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.
The complexity of pricing is illustrated by concerns about price differentials between Canadian and U.S. retailers when our dollars reach parity, says Karen Proud, a spokeswoman for the Retail Council of Canada. The Standing Senate Committee on National Finance, which has been studying the issue since the fall and is expected to report in June, is hearing organizations such as the council talk about product pricing based on tariffs, product availability, supplier markups and costs, from the minimum wage to fuel prices.
“So many different factors go into pricing decisions,” Ms. Proud says, adding that lately “a little bit more art has to go into it.”
Many small business owners decide on prices too quickly, often based on what their competitors are charging, says Peter Conrod, vice-president of client and business strategies for Royal Bank of Canada. Pricing should be part of a business plan, he says, taking into account your risk and investment and aligned with broader decisions, like your segment of the market and what you stand for.
“Alignment is really critical,” he explains. “There’s a whole bunch of considerations the business-owner needs to package into their value proposition.”
Mr. Satov says the Internet has provided more transparency in pricing, putting pressure on sellers, especially in B-to-B transactions. For example, companies are using reverse auctions, forcing suppliers to offer their best prices. In such cases, as well as in negotiations, it’s important for sellers to determine a “bottom-dollar” price, he says, and to ensure they don’t come out of the process with less than that. This can mean they might not cover their costs or earn a profit – and also sends a negative signal to potential buyers.
“Once you drop your price, you change the perception of value,” he explains. “You don’t want your brand to be tarnished.”
Buyers looking for the best prices should also be made aware that “you’re allowed to make a profit,” Mr. Satov adds. “They need to know that if they strip all the profits away from you, you may not be a viable supplier.”
Mr. Conrod says that prices should not be left at one level but should vary, based an assessment of what competitors are charging, for example, or using new concepts, strategies and structures, such as bundling products together.
“Some people tend to create an offering and leave it there,” he says. “You just can’t leave your pricing stagnant.”