The following is a transcript from a Professional Pricing Society Podcast, recorded on Thursday 5th January 2017.
Hello and welcome to our Pricing Podcast with The Professional Pricing Society. I am Lisa Fisher with PPS. Today we will feature Philip Huthwaite CEO and Founder of BlackCurve. He can be reached on firstname.lastname@example.org and their website is http://www.blackcurve.com/.
Today’s topic of discussion is “How Companies Can Fine-Tune Their Pricing”.
Hello Philip and thank you for joining us. We are happy to have you and look forward to your pricing expertise.
Thank you Lisa for having me. To give some background, I head up BlackCurve, a cloud-based price management and price optimisation platform, which helps businesses to fine-tune their pricing.
I’ve been helping companies use software to solve their pricing challenges since 2012.
Before BlackCurve, I was a Technology Consultant at Accenture, and worked with multinational companies such as The Royal Bank of Scotland, ITV, Royal Mail and EDF Energy. It’s a pleasure to share my experiences with your audience.
Thanks Philip. Let’s jump straight in with the first question. What common pricing errors do you see companies make?
There are a number of common pricing errors we see companies make.
The first is an over-reliance on excel to manage their pricing. One simple formula drag on an excel spreadsheet can cause large problems.
The second is an over-reliance on cost plus pricing. Whilst it is fair, justifiable to customers, and ensures a reasonable margin, it limits your ability for positive price segmentation.
If costs go down – do your prices also go down? We see companies who have linked a markup automatically without checks in place to keep the higher price if customers are still buying from them at that higher price.
We often see companies ignoring the value your product provides to customers.
Think about that coffee. £3.10 for a large cappuccino from Starbucks. Does it really cost then that much, I think not! But you’re buying into the experience, brand, need for that pick-me up.
We see sales teams that are over-discounting. This may be caused by lack of discount control or not giving the sales team the right information. Will they still buy from you if you stop discounting? Probably yes 9 times out of 10.
We see companies only making pricing updates once a year because it’s time-consuming.
There may be a long drawn own manual approval process.
You may lack the tools to apply advanced pricing methods or issue prices lists to different customers and markets.
Remember, pricing is a journey, and you need to be constantly innovating, testing, tweaking to make those incremental margin gains.
What do you do if there is an error, you need to be able to address it quickly?
Marks and Spencer is a large UK retailer, both online and with bricks and mortar stores. They saw a 50-inch 3D television - which normally retails at £1,099 - on sale for just £199 through their website.
After the orders flooded in, the high-street giant realised its mistake and cancelled orders at the knock-down price, offering disappointed customers £25 as a goodwill gesture.
An online petition entitled "Marks and Spencer supply our TVs that we paid for" forced M&S to do a U-turn and honour the orders.
It made some valid arguments about the binding contract M&S had entered into when it accepted orders and took customers’ money.
Another example is Screwfix, who are a large supplier to the construction industry.
An online pricing error resulted in all items on their website marked down to £34.99.
As you can imagine, eager beavers quickly snapped up thousands of pounds worth of goods after news of the error spread on Twitter.
Screwfix quickly realised its mistake and cancelled all orders that had not already been delivered or collected from stores and said it would issue refunds to customers.
It said people who had already received their goods were unaffected.
Many customers who missed out were angry that the company is not honouring their purchases, especially as they had paid for the goods and the majority had received an email saying the product had been dispatched.
Both of these examples show different ways of dealing with the situation, but both show how simple pricing errors can be a big pain.
We also see companies where there is no consistency in the pricing published to customers. We often see this when a company is selling a range of similar items good, better, best.
Is the pricing consistent?
Why should a cupboard on it cost more than the same basin with a cupboard and drawer under it?
Companies need to manage customer perception and frame their products value correctly to not turn them off.
Lastly, we see companies who have pricing tools, often built in spreadsheets, that allow very basic pricing strategies.
Companies find it difficult to see the impact of pricing changes or pricing tests on their business.
With no transparency, it is difficult to learn from, or you find out too late at the year-end report.
There are advanced pricing strategies out there that are relatively untapped such as psychological pricing. It’s proven to work, and not just in consumer industries such as retail. The study done by an American university on selling a dress for $45 and $49 and the $49 selling more always makes me chuckle.
Thank you Philip for those initial insights. Leading on from there. What common pricing strategies do you see businesses adopt?
It is common in manufacturing and distribution that a cost-plus strategy is adopted.
This is where they take the cost to manufacture or buy the product and then apply either a fixed real amount or % uplift to reach the selling price.
This ensures consistent pricing across product ranges, and gives manufacturers the confidence that their costs are covered.
However, it ignores the value your product provides, and does not exploit the ability to set different prices in different markets or to different customers.
Within retail, dynamic pricing is very common.
It allows companies to change prices based on algorithms that take into account competitor pricing, supply and demand, and other external factors in the market.
The goal is to find the highest price that consumers are willing to pay.
The strategy features price increases when demand is high and price decreases to stimulate demand when it is low.
It’s important to ensure that the new price given is perceived well by the customer
Uber an online taxi company calls it surge pricing when demand is high.
During a storm in New York state, surge pricing was triggered automatically.
After the event, there was public backlash as consumers felt Uber were profiteering on public safety, so when using dynamic pricing, make sure the algorithm has fail safe stops!
The value-based approach is most successful when products are sold based on necessity (pharmaceuticals), emotions (fashion), in niche markets, in shortages (e.g. drinks at open air festival on a hot summer day) or for indispensable add-ons (e.g. printer cartridges, headsets for mobile phones).
It is also used where external factors such as a recession or increased competition forces companies to provide value products and services to retain sales e.g. value meals at McDonalds and other fast-food restaurants.
Value pricing means that you get great value for money, i.e. the price that you pay makes you feel that you are getting a lot of product. However, reducing the price does not always increase value.
Thank you Philip. If a company wants to optimise their pricing, how would they go about it?
Pricing is a journey, and there is no one size fits all approach.
Firstly, before you do anything it is important that you get leadership buy-in to the power of pricing to grow your business.
No one man or woman is an island, and in business, everyone has to be behind using pricing as a strategy to benefit the business.
Otherwise new processes and prices will fall on deaf ears and be ignored.
There has to be a desire and faith that pricing can help. If you’re a pricing manager, perhaps circulate case studies of where smarter pricing has been beneficial.
Secondly, you might wish to consider a pricing audit from a specialist consultancy who does it for a multitude of businesses or set up a review board internally to complete the research.
A pricing audit should assess at a high level how mature your pricing operation is benchmarked in your industry, and also the potential financial benefit from improving your prices.
It may identify areas where you may wish to investigate further as part of a specific project, such as: where you’re over-discounting, inconsistencies in pricing levels, whether your pricing strategy is actually supporting your corporate objective of e.g. revenue growth, and whether your customers have been segmented correctly
If you’re looking for more in-depth analysis and support, a pricing consultancy might be the answer for you.
A pricing consultancy can give you recommendations for price improvements an individual SKU level.
A pricing consultancy will complete a detailed analysis of the prices of your won orders against other data available.
They can complete a review of your current price structure, dimensions & levels, and make recommendations for any structural improvements.
A price elasticity testing plan may also be delivered to ensure the impact of changes can be monitored.
A typical pricing consultancy will quote results of margin increases of 2-5%.
If the initial results are good, you may wish to keep the relationship open with the consultancy to refine the price optimisation work by completing further data modelling and price testing off the back of this.
The output may be to design a specific price algorithm to set the final price quoted.
You may wish to implement a pricing tool to support your pricing journey.
Pricing tools support that feedback loop enabling you to: implement advanced pricing strategies, complete isolated pricing tests, monitor the impact, analyse areas for improvement, make new pricing changes, rinse and repeat!
The beauty of a pricing tool, is that: everything happens in real time, pricing decisions are typically more accurate, rules conflicts are handled automatically, you have a full audit history, and crunching lots of data with a complicated pricing algorithm is effortless.
Great stuff Philip. Are there any quick wins when it comes to fine-tuning your prices?
I love low hanging fruit, and keeping things simple to start with and building from there. Whilst this answer is not exhaustive, it shows some good places to start.
Finding out your price elasticity is a good place to start.
Do people buy more when prices drop? How much more do they buy? Do they buy less when prices rise – and how much less?
Price elasticity measures the responsiveness of demand after a change in a product's price.
If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or sensitive to price changes).
Alternatively, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.
Beef is an example (sorry to the vegetarians out there!) of a product that is relatively elastic – because there are alternatives available. Lots of other supermarket products fall into this category as well.
Petrol is inelastic because most people need it, so even when prices go up, demand doesn’t change greatly.
Products with stronger brands tend to be more inelastic, which makes building brand loyalty a good investment. Typically, businesses charge higher prices if demand for the product is price inelastic.
How many times have you bought a branded paracetamol over a supermarket own brand? They are the same product, but packaged differently.
If you can find your price elasticity, it can help you assess any product outliers, such as items where prices can be increased with no impact on sales.
You may wish to reframe your product’s value. It’s easier to evaluate how much you’re getting out of an £89.00 a month subscription than a £1,000 a year subscription, even though they average out to around the same amount.
You could look at amending your marketing messages. In a CMU study, trial rates for a DVD subscription increased by 20% when the messaging was changed from “a $5 fee” to “a small $5 fee,” revealing that the devil sometimes is in the copy details.
As mentioned at the start of this answer, remember to keep things simple. In a paper published in the Journal of Consumer Psychology, researchers found that prices that contained more syllables seemed drastically higher to consumers. $1,499.00 versus $1,499 versus $1499. A relatively easy thing to change and test.
Lastly, you could bundle items purchased in tandem. The luxury version of car "packages" is a good example of successful bundling. It’s easier to justify a single upgrade than it is to consider purchasing the heated leather seats, navigation, and roadside assistance individually.
Some excellent examples there Philip. Leading on from the low-hanging fruit. Are there any long-term strategies to fine-tuning pricing?
In the long term, you should consider completing market research to assess what your customers think of your product to assess the true value, as well as ensuring you have suitable strategies in place to test your pricing.
How do you know if your pricing strategy is working?
How do you know if the prices you have set are the best prices for your goods or services?
When was the last time you made iterative changes to your pricing strategy to test if that made a difference to your overall profitability or revenues?
Are you reliant on traditional pricing strategies such as cost-plus pricing?
If you’ve answered “I don’t know”, “a long time ago”, or “yes” to the above questions, it’s likely you’ve stuck with the same pricing methods for years, and now is the time to test your pricing strategy.
By not testing your pricing, you may not realise your full revenue potential. Your competitors may have gained an advantage over you by improving their own pricing.
Pricing is one of the few business functions which has a direct positive impact on your company's profitability.
In order to test your pricing, you first need to set your business goals.
Are you looking to grow revenue, or are you looking to improve profits?
If you’re looking to grow revenues, the key focus is going to be increasing the number of goods sold.
You’re going to be much less concerned with margin.
There will be a tipping point whereby reducing the price, you sell more to make up the difference in revenue, if you kept the price at the higher point.
Once you have set your business goal, next up is to determine what market or what products you are going to use for your test.
It is advisable to select goods and services that have a statistically represented sample, i.e. a larger than average volume of sales.
Once you have selected these parameters, you need a control group that is similar, where you keep the prices constant as a benchmark.
Whilst these don’t have to be identical products, such as kettles vs toasters, you should try and select groups that have similar sales.
This price test should be done in small increments.
It's best to test for 30-60 days in order to get results that will be significant.
Simple variance analysis will give you a solid conclusion of whether you are having an impact on revenues and profits.
As mentioned previously, make sure you have the right skills and tools in place to support you.
What examples can you share of companies who have successfully fine-tuned their pricing?
There are three case studies I’d like to touch upon. The first is a lighting manufacturer I worked with.
They’d invested heavily in their manufacturing plant to automate it.
However, they had adopted a cost-plus nature of selling, and therefore any gains made through the automation were wiped out, because there was a general understanding in the workforce that a certain margin was acceptable and unnecessary discounting was commonplace.
The leadership team got behind the message that pricing can be used as a driver for business growth, and we implemented a pricing tool that enabled them to decouple pricing decisions from the cost price, apply advanced pricing methods to positively discriminate based on parameters such as the quantity purchased, and also control discounting.
There were extremely positive financial benefits.
The second is an entertainment company we worked with. They sold advertising that was broadcasted at certain times, think radio or tv advertising.
You have a limited inventory each day.
Before working with us, they had a number of levers to pull in the pricing sense such as pricing differently dependent on time of day, or day of the week.
Our system gave them further flexibility in being able to apply different pricing levers such as seasonality e.g. if it’s Valentine’s day or Christmas, how far in advance the booking was made, the ability to increase deal sizes through bundling etc. as well as given the ability to efficiently price differently dependent on the customer or market.
Again, the financial results were positive.
The last example is from the airline company Air New Zealand. Not one of our customers I’m afraid, but it shows the innovation in a well thought out strategy.
At the online checkout page when buying your ticket, they have a system called One-Up.
If you’re booking an economy seat it essentially gives you the ability to bid how much you would be prepared to pay for a business class seat after giving you a rough idea of what a typical winning bid consists of.
At this point you’ve still only paid for an economy seat.
At the time of departure, if there are still unsold seats in business, the highest bids get the option of paying the bid price to occupy the seats.
It ensures the airline maximises the cost per seat, whilst still selling seats at a higher price for those not wanting to take the risk of having a winning bid.
This is a great example if a company thinking outside of the box. It’s already got me thinking could a similar strategy work in other industries?
Some excellent examples. What are the pitfalls to avoid when fine-tuning your pricing?
Getting your pricing wrong can cause a decrease in revenue and profitability, that’s a given, but it’s also important to consider how customers may react to pricing changes.
There have been a number of high-profile cases recently which has either caused negative press or a drop in sales.
The first is Toblerone, which is a chocolate bar sold in chunks. They recently increased the spacing between each chunk in the chocolate bar, and removed one of the chunks, keeping the price the same.
Needless to say, there was a public backlash as it was so blatantly obvious that the value of the product had gone down in consumer’s eyes.
Unilever tried to strong arm a leading UK supermarket into accepting higher prices for goods as a result of the decision of UK leaving the European Union, quoting fluctuations in exchange rates.
As a result, for a week, there were empty shelves across large product ranges.
Many of the goods in question, such as Marmite, a spread for toast, were in fact manufactured, and had ingredients supplied from within the UK, so there would be no change in costs. Whilst brand loyalty to this product will probably win out in the end, it didn’t show Unilever in a good light.
And finally, Coca-Cola, the drinks company, took value based pricing to a new extreme. They started a trial on their vending machines, that when the temperature went up, the price of their coke cans would also increase automatically in response to higher demand.
Again, Twitter had a field day!
Whilst this time it didn’t work for Coca-Cola, I do take my hat off to them, for at least trying to innovate, think outside the box, and not being afraid to optimise.
In summary, pricing is a journey and you should always be tweaking and striving for perfection.
Start small, tackle the low-hanging fruit, and then work up to a bigger transformation strategy.
Fundamentally before any pricing project, you need to ensure you have leadership buy-in, and the right tools in place to implement and monitor the impact of any pricing changes.
Philip, thank you again for joining us and sharing your insight on "How Companies Can Fine-Tune Their Pricing".
PPS will host a pricing chat with Philip on Wednesday 18th January 3pm EST please join him live on Twitter – Topic “The Importance of Price Optimization”
Visit our website http://pricingsociety.com/ for additional info on all upcoming podcasts and pricing chats.