higher than your high end competition, then the prices probably should be adjusted. If that is the case, then I suggest making a new price list/catalog rather than offering discounts to those who have complained you are high. This way you can explain your ability to do so by explaining that better volumes and efficiency are giving you margin benefits that you are passing along to them, but you hold your ability to sell off your price sheets without discounting. However, if you find you are priced comparably and you are experiencing price resistance, my guess is that you haven't pursued the right clients hard enough.

Ultimately, selling and promoting are the key to having high margins; selling to the right retailers who service the right consumers and promoting your brand in such a way that your perceived value is very high. If all is well on the selling and promotion front, pricing sort of falls in line (assuming your production/acquisition costs aren't out of control). There's no doubt that we live in a world where we can get much of what we want for practically nothing. But the consumers you are targeting are aware that they get what they pay for. So tell them that story, and help them make choices they feel good about.

The Art of Being on Sale

Short Summary: Designers are often told to never put their products on sale. But is this good advice? Today's blog gives this question the more nuanced answer it deserves.

or Inventory, Brazil Nuts, and Bottom Feeders . . .

My favorite afternoon snack is mixed nuts and seeds. There’s a special mix I buy that is perfect except . . . it contains Brazil nuts. I really don’t like Brazil nuts.

The good news is that my wife loves them. So every two or three weeks I bring her a canister containing all the remaining Brazil nuts. In fact, she likes them so much that I suggested that we buy a bag of Brazil nuts so she wouldn't have to wait for my leftovers. Interestingly, she declined.

Who is Your Brazil Nut Eater?

There are a lot of business management myths in the jewelry industry (a lot. A ridiculous lot). The one I’m tackling today is the one that says Designers Should Never Be on Sale.

Jewelry Lore has it that if you make high-end jewelry you should never be on sale, and that if you’re an eponymous designer, you should definitely never be on sale. But the truth is more nuanced than that.

On the one hand, the only reason people pay high prices (which ideally deliver high margins) is because your jewelry seems worth it. That is a troublesome phrase, worth it. It begs to be followed with the next two words, to whom. And the answer to to whom is what you need to get at.

But first, let’s do a quiz (answers follow. Do try not to cheat). Respond to each of these statements with True or False:

If you acquire a buyer on sale, they will always expect to buy on sale.
If you have regularly scheduled sales, people will wait for those sales to buy.
You should never advertise a sale online or anywhere outside the store.
You should never let retailers mark down your designs.
You should never put your own work on sale.

Now let’s see how you did.

1. If you acquire a buyer on sale, they will always expect to buy on sale.

This statement is mostly true. There are some fundamental differences between full-price and on-sale buyers, and the point of first brand encounter seems to be a meaningful in terms of how they buy going forward. What do I mean by that? Well, most of us are wired to look at certain products in certain ways. For example, I don’t buy used cars, but I would certainly buy a used boat. I don’t wait for technology or shoes to go on sale, but I do wait for home goods and kitchen items to go on sale.

It’s a myth that people are either “on-sale” buyers or “full-price” buyers. While there are definitely people at both ends of the spectrum, most of us fall somewhere in-between, and we’re product-dependent at that.

So let’s talk jewelry. Some folks are on-sale jewelry buyers; some are opportunistic, grabbing sales when they can but not waiting for a sale if they can’t; and some folks are full-price jewelry buyers. When you acquire a new customer with an on-sale item, their long-term response has more to do with their individual behavior related sale prices and jewelry than the fact that you were on sale when you found them.

So why is this statement mostly true? Because of this one detail: Our first impression of a brand not only sets our perception of the brand itself, it also sets our value thermometer. So the risk of acquiring a customer on sale is that you might establish a value perception for your jewelry that is lower than the regular price of your jewelry.

So what do you do about this? First, be prudent about where you advertise and market being on sale. For example, if your core customer is a Town & Country reader who has proven to be a full-priced buyer, don’t advertise your sales in Town & Country. Sure, you can tell your current customers about your sale items, but use a different medium — like email — to share the information. That way you don’t risk attracting new, potentially full-price buyers, and turning them into on-sale buyers.

On the other hand, if you’ve tried a different magazine and failed to find the right kind of new customers with it, but did find a few customers for your lowest priced items, perhaps you should advertise your sale in that magazine. At that point you’re not looking for a new full-price buyer: You’re looking for a Brazil Nut eater.

2. If you have regularly scheduled sales, people will wait for those sales to buy.

OK, this is a bit of a trick question. Your Brazil nut eaters will wait for sales, because that’s the only way they’re going to buy your jewelry. Your full-price buyer will buy whenever she is moved to. She’ll definitely take advantage of a sale when she can, but won’t wait for a sale if there’s something she needs or wants.

It’s your indifferent buyers that will learn to wait for sales. So the big question here is, how many indifferent buyers do you have?

If you have a strong core of brand loyalists willing to buy at full-prices, then you can probably get away with having a regular sale once or twice a year. But if your following is mostly indifferent, then having regular sales could lead to a very negative selling cycle in which everyone waits for your annual or biannual sale and your margins go down the drain.

The most important thing is to know your customer. You must understand when she buys, why she buys, and what motivates her to buy. In the meantime, while you’re learning all this, you may want to schedule sporadic sales. When you offer an occasional spur-of-the-moment sale, a just-because-we-thought-of-it sale, or isn’t-it-a-beautiful-weekend sale, you teach your customers that sales aren’t something they can count on. Again — this doesn’t change the behavior of your Brazil Nut eaters (let’s start calling them BNEs, shall we?) or your full-price buyers. It does, however, hedge against your indifferent buyers swinging the overall business into a sale-only mode.

3. You should never advertise a sale online or anywhere outside the store.

This is true only if you’re a designer/brand and you’ve committed to your retailers that you will not ever put your own products on sale. Otherwise, it’s false, but with caveats.

If you do both wholesale and retail sales of your line, then you must be very thoughtful of your retailers when you go on sale. I don’t recommend ever putting current designs on sale on your own site if you still have them out in the stores.

However, if you have a lot of dead inventory collecting dust at your retailers, and if you offer a 2::1 or 3::1 buyback of inventory (which you should), then you can certainly pull back that dead inventory and put it on sale. Sigh. More caveats now follow.

If your new work looks so much like your previous work that consumers won’t know the difference, then the retailers may still hate you for going on sale with your old work. If you and I were chatting right now, this would lead us into an in-depth discussion of the strategies involved in collection development. But since I’m writing a blog and not a novel, we’re not going down that path at this time. Suffice it to say that it’s on you to make sure that consumers can see a clear difference between work that is no longer available at retail and the new, presumably more desirable work currently available.

So. If your collections are truly distinct, then by all means – host a when they’re gone they’re gone sale and let scarcity drive interest. Heck, you probably won’t even have to mark your prices down very far.

For the rest of the answer to this question, go back and review my answer to Question #1.

4. You should never let retailers mark down your designs.

Definitely false. In fact, retail is the very best place to eliminate unsold goods. Think about all the luxury shopping you’ve done. Isn’t there a sale rack in every Neiman Marcus, Saks, and upscale shoe department? Even Mercedes and BMW clear out year-end models to make room for new models. Cruise lines go on sale during the slow season. Every single industry – excluding only the very highest of high end – needs its BNEs. Smart retailers cultivate this subgroup of customers in order to move out old inventory to make way for new. If you don’t have smart retailers doing this work already, then you probably have retailers who are refusing to buy now because they’re still sitting on your old styles (and everyone else’s).

By the way - every bit of advice I’ve given so far also applies to retailers. What you don’t want is a retailer who is constantly on sale, living on the knife-edge of margin and bringing your brand value down with them. You also don’t want retailers who run sloppy businesses and therefore must go on sale regularly to get a little cash flowing. But savvy retailers who know how to bring in inventory and sell it quickly to their full-price buyers, who cultivate more full-price buyers than indifferent buyers, and who actively cultivate the right amount of BNEs so they can quickly sell out their slow-moving stock on sale — these are excellent partners to have.

5. You should never put your own work on sale

This is mostly true. But perhaps not for the reason you think.

Not all your work is going to sell through. It’s. Just. Not. If you have a healthy retail distribution network selling stocked goods, you are going to create products that don’t sell through. If you’re doing your job right, you are cultivating relationships with retailers who know what they’re doing. The reason you give a wholesale price to a retailer is because you expect them to do the retail job. The whole retail job. That means marketing, smart buying, selling, and eliminating styles that don’t sell — and in the process making enough cash to do it all again. Yes, you should support the tail end of that effort with rational buy-back programs, but the retailer should be doing the bulk of the work. Otherwise they are not worth the full wholesale discount.

Yes, the retailer has taken a risk in terms of real-estate and built-in traffic, but if that’s all they’re bringing to the table, you need to figure out if that’s enough.

OK, so back to the point. The reason you should aim to never have to put your own work on sale is that your retailers should be eliminating those dead products for you, and you should be controlling your production sufficiently that the goods you bring back in a buy-back can be circulated to other retailers who can still move it (that means staying on top of your buy-backs!).

The fact that it’s taken me 1,786 words to get to this point bolsters the notion that the question of “to be on sale or not to be on sale” is a loaded one. But there’s one thing you can count on to be absolutely true.

Unless you only make one-of-a-kind, pre-paid, custom-ordered jewelry, you will always have some inventory that needs to be eliminated. Putting inventory on sale is a tried-and-true solution to this problem. That’s why you must study and perfect the art of the sale for your own business.

The Cost of Pricing

Short Summary: Want to do a better job of pricing? Understand how Value Proposition relates to pricing strategy and how you can get more bang for your pricing buck.

A question was raised in the "Ask a Question/Find an Answer" section of the StrategyWerx website regarding pricing, and how to deal with a management group or manager that wants to price a new product cheaply to try to gain market share. I answered the question briefly in the forum, and promised to expand on the answer more in today’s blog.

Competing on price to gain market share is a strategy that almost never works unless the company using the strategy is particularly large and can leverage existing high volumes on related or adjacent products into high volume on the new product. I've encountered a desire to compete this way both in companies I've been a member of and in companies I've consulted for. It can be an extremely difficult position to argue against, and I've lost the argument at least as often as I've won it, so I sympathize with anyone dealing with this challenge. Regardless who won the argument initially; I can honestly say that I have not seen the tactic work yet.

There are lots of books and workshops available on pricing, including my own company’s seminars and workshops on pricing strategy. But no matter how well-schooled you are on the topic of pricing, if you can’t integrate your corporate strategy and value proposition to all of your pricing activities, you will leave money on the table when you go to market.

Your overall pricing strategy is secondary to your company's strategy and value proposition. "Lowest price always" is a valid strategy, but it has to be applicable across the board, and not just on a product or two. It is also heavily dependent on volume, which is why you have to be the size of Wal-Mart or Amazon to successfully deploy that strategy. Other value propositions are customer intimacy, leading product/technology, and system lock-in.

So what’s the difference between these strategies? A lot. Remember that management is built on four concepts – planning, organizing, leading and controlling. Pricing is related to the planning, organizing and controlling functions (and of course, without good leadership none of these can be executed, but that’s a different topic).

Let’s start with a lowest-price-always strategy. If you want to offer the lowest price, two primary conditions must be present; high volume and low operating costs. High volume suggests that you already have great market penetration. Ideally, you have established (paid for) your market position through advertising and marketing, which really cut into margins, and when your margins are narrow, there’s not much to cut into.

For instance, Wal-Mart doesn’t have to spend the same percentage of their revenue on advertising as a smaller adversary, because they already have market visibility and high traffic. Also, at their size they can negotiate for much better advertising rates (print, television, newspapers, web presence, etc.) than their competitors. So market presence is already established. Here is your first argument against using low prices as a way to establish market share!! Because establishing market share requires creating visibility, and low prices have never been demonstrated to create visibility – only to take advantage of already present visibility.

Second, to compete using low prices you must have extremely low operating costs. Everything from your sales technique to your manufacturing and distribution operations must be as lean as they can possibly be. Why do you think Wal-Mart revolutionized supply chain logistics! It wasn’t that Mr. Sam set out to turn the world on its ear related to cheap supply – its that he realized that cheap supply was essential to offering low prices. But that advantage doesn’t last forever. As the supply chain was revolutionized, everyone has benefited from the advances, and as we know now, Wal-Mart has embarked on a 3-year plan to completely transform all (yes, all) of their American stores. Why? Because reducing costs is ultimately a zero-sum game. Now Wal-Mart isn’t going to disappear any time soon (grin), but if Wal-Mart is struggling with their lowest-price always strategy, it’s time to recognize that this is a really hard row to hoe.

The next strategy is customer intimacy. To establish customer intimacy requires excellence in the sales and service functions – both people and systems. It’s also a marketing strategy. What do you need to focus on excellence in sales, service, people, and systems? Margins! But customers who value a better all-around service experience are willing to pay a little bit more for the experience, so you can charge a little bit more. If you are pursuing this strategy and the customers say, “well, they cost a little bit more, but they’re worth it,” you’ve hit the sweet spot.

The third strategy is leading product/technology. This is the strategy that involves always being first to market with excellent new product ideas, leading edge technology, and innovation in meeting customer needs. Will the competition copy you? Absolutely – even if you have patents and other intellectual property. There is always a way to copy a good idea. So the companies that pursue this strategy have rigorous intellectual property efforts (expensive) and they also do product development better, faster, and cleaner than anybody else, so by the time their innovation has been copied, they’ve already moved on to the next thing. Investment in product development is not cheap, nor is the advertising necessary to get those first-adopters to start using something new and different. You need margins to do that. But customers who want the leading edge thing are willing to pay a bit more for it. Are you one of the people who would stand in line for 3 days waiting for an iPhone, or one of the people who laughed and decided to wait until the price drops? Both customer categories are important, but the leading edge value proposition companies cater to the ones who will stand in line and pay. Pricing in this case is a clue to the value of the product – to appeal to those cutting-edge-sensitive customers they need to be able to brag not only that they stood in line, but also how much they paid to do so.

Of the four value propositions, system lock-in is the smallest – the three already described probably account for 85% of all value propositions. System lock-in is when your product is so dominant – due to advertising, word-of-mouth, first-mover advantage, or intellectual property – that your facial tissue becomes Kleenex, your MP3 device becomes an iPod, any search-engine activity becomes a Google, or your PC (regardless of make) becomes and IBM. Once you achieve system lock-in you still have to invest to maintain your advantage, and furthermore, customers don’t expect to pay less for dominant products – they expect to pay for the perceived value.

Hopefully this overview of value propositions gives you a sense of the investments you must make to achieve them, and how those investments will be reflected in your pricing strategy. Each value proposition merits a much deeper discussion of the investments and operational systems necessary to achieve them, and maybe we’ll go into those at another time in this column. But until then, ask yourself: What is my company’s value proposition, and do we convey it consistently from product line to product line and through our pricing strategy?

The Price is What

Short Summary: Customers don't pay for products or services. They pay for perceived value.

Our neighbor is planning to have a garage sale, which we are really looking forward to. In fact, we’ve told her at least a few times to make sure she lets us know in advance, because we want to be the first ones there.

It’s not that we need more junk – we just had our own garage sale a few weeks ago in preparation for moving across the country. But the nature of this garage sale is a little unusual. The neighbor is Holly Roberts, and what she plans to clear out is some of her unsold art. Instead of paying $15,000+ for any one of her works (which I’ve been lusting after for years), we’ll probably be looking at somewhere in the neighborhood of $500-$1,500. For this garage sale, we’ll definitely wait in line.

What makes a price right? Venue obviously plays a part. When you put your belongings – even nice ones – in your driveway and guide people there with a $24 newspaper ad, everything is worth a lot less than if you sold it through Craig’s List. Presentation matters too. I sold some designer linen dresses suspended from the rungs of a patio umbrella during our garage sale, and the woman who bought them said she would have spent more than five times as much if she had purchased them at the local designer resale shop.

What does this have to do with business? Well, everything. Pricing is everything. And pricing is the thing that stumps most people most often. In general, business managers spend more time focused on every other aspect of management, leaving pricing as an afterthought. And when they do tackle pricing, they tackle it filled with opinions and fears, rather than strategy and a genuine understanding of merchandising and marketing.

Pricing is the cornerstone of marketing. Marketing is the outward expression of a business’s strategy. So pricing is a direct expression of business strategy. Unfortunately, much pricing is done as a defensive tactic or a lure. Small businesses selling services frequently approach pricing from a let’s-make-a-deal or a what-do-YOU-think-it’s-worth standpoint. And there is a whole world of artisans out there terrified to price at all, constantly watchful of customer reaction to determine whether or not they picked the best price.

You can’t set your prices if you don’t understand your value. You can’t understand your value unless you understand your business proposition. Business proposition and strategy are inextricably linked (but not exactly the same). In a nutshell, if your business strategy is to be the cheapest and fastest of all your competitors, then your prices clearly have to be the cheapest. Cheaper than whom? Cheaper than your competitors. And your competitors aren’t always who you think they are! If your business strategy is to offer the cutting edge of products or services, always a step ahead of your competitors, then your prices should be higher than your competitors to represent the value of being the best. Again, you need to know who your competitors are. And if your business strategy is to offer the best customer experience and relationships, your prices should be higher than your competitors to represent the value of that business proposition. Assuming you know who your competitors are.

In theory, price competition should be taking place 1/3 of the time or less. Yet this is not the reality of current markets. Why? People don’t always grasp the importance of choosing a business proposition and aligning their entire organization behind it with discipline. When you organize for a business proposition, the operations, product development, supply chain, and sales and marketing are all in support of that business proposition, making it sustainable. This is where value from the customer’s perspective comes from. Different business propositions require different investments, talent, and activities, and your margins will have to be sufficient to pay for the requirements of the business proposition while still yielding an acceptable bottom line. If any one of the components of your business falls out of alignment, the balance required for the business to be profitable will not be present.

Customers don’t pay for products or services. They pay for perceived value. Perceived value is a concept that goes well beyond the tangible product, actual service, or price tag.

Now if Holly would just hurry up and have that garage sale.

Business Insights from Andrea Hill