Archive for the ‘pricing’ Category

If you can raise prices, don’t hesitate

Thursday, August 9th, 2007

Last night I was talking with my mother in law & she related to me a story. When they were renting apartments, they would have customers sign a lease. When it was time for that lease to be renewed they could raise the rent if they wanted. At first, they tried not to increase the rent until it was absolutely necessary. What they found is when they waited & did it much later that the rent raise was a real shock to the tenants, who had a very negative reaction to the increase. They actually lost some tenants due to that.

She learned that increasing the rent each renewal time, even a small amount, was better than holding off and giving a bigger increase some time in the future.

This is true in pricing almost any service product. At my last company we worked hard to negotiate price increase clauses in our long-term contracts. But if we didn’t use them for the first few years of the contract, we found it very difficult to raise prices later. Customers would scream, and in some cases we backed off.

So the lesson to marketers is: small regular increases work far better for customer relations than no increases followed by a jump.

It’s better for your revenue too.

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Perhaps advertising isn’t the money pit people thought it was

Friday, July 20th, 2007

The July-August Harvard Business Review contains a provocative article from Prof. Leonard Lodish of the Wharton School of Business and Carl Mela of Duke University on the decline of product brands (”If Brands Are Built Over Years, Why Are They Managed Over Quarters?“).

We’ve looked at the phenomenon before from the private-label goods perspective, Lodish and Mela approach the problem from a different angle: rather than blaming Wal-Mart and other retailers for squeezing the value out of branded products by their price-cutting philosophy and private-label strategies, they fault the brand managers themselves, who favor price promotion strategies—-which bring a rapid response from customers—-over brand-building activities, such as advertising, which only work over the long term.

By examining data on baseline sales (i.e., sales levels without promotions), and performance during promotions periods, they document persuasively how certain brands fall into a spiral of commoditization by relying on discounted sales for an increasing percentage of their sales volume. Customers learn to stock up when the product is on special, and their perceived value of the product declines accordingly. Brand equity is eroded.

[Why do brand managers prefer promotions? Lodish's and Mela's reason, perhaps good fodder for another post, is that purchase data is useful immediately, while brand equity information is less tangible and takes years to identify trends.]

By contrast, companies who hold firm on price and invest in long-term brand-building activities, such as advertising, development of new distribution channels, and product innovation (exhibit A: P&G), show higher baseline sales levels and therefore more unit profit per sale.

Think it can’t be done? Clorox bleach (a product ripe for commoditization if I’ve ever seen one) was able to raise retail prices 30% and turn a trend of revenue decline into growth by cutting promotions budgets and increasing advertising.

So, television networks, radio stations, newspapers: take heart. Perhaps marketers will fall in love with advertising all over again.

US Broadband prices vs. rest of the world–nothing has changed

Wednesday, July 11th, 2007

Let’s face it. For pervasive use of advanced web applications, like streaming video, you need affordable broadband access. And the US is way behind on this count.

I talked about this in a January post, using numbers from 2005, and today I saw an update on I was hopeful the situation had changed. But, alas, no. Even with the fall of the US dollar over the past few years (a nearly 20% decline vs. the euro since 2003), European and Asian prices for broadband are in some cases far less than ours. Here’s a brief comparison:

Price per megabit:

South Korea: $0.34
Japan: $0.70
France: $1.68
Italy: $3.45
USA: $3.33 (fiber), $7.16 (cable)

(sources: US – company websites, other countries –

Now, if you sign up for a bundled package, your price will be somewhat lower. But I can’t help but feel a bit of envy for people in Seoul who can buy 50 Mbit/sec access for $17 per month. Imagine watching “Lost” reruns over that kind of connection.

On the bright side, we get a far better deal on broadband than our friends in the United Kingdom. They pay $11.31 per megabit, according to the Telegraph. Remember that the next time you pay your Comcast bill.

(Photo: “fiberoptics” by rotorhead via stock.xchng)

Companies who profit from customers’ mistakes–watch out

Tuesday, June 5th, 2007

Do you hate your cellphone provider? How about your credit card company? If not, you probably haven’t tried to exit your contract or been late with a payment. More and more companies are increasing their profits by penalizing their customers, turning what was intended as a negative reinforcement for bad behavior into a growth engine.

And that’s setting those businesses up for a fall, say Gail McGovern and Youngme Moon of the Harvard Business School, in June’s Harvard Business Review–”Companies and the Customers Who Hate Them” (link – $$).

Penalties that morph into profit centers create perverse incentives for companies, influencing them to create complex packages and rules that customers can’t help breaking (sound familiar?), and to extract large penalties for small offenses ($25 fees for bouncing $5 checks, for example).

When customers find a more reasonable alternative, the penalty businesses become vulnerable. Say McGovern and Moon:

It’s no surprise that when a nice guy comes along, customers defect. Consider the online bank ING Direct. In the six years since its launch, ING Direct has taken a determinedly customer-friendly stance, offering products that are straight-forward and easy to understand. From the start, the firm deliberately rejected banking orthodoxy by offering savings accounts with no fees, no tiered interest rates, and no minimums. Today, it offers equally simple ckecking accounts and gives customers surcharge-free access to a network of ATMs…. The approach has paid off. ING Direct is now the fourth-largest thrift bank in the United States….

There are many other examples cited: Netflix’s rise as a result of Blockbuster’s draconian late-return policy, Life Time Fitness, Virgin Mobile. These companies sell straightforward products with transparent terms that are easy to adhere to. And more of these upstarts will come–unless banks, mobile providers, and others for whom customer penalties are driving their profits change their game.

(Photo: “The Stocks” by stevekrh19 via stock.xchng)

Does the record industry fix prices? The Economist thinks not

Friday, April 20th, 2007

Let’s talk about price-fixing, shall we? The Economist reported in a recent issue that the European Commission was re-opening its investigation into the merger that created recorded-music titan SonyBMG.

Says the Economist, “At issue is whether the four majors together might now reach an unspoken understanding about prices.”

It’s clear that CD suggested retail prices–it’s clearly illegal for manufacturers to coerce an actual retail price from a retailer–are highly standardized. The actual retail prices, however, differ substantially based on the outlet (the latest Rascal Flatts CD at Wal-Mart costs far less than it does at Joe Nardone’s Gallery of Sound).

The Commission is not concerned about retail prices; instead they are looking at whether wholesale prices–the prices that retailers pay to the record companies for their stock–are coordinated.

Here’s why such coordination is virtually impossible. The power in retailing has shifted dramatically from manufacturer to retailer in the last twenty years (the recent book “Private Label Strategy” does a good job of explaining this shift). No record company dictates to Wal-Mart how much they must pay for CDs. Ditto Amazon and Target. So such collusion, difficult as it is to coordinate between the four companies, would fall apart anyway once they tried to enforce it with their retail customers.

So we can all breathe a sigh of relief about that and go back to illegally downloading our music over peer-to-peer networks. (Just kidding!)

(Pictured: the new album from Son Volt, distributed by SonyBMG)

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Think business as usual doesn’t cost you money? Check out Parker Hannifin

Wednesday, March 28th, 2007

If you thought cost-plus pricing went out with the Reagan administration, read today’s front page Wall Street Journal article on Parker Hannifin Corporation and the efforts by its CEO to overhaul its decades-old pricing approach.

Parker’s managers priced their 800,000 products using roughly the same formula: cost plus 35%, whether the product was a commodity or a one-of-a-kind.

According to consultant Tom Nagle (disclosure: my old pricing professor), 60% of industrial companies still price in this manner. Yikes!

With the help of outside consultants (and an iron-willed CEO moving aside internal objections), Parker sorted its products into five buckets from commodity through most differentiated, and raised prices on most. Some commodity products saw their prices lowered.

Possibly the most difficult task was to push the price increases though their distributors and customers objections. But the result was a $200 million increase in operating income and a return on invested capital rising from 7% to 21%.

The lesson for businesses is to look at pricing regularly. Don’t let your pricing or your pricing model get stale. And don’t be afraid of raising prices when you find a product priced too low. (Perhaps try some deliberate mistakes by raising prices on a small subset of products and see what happens.) The results can be astounding.

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