Profit Parabolas - A Boston Consulting Group article

I was trawling around looking for good information on pricing, and I chanced upon this article. It echoes work I did ages back, but it takes it a little further. It's a nice read, and might give you ideas. Here it is: Profit Parabolas: Bringing Science to the Art of Pricing

I think that a crucial bottleneck in their approach is that you need to have a hell of a lot of data about your competitor's pricing and cost structures. As we see, often enough the net price paid by a customer is 30 - 50% lower than the published list prices at any company.

Should you publish the prices of your product or service on a website

I came across a post on the ecademy website, from a practitioner of NLP on whether she should post the prices of her services online. But this is a general and important question, and needs to be answered on a case by case basis. The more commoditized your product or service is, the more reasonable it seems to publish prices. My opinion is that publishing prices is not right, and pricing need to be based on the value that your product or service provides them. To give you a quick and dirty look at how you could go about such a decision:

The steps to effective pricing are

• to quantify the value of your service - as seen by the customer
• to set up a process whereby you can demonstrate this value to your clients
• to motivate your sales channels to recognise this price in final achieved price.

The crucial issue you have to tackle first is - what is the value of your service as seen in euros? (or whatever form of currency you use) To answer this question,

• Ask yourself if you have a homogeneous customer base?. If there are differences in the customer base as regards how they buy, and how important your service is to them - you need to set up different prices for each of those groups.
• Look at your track record of previous sales to see if some customers are willing to pay more for your product than others.

If any of the answers to the above questions are yes, please don't publish prices! Your customers are obviously motivated to buy, not just by price but also by other significant issues.

If of course both answers are no; you could go out and publish prices. The moment you publish your price, that price becomes a list price, and customers will start negotiating for price discounts from that price. More importantly, you need to start innovating in your service to see if you can find other reasons to increase the price you have set.

Once you have found these reasons and add-on capabilities to your service, create a split level price, where you drop your original price of the basic service package a little bit, and publish a new price as well, which is slightly above the original price.

I hope this helped a little bit. I have a more comprehensive document on Optimal pricing on my website that you could look at.

Swanson's Rules -- The (Un)Secret CEO Cheat Sheet

I got this from Christian Mayaud's blog. It seems too good to not share this on with others.

- Arun

Business 2.0 :: Magazine Article :: Features :: The CEO's Secret Handbook

Swanson’s (Un)written Rules of Management

by Bill Swanson, CEO | President, Raytheon

1. Learn to say, "I don't know." If used when appropriate, it will be often.
2. It is easier to get into something than it is to get out of it.
3. If you are not criticized, you may not be doing much.
4. Look for what is missing. Many know how to improve what's there, but few can see what isn't there.
5. Viewgraph rule: When something appears on a viewgraph (an overhead transparency), assume the world knows about it, and deal with it accordingly.
6. Work for a boss with whom you are comfortable telling it like it is. Remember that you can't pick your relatives, but you can pick your boss.
7. Constantly review developments to make sure that the actual benefits are what they are supposed to be. Avoid Newton's Law.
8. However menial and trivial your early assignments may appear, give them your best efforts.
9. Persistence or tenacity is the disposition to persevere in spite of difficulties, discouragement, or indifference. Don't be known as a good starter but a poor finisher.
10. In completing a project, don't wait for others; go after them, and make sure it gets done.
11. Confirm your instructions and the commitments of others in writing. Don't assume it will get done!
12. Don't be timid; speak up. Express yourself, and promote your ideas.
13. Practice shows that those who speak the most knowingly and confidently often end up with the assignment to get it done.
14. Strive for brevity and clarity in oral and written reports..
15. Be extremely careful of the accuracy of your statements.
16. Don't overlook the fact that you are working for a boss.
• Keep him or her informed. Avoid surprises!
• Whatever the boss wants takes top priority.
17. Promises, schedules, and estimates are important instruments in a well-ordered business. You must make promises. Don't lean on the often-used phrase, "I can't estimate it because it depends upon many uncertain factors."
18. Never direct a complaint to the top. A serious offense is to "cc" a person's boss.
19. When dealing with outsiders, remember that you represent the company. Be careful of your commitments.
20. Cultivate the habit of "boiling matters down" to the simplest terms. An elevator speech is the best way.
21. Don't get excited in engineering emergencies. Keep your feet on the ground.
22. Cultivate the habit of making quick, clean-cut decisions.
23. When making decisions, the pros are much easier to deal with than the cons. Your boss wants to see the cons also.
24. Don't ever lose your sense of humor.
25. Have fun at what you do. It will reflect in your work. No one likes a grump except another grump.

BTW, Raytheon will send you your very own copy of Swanson’s Unwritten Rules of Management by US mail (That’s right — Raytheon supports our postal workers) if you fill out their online request form (I guess “The CEO’s Secret Handbook” is about to become a little less secret)

Raytheon : Bill Swanson's Unwritten Rules of Management

July Newsletter - Customer segmentation and the pricing cube

Executive Summary

In certain B2B markets such as construction materials and electrical supplies, customers buy a mix of products from suppliers. Improving the revenue achieved in such situations calls for a slightly different approach, as laid out here.

• Segment your customer base based on customer need
• Understand and measure all the tangible and intangible benefits provided to each customer segment on a ‘average basket or invoice basis’
• Tune your list price structure and discount structures to improve pricing

Introduction

Suppliers of material to industrial and construction customers either supply for projects or for maintenance and repair work. There is a slowdown in manufacturing and in new construction projects (certainly in Europe), and the competition between firms in those industries is very high. Buyers in those industries are changing buying habits. Some are using internet price comparison tools and reverse auctions. Some are using buying agents in different countries to exploit price differences of the same essential supply in different countries. All these issues have affected the average revenue achieved on every deal.

The marketing and sales teams in supplier companies need to develop an integrated deal based and individual customer approach to tackle such issues. This newsletter outlines an approach of how one might go about it.

Customer segmentation

There isn’t something extremely novel here, except that customer research and segmentation should be done not just per country but over entire geographical areas (perhaps even globally). By doing this, you will get an idea of critical buying traits and customer needs across the customers over the entire region.
Use external sources to get qualitative information on

• How other companies supplying to the same industries as you do perform customer segmentation across countries?
• How do they track and measure customer traits etc.
• How do they manage their pricing policies and structures?
• How much of revenue do they share with their channel partners?

Use your internal sources to verify and adapt these methods after comparing them with your own internal processes. This way you can benchmark and evolve your customer segmentation.

Now talk to your sales force in the geographic area to see

• What needs to their customers have in each customer segment from us? Are there any niche customer groups that we can explore?
• How are these needs different among various groups?
• What is the minimum discount that needs to be offered off the current list price

The ‘basket’

A basket can be seen as the most commonly sold set of products. If you were to look at your invoices – preferably in your data warehouse, you’d find that most invoices had more than one product. You could create the basket in several ways

• Take composition of the set of products that appears most often in the invoices
• Calculate the average composition of the set of products that appear in your high value invoices, mid value invoices and low value invoices
• Choose a basket composition that suits your business

Now ask your sales force across all geographic areas: Given three baskets of products – One having a lot of items, one having a less number of items, and one having very few items:

• What would be the itemized price for each of the baskets that they would submit?
• If they were allowed a range of prices, at what prices would they have a 20%, 40%, 60%, 80% and 100% chance of success of closing the sale?

Build a regression model of these responses – the price at which ‘mathematically’ the basket has a 0% chance of being sold, is the value of the basket.

Tuning the list price and discount price structures

Now that you have calculated the value of the basket, you need to find a way of distributing the value across the different products in the basket. You could use any way to do this. One way could be comparison – compare the different baskets to see differences in value ascribed to different product sets. Another way could be similar to that described in the previous newsletter (Linked here) –

• Figure out the demand curve of the product as compared with a competing commodity product. Build a regression model.
• The price at which there is no uptake of the product vis-à-vis the competing commodity product is the perceived value of the product.
• Add that perceived value to the price of the competing commodity product to get the value of the product.

Using information about list price structures in external industries, current list prices, the minimum discount required and sales manager inputs about the itemized prices of products in the different baskets, we can set up a list price structure according to geographic area, type of deal and customer segment.

Now we look at the data warehouse where you have the actual spread in prices of the different products in each invoice – which we can use as a “basket”. We find invoices that resemble our theoretical basket, and use the same “value distribution” method to distribute the price of the invoice. Thus we have a list price of the product and a range of “achieved prices” of the product. Now we use our judgement to set up a discount structure.

Eventually this gives rise to a pricing cube for each type of deal: Each cell of the pricing cube should ideally have its own list price and discount structures, but we could group cells together if necessary.

Here is a graphical representation of the pricing cube


To get a pdf version of this document, please click on this link here.