The 7 most common questions I get about price: answered.

May 25, 2020 | Customers, Marketing

Settling on a pricing mechanism for your products and services is a profoundly important element in a successful enterprise, but is often the last thing done.

Ask a few people internally, go and see what others are doing, or just add a margin to your costs and out you go, all of which will result in a less than optimal revenue/margin mix.

Settling on a strategically driven price is really fundamental to financial success.

When should I tell them the price?

My general advice is an old saying mumbled to me by my key mentor as a young bloke: ‘He who mentions price first, loses‘.  ‘Anchoring‘ is a key concept in a sales conversation, reflected in this adage. In consumer products, this is cannot always be the case, walk into any supermarket, and the price is there for all to see, so our options are limited, as we have lost control of the conversation. That conversation happens in the buyers office, where there is usually an imbalance of power in any event. However, in B2B, we generally have control over price, so we can manage the conversation, in which case, the old saying holds. Psychologically, it feeds into another old, and often repeated saying, this time from Warren Buffett: ‘Price is what they pay, Value is what they remember’. Therefore, it makes sense that you allow the buyer to reflect on the value they will get by a purchase, and then price accordingly. On line, this is now being controlled by algorithms that look at your history, the history of those like you, product availability, and a host of other individually tiny, but cumulatively significant factors, and set the price quoted accordingly.

Should I have standard prices?

Are all your customers prepared to pay the same price? No, so consideration of differential price packaging should be a core part of your strategy. The challenge is how to apply differential pricing while retaining control of your price list. The most common categories of differences are demographics, geography and volume. Your local wine shop has trouble competing with the big chains, because they buy a few cases, delivered into their back dock, while the chains buy a few truckloads delivered into a central location for redistribution on retail demand. This increases their stock turn, by minimising pockets of slow moving stock, reducing average cost.

How many price options should I have?

Do not give each customer any more than three price options. Our minds tend to get overwhelmed by too many choices, three is the optimum. Those three options should be clearly articulated with the differences in value that is delivered by each. This strategy is almost universally used for on line sales of software services. They all use the three columns, with varying added services for an increased price.

In which order should I show price options?

Show the highest price first. Often this is counter intuitive, as the instinct of many sellers is to go low in order to ensure they secure the sale, which almost always leaves money on the table. It is way easier to go high, as you then have room to come down while perhaps removing pieces of the value offering that do not add value to the buyer, or that cost you nothing to remove, but seems to be a concession. By contrast, by going in low, you have nowhere left to go if the buyer is looking for ‘more’.

Should I show shipping costs?

No. Instead, shout ‘Free shipping’ which is a powerful motivator. ‘Free’ is one of the most psychologically strong motivating words, so use it by including shipping costs in your price. Amazon has used this strategy to devastating effectiveness by offering an annual subscription that enables free shipping via Amazon Prime, now in over 50% of US households. It also adds a distribution channel for other services, such as video streaming

How can I manage competitor pricing?

You cannot, you do not live in a vacuum, competition is a reality of commercial life. However, concentrating on the value of your offer rather than just the price will deliver the best results. Every purchase decision made has a context, winning just because you are the cheapest is a good way to go broke.

How do I manage price increases?

Carefully, but offering notice of a price increase is both proactive as a means of simply being courteous to your customers, and as a deadline by which they must purchase in order to get the current price. This can act as a powerful call to action.

Another of Warren Buffett’s quips is: If you have to have a prayer meeting before you put your prices up 10%, you have a lousy business’

The final word is that not every deal, not even those that seem to be ‘in the bag’, will come to fruition. The reason stated will often be ‘price,’ but that is rarely the whole story. Politely probing for the real reasons and learning from them for the next time, is a core part of the task of a quality sales process.

 

 

 

The single word that delivers sustainable profitability. 

May 15, 2020 | Branding, Marketing, Strategy

The single word that delivers sustainable profitability. 

That single word used to be ‘Brand’, but no longer, despite the role of intangibles in the market valuation of an enterprise.

With the tectonic changes in business models over the last 25 years, it seems the focus has moved to ‘Control‘. This change applies even when considering the legacy business models of the last century that are being renovated to meet the demands of this century.

You can tell the value of your brands, and intangibles more generally, if you look at your balance sheet and apply an ‘industry standard’ multiple to net assets. The difference between that number, and the saleable price of the business is the value of your intangibles. If it is a public company, the market value is simply the current stock price, but more complicated if the enterprise is not listed. However, the accountants will tell you there are benchmarks depending on the industry and your position in it. Their valuation will usually be a single figure multiple of the free cash flow, plus the recoverable value of assets.

That calculation simply does not compute with the stratospheric valuations of the successful tech companies around, or the volatility of their stock prices, so something is missing.

A few of the ‘old industry’ businesses with deep branding, also defy that quantitative logic, but not many. P&G’s Tide detergent in the US, Vegemite here in Australia, Coca Cola, and a few others defy, for the moment, the trend to homogeneity.

The common theme amongst those whose valuations defy the accountants calculations, largely the ‘new age’ unicorns, is captured by that single word: Control.

They all have some level of control over the value chain that reaches the end customer.

Remember Netscape? It was the original web browser that delivered smooth browsing to web walkers. It was sensationally successful, paving the way for the web trawling we all now just accept as a normal part of life. Killed off by Microsoft, who at that time had a virtual monopoly over peoples PC’s via MS Office. Microsoft simply bundled Explorer into Office, free, and whammo, Netscape is dead. Microsoft controlled the distribution channel, so was able to squeeze out Netscape.

Domestically, the NSW dairy industry used to be a regulated monopoly, delivering monopoly power to the designated processors via control of the distribution channels, supposedly for social reasons. That monopoly ensured that there was no innovation, and nothing that would disturb the comfortable monopoly was allowed, until economic logic shone through, and deregulation occurred. In a day, deregulation demolished the control the processors had over distribution, and handed it over to those with the control of the channels: supermarket retailers.

That sudden change, for which the processors were largely unprepared despite years of warning, led to the current situation where there are now no domestically controlled dairy processing companies of any real scale.

Spotify, a genuinely innovative platform that has changed, again, the way we obtain our music, relies on Apple for its distribution via the Apple App store. It seems Apple is actively pushing Apple music, so the future of Spotify must be at huge risk, unless they can find a way to gain control of their distribution channel. Apple will squeeze them to death over time, and take not just the subscription revenue from the consumer, but also squeeze down the royalty payments to the music creators at the other end, building monopoly margins.

Nice work if you can get it! 

Supermarket retailers around the world have played the same game for ages, nowhere better than Australia, where the two gorillas control somewhere around 70% of FMCG sales to consumers. Proprietary brands have all but disappeared, and most of those that remain have little real value, as the customers have been taught to buy on price by the retailers house brands. This has squeezed proprietary margins by restricting access to the consumers.

Monopolies are great, when you are the monopolist, oligopolies are almost as good, and when you reach unstated arrangements with the other oligopolist, the margins are terrific. Just look at Australia’s banks, who collectively are the most profitable in the world as a % of GDP. Their profits are boosted by the lack of competition, and small regulated number, while their duty of care to customers becomes almost irrelevant, despite their protestations to the contrary. Let’s not talk about Australian petrol retailing, another example of profitable oligopoly control.

Amazon controls a huge chunk of the on line market by direct access to consumers. Third party products sold via Amazon that are successful find themselves faced with Amazon branded competitors very quickly, as Amazon knows more about your financials than you do, and controls the relationship with customers. They will suck out the margins, competitive advantage and shareholder value.

The lesson: build vertical control of your distribution channels into your business model.

In years to come, there will be no alternative.

It will be expensive, and risky, and certainly different to the model those of us over 40 grew up with, but that is the new world of vertical competition we now live in.

 

Does your packaging tell a story?

Does your packaging tell a story?

May 12, 2020 | Branding, Marketing

You can have the best product in the world, but if the packaging is inconsistent, out of place, bland, and does not accurately describe the product, or what a consumer might be expecting, it will not get bought.

Jeans and T-shirt will normally not get you entry to a black tie event!.

As I wander around supermarkets, I regularly see packaging that has  been designed to appeal to the designer, or perhaps  the product manager, rather than telling a story about the product to the consumer, the one being assailed by messages inside and outside the store.

The design may be artful, it might meet the regulatory standards, and it almost certainly has a logo prominent somewhere. However, does it stand out on shelf, does it deliver a message to a busy and stressed buyer who does not really care about your artful design, but just wants to get what she (and it is still almost always a she) needs, so she can get on with it, and get out of the store as quickly as possible.   

A really good test is to put a package in front of people who do not read English, and have a translator ask them to describe the product, and what benefit it delivers. Fail that test, and back to the drawing board you go.

Pack design is a part of a process, the make or break part when it comes to consumer trial.  Developing and launching a product, even a line extension is a significant investment, don’t you think it should be given the best chance possible to succeed, to be selected off the shelf, and to deliver a return?

Next time do not do the pack design at the end of the development process, do it at the beginning. Sending it out to a ‘designer’ at the end of the development process, looking for a quick turnaround and cheap price,  could end up being the most expensive piece of design you ever did. Failure to grab attention, and encourage customer trial will make that cheap, quick, but artful pack design, a really dumb idea.   

When you need help thinking this all through, call me.

PS. Bet nobody nicks my grandaughters lunch again!!

 

An extreme case of Marketing Alchemy: Bananas!

Mar 11, 2020 | Branding, Marketing

Italian artist Maurizio Cattelan may have set a new world record. He taped a banana to a wall in an art exhibition in Florida on December 7, 2019, which was then sold for $120,000 (US) dollars.

The buyers, Billy and Beatrice Cox acknowledged the absurdity, but supported the impact the taped banana had on conversations about art.  As a marketer, I am in awe of the process by which Cattelan turned a perfectly ordinary banana, into a cash cow.

Marketing alchemy at work.

A competitive artist at the exhibition ensured the banana would not go off, by eating it. An act of sabotage, or extension of the publicity the ‘thingo’ (I have difficulty calling it art, or even exhibit) generated.

Nevertheless, it is a massive demonstration of the contextual impact on the perceived value of an object.

You can buy an Eric Clapton signature Stratocaster for a couple of grand, new, or had you been at Christies in New York on June 24, 2004, you would have seen Eric’s Stratocaster (nicknamed ‘Blackie) that was the mainstay of his playing during the heydays of ‘Cream’, sold for $959,500. Better value than a banana, at least you could have resold it, rather than have some goose run up and eat it. 

All this proves, once again, that utility has little to do with value.

Update: November 2024. The monkeys have really come out to play. The original buyers of this ‘art’ the Cox’s sold it subsequently for 184k, on-sold twice more for 150k and 230k. It has now been sold again at an auction in new York for 6.2 million according to a video in X. (which I always believe to be the truth..???). The absurdity of this is disturbing, Every few days the thingo has a new banana added,  presumably to keep the ‘art’ fresh. I have never heard of such marketing alchemy as this! https://tinyurl.com/w7ma9fvx

Marketing technology. Master or servant?

Mar 4, 2020 | Communication, Marketing

 

 

This is a story of two modest sized SME clients.

One has spent a lot of time, effort and money building a marketing technology ‘stack’, to use the vernacular. The expectation was that it would deliver significant marketing productivity, which they defined pretty well with a range of measures.

The other uses a basic system to record customer contacts and follow ups, as well as a semi manual system to create, collect and collate information, or ‘content’,  combined with social platforms and their website for lead generation.

The first client, with the sophisticated system has a tiger by the tail. The technology is ruling them, is unrelenting, unforgiving, and prone to drive them down dead ends because their data input is patchy  and sometimes flawed. Their recognition is that after all the effort, they are  little  better off than before the technology, just lighter in the pocket, and wearing people out.

The second client is struggling with the processes, particularly the manual interventions required, and the personal level of engagement necessary. There is frustration as they are continually told, ‘all this should be automated’ ,  but when you look at the total cost of conversion, share of wallet, lifetime value and referrals, they are much better off.

The question then is the extent to which the software is serving the purpose to which it has been directed, vs. serving itself. The intervention of people has been removed, automated, and the automation does not give a fig about the human interactions that make relationships, it just needs to be fed data.

Greek philosopher  Sophocles is quoted to have said, ‘nothing vast enters out world without a curse’ , and never has that reported quote been truer than when we consider the automatic responses we all have to the digital triggers now prevalent in our lives.

Give me back some of the humanity, with all its ambiguity and nuances any day.

So, as you are considering automation of your revenue generation processes,  never forget to account for the fact that people do business with people, in strong preference to algorithms, which are just tools.

 

 Header cartoon, Courtesy XKCD

The core problem of calculating a return on an investment in marketing.

Feb 24, 2020 | Management, Marketing

Return on Investment is a very simple financial equation.

What you earned, minus what you spent, divided by what you spent.

Earn $100 after spending $75, divided by the $75, and you have a  33% ROI. Put another way, for every dollar you spend, you get back $1.33.

Simple, right?

Then why do marketers seem to have so much trouble convincing the corner office that investing in marketing is a sound strategic and commercial choice.

Simple answer: Attribution.

Which part of revenue, or margin earned, depending on how you want to measure the success or otherwise of an investment, is attributable to the spending of the money?

Let’s take a simple and very common example: building a website.

Every business these days is told they need a website, not having one is like not having a phone, it simply makes doing business next to impossible.

 Let’s look at the formula to try and pick clean the bones of the calculation.

What you spent:

  • You need resources to determine the form and scope of the website.
  • You need someone to write the copy, and take or source the photos and illustrations.
  • You may need subscriptions to items supporting the website, such as CRM integrations, analytics services, pop-ups, autoresponders, and on, and on, and on.
  • You may need resources to manage and ‘clean’ the data bases that appear on the site, such as product specifications, promotional deals, customer and lead management, and on, and on, and on.
  • Finally, you need resources to build and maintain the website.

All of these resources can be sourced from external parties, in which case you can track invoices, or from internal resources, in which case all you have to do is determine what part of their employee costs you need to attribute to this website development. Simple to say, hard to do.

What you earned:

If anything, this is harder than attributing costs to a website development project.

  • What part of the revenue, or margin, whichever you choose as the benchmark, can you attribute to the cost of the website, and which part goes to the sales force, the quality of the product, the photography on the website, the manner in which you follow up enquiries, how  you capture returns, the cleanliness of the delivery truck belting around suburban streets, and on, and on, and on.
  • Over what time frame do you measure the return? A week, a month, a year, the duration of the associated advertising campaign, the lifetime of a customer?
  • How do you factor in other marketing activities, advertising on traditional media, digital ads, the weight of your distribution, the quality of the targeting of activity to real potential customers Vs the tyre-kickers. And on, and on, and on.
  • How do you include the value or otherwise of the word of mouth, or organic reach on social media? Which social media do you include in these considerations, is it just Facebook and twitter?  What about LinkedIn, or if you are a ‘techo’, GitHub, or Reddit, or the networks of gamers, and on and on, and on.

The core question is, ‘what do you include, and how do you allocate a weight to the contribution it made to the outcome?‘

Attribution.

Too add to  the confusion, people use a range of  terms interchangeably, usually because they do  not think about, or recognise the problems of attribution.

For example, they confuse return on marketing investment with return on advertising spend, and they  confuse leads generated with real financial results, and most particularly when confronted by someone flogging new and shiny digital toys, revenue with margin.

To go back to the metaphor at the beginning, a website is not anything like a telephone, so to make the comparison is  nonsense. A phone is a one dimensional tool. They all look the same, and do the same job, although the advent of smart phones has widened that scope considerably. A website by contrast is infinitely variable in what it does, looks like, and performs, and should be the product of a robust strategy and tactical implementation plans, not some simple template pulled out of a digital urgers kitbag.

To build that necessary credibility in the corner office, most probably occupied by an accountant or engineer, whose whole mind set is quantitative, you must be able to draw conclusions based on data. This data must demonstrate the cause and effect chains that exist, often  very well hidden, and avoid the marketing clichés and jargon, which just make you sound like that digital urger in the foyer.

Need help thinking about the implications of all that, call an expert.