Don't hit that markdown button; Pricing Strategies for a Small Planet.
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Last week in Seventy Three Shopping Days Till Christmas we talked about Trade Promotions. Now let’s talk about Price. Companies that know their segments well, increase margin in those segments and often increase pricing, as well. (Next week we will talk about segmentation).
I was schooled on a whole different philosophy of differentiation! Markdowns seem like a defeat to me—of product, brand, presentation, or planning. Of course, as a shopper I like them, sometimes. I don’t want to perceive, though, that someone got a better deal than I did.
There are so many organizations involved in pricing, though, it is hard to keep control, especially as the pressure mounts—quarter-end, seasonal offerings and such. But the pricing predicament can be tackled by companies if they organize and automate.
Organize Price for Profit
“The whole reason that sales and marketing departments exist is to accentuate differentiation, escape commodity price pressure, and create profitable deals,” says Dave Taber (The Price is Right, The Taber Report). I couldn’t agree more.
So promotions should have some brains, yes? But at the core of the game is pricing, which is generally an abysmal effort, lacking process and structure. Today pricing is Costing and negotiation in most companies. Not that marketing does not attempt to declare a market price, but many companies lack consistent analyses of customer segments, before matching products and value to that segment, then deriving the price. Most often, of course, mapping competitors or sitting with channel partners/retailers to set price on item becomes the mechanism. Once the product leaves the manufacturer’s shipping dock, price is no longer under the control of the product company.
Of course promotions have a big, mostly negative impact on price; but it doesn’t have to be that way. In this commodity crunch world, we need to think differently. The race to the bottom has no winners, and even your retailer is not interested in your lowest price - that is a huge myth! They are interested in the attractive price that a customer will pay. And they want that customer to come to their stores, not their competitors’ stores.
So the responsibility is really on the brand company to come up with that market price. Too many studies have shown that even slight price increases can make a huge difference in your profit.1 And eschewing that, ‘holding the line on price’ might be enough to have a drastic possible impact on the profitability of your company.
Is that Your Final Offer?
In our research, many companies told us that they really had no idea, (think of it, no idea!) what the final price was for their products until they analyzed POS data months later! And in another survey, we found that only about 20% of the SMBs even used their POS data. So, flying blind is scary. And in this market, you can assume that the good products will float the whole business. We have worked in environments where CEOs did not know what product made money for them. Yet production rationalization committees were ready to cut products. Or SKU rationalized efforts by retailers, also without good market data, were ready to dump profitable products.
Figure One: Organizations and Process Elements in Pricing
We recommend, since it works, rethinking how you do pricing and integration of the processes, for people to gain a clearer perception (see Figure One). Aligning efforts can make a significant difference in your understanding of your markets and create pricing consistent with your brand and corporate performance goals.
Think about it:
Slight changes that add no cost, but add value perceived by the retailers and/or end customer can allow you to increase prices.
Pricing by segment allows you to manage in multiple segments, pitch value to ‘brand conscious’ vs. ‘value shopper’ segments, and price accordingly—not the same price for all segments.
Don’t rely on the channel to provide insights—their interests often diverge from yours.
Conversely, the Retailer should expect and seek guidance from the brands on their products, packing, price, etc. They know what sells best, since they have the data across their channels.
So-called transparent web pricing is perceived as a downward spiral on price. But here again, you need to package based on segments—each channel, each market. Customizing promotions, packaging and other aspects of your offering can avoid the worsening webpricing predicament.
Create pricing ‘games’ that consumers can understand.
Create a ‘pricing team’ in your company and get serious about the data. It is very revealing.
Arm yourself with the data—it is the best sales tool you have to win big. Everyone wants to know—channel partners and consumers—Is that your final offer?