Pricing products involves a mixture of science and art, blending your hard costs with what the market will bear, taking into account age-old marketing principles and brand-new electronic realities. But no matter the equation you use, it’s important to get pricing right.
“You have to be careful not to leave money on the able,” says Mark Satov, who runs a management consulting firm in Toronto that helps companies make strategic and operational decisions. Pricing is a difficult game, he says; managers must avoid getting pushed around by customers while balancing myriad factors related to a product’s worth.
“Companies of all sizes struggle with pricing decisions,” says Mr. Satov, founder and leader of Satov Consultants Inc. His company applies tools to the mix, such as customer surveys, forecasts, competitive intelligence, analysis and other techniques. “But as much science as you do, you can never take out the art.”
He suggests that all companies carry out a four-step process to guide their pricing. It starts with deciding who your customers are, and then developing a “value proposition” to target them. For example, are you going to offer the lowest prices, or a combination of price and value?
Next, develop a pricing approach that supports this proposition. Finally, make pricing decisions for individual products or categories, based on the role they play in your overall strategy.
Business-to-business pricing for goods and services can especially be tricky, Mr. Satov says, because of the amount of negotiation that happens today, especially by designated procurement teams. Business-to-consumer pricing has large chains such as Wal-Mart buying and pricing on volume and offering goods to consumers “on deal,” for example in advertising flyers.
“We’ve trained people to shop the sales,” he says, adding that companies still use a degree of intuition and “gut reaction” in pricing and often must react to factors that arise, like competitors’ responses to their own pricing changes.
“There’s always nuance,” he says. “There are things you can’t model on a spreadsheet.”
Marketers for years have considered the “Four Ps” – product, price, place and promotion – and have differentiated whether price should be “cost-oriented,” essentially totalling all internal costs and adding about 15 per cent for profit, or “demand-oriented,” with the price based on what the market is prepared to pay. Today a blend of all of the above is critical.
“If you use a cost-oriented structure, I guarantee you’re leaving money behind,” says Lindsay Meredith, a professor of marketing at Simon Fraser University. He says that adding up your costs is important, “to know your floor,” but it should be only one element in consideration.
Other variables include whether a transaction is B-to-B or B-to-C, the business’s size and growing pressures of the computer age.
“Social networking and the Internet have had a massive effect on pricing,” Prof. Meredith says, because it’s made consumers much more “price sensitive,” or elastic, and has widened the field of competition. “As pricing knowledge grows, it’s difficult to pick an artificially high price point and make it stick.”
Smaller retailers, he says, can try to differentiate themselves with service and advice, personally taking care of special requests and offering better warranty conditions or delivery terms, for instance. The key is to offer economic value to the customer (EVC), influencing buyers to look beyond the true cost of the product or service, thus making them “price insensitive,” or inelastic.
“You can overcharge like hell, you just have to have a better EVC,” Prof. Meredith says.
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Mary Gooderham – Globe and Mail – April 19, 2012