The Art of Raising Prices: Lessons from Amazon Prime

Harvard Business Review:

 

Raising PricesThink about what Amazon has done to convince us how much we will save with Prime. And how even a large price increase seems like a real value.

Read more on pricing from Channel Instincts at “Are You Pricing for Volume or Profit?” and “What Does ‘Your Price Is Too High’ Really Mean?”

Good Selling!

Originally posted on HBR Blog Network - Harvard Business Review:

With the economy on the upswing, most companies are contemplating increasing prices. Managers are rightfully anxious about making this move – it’s a sensitive issue for customers. While no one enjoys paying more, the right series of messaging tactics can tame potential backlash.

Amazon recently hiked the price of its Prime service, which includes two-day shipping, Kindle book loans, and streaming video. Raising Prime’s price is especially risky as it’s a key marketing conduit that draws in and engenders loyalty from customers. Analysts estimate Prime members spend over double compared to the average Amazon patron. With a P/E ratio exceeding 550, Wall Street is expecting Amazon to continue dazzling investors with eye-popping annual revenue increases. As a result, the Seattle-based retailer needs to keep Prime – its key engine for growth – in tune.

Amazon did a solid job of raising the price of Prime from $79 to $99. Given…

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Are You Your Customer’s Biggest Fan?

Are You Your Customers Biggest Fan?Ever buy something that costs less than the thing you really wanted because it looked all right and somebody said it would work just as well?  Then, when it didn’t live up to your expectations, did you tell yourself you’d gotten what you paid for?  We’ve all done it.

Stop selling on product and price!

Yet, people continue to buy based on appearances and price…and to make them comfortable about products that can’t be tried before they’re bought, both makers and sellers issue liberal promises.  Those promises are on the web, in advertising and sales literature.  They are repeated by sales people, and reinforced by warranties.

But, customers sold on unfulfilled promises can be lost forever once they are unsold.  The web and social media give these unhappy customers a megaphone to declare their disappointment, frustration and, occasionally, raw bitterness.

There is a way, however, to beat the price game, still make the sale, and keep the customer satisfied.  The answer is to add value to your product lines.  And, the way to do that is to stand out from the competition.

The real key to unlocking growth with your customers is to align your business with their needs

Key to unlocking growth with your customers is to align your business with their needsTruth is, having the right product at the right price and an acceptable level of service are the cost of entry today.  You have to stop selling product features and specifications.  You need to start selling

  • Service
  • Relationships
  • Customer success

Your customers, like all of us, are bombarded with thousands of messages everyday…family stuff, business, the news of the day, social media, advertising, email, sales promotion, publicity.  The trick is to avoid having your message lost in the daily clutter.  So your customers know who you are, what you have to offer, and that you care when they’re ready to buy.

Looking beyond products

Looking beyond productsIt’s the “care” part that makes you different.  You have to guarantee their satisfaction.  Your sales people must be knowledgeable.  You have to offer the best products available in every price range…best for the money, best for the application, best for builder, best for remodeler and homeowner satisfaction.

You’re an expert at what you do.  That means you need to look up from the day-to-day business long enough to identify market problems and turn them in to advantages.  Do this customer by customer with the goal of being the supplier who is most committed to their success.  Leverage your strengths as the marketplace expert and resource.

Why adding value is good for your business

Good for your businessThe end result?  You will stand out in your customer’s minds.  You will make your competition irrelevant because all they are selling is product.  And if they are using price as their primary sales tool, this strategy makes price less important.

That’s why adding value is good for your business.  Because aligning to customer needs benefits you with…

  • Increased customer loyalty
  • Less price sensitivity
  • Higher sales

And, that helps you stand out in a crowded marketplace, beat the market’s economic swings and pitfalls, and increase sales profitability.

For other posts on value from Channel Instincts, see Are You Ready For A Dog Eat Dog World? and  Are You Delivering Real Value to Your Customers?

Image via Shutterstock

Are You Ready For A Dog Eat Dog World?

Let's talk about competitionWith that in mind, let’s talk about competition. To paraphrase Sara Lee, “Nobody doesn’t have competition.” We do, you do, everybody does.  Do I hear you asking what’s the point?

Simple.  Since having competition is a given, it’s what you do with it that counts.

What do you do with it?  Ignore it?  Hope it will go away?  Bad mouth it?  Or do you learn from it?  Do you make improvements to keep ahead of it?

For many of us, a big part of our current competitive situation boils down to one word.  Price.  There are always small companies cherry-picking chunks of the market with lower prices on selected product knock-offs.  Do they offer anything else?  Uh-uh.  They can’t afford to.  Have they embraced the very important concept of customer support that is key to a successful marketing effort?

The low price competitor is historically short on value

The low price competitor is historically short on value

As we’ve watched price-based competition come and go over the years, we’ve learned that your customers demand more than low price.  They want comprehensive programs that include new product development, technological innovations and easily understood differences.  They also want merchandising support that really helps them sell.  And, of course, they want service…before, during and after the sale.  Moreover, they want it from pros who know their products, their markets and their needs.

It’s impossible to separate price and value

Your customers also know that it’s impossible to offer a comprehensive package loaded with value and always offer the lowest price in the market.  But, they’re not searching for a shortcut to a quick buck.  Like you, they’re in this for the long haul.

Dog Eat Dog World of CompetitionIf this support list describes what you provide to your customers, you should be able to weather just about any competitive storm.  Your customers should recognize that in this industry, it’s impossible to separate price and value.  A successful distributor-based business needs both.

The low price competitor is historically short on value.  And, in this dog eat dog world, value is the thing on which we and you keep our incisors sharp.

For more on value, see the Channel Instincts posts Are You Delivering Real Value to Your Customers? and Are You Your Customer’s Biggest Fan?

Are You Delivering Real Value to Your Customers?

price_is_what_you_pay_value_is_what_you_getMany business experts have hailed the arrival of a changing marketplace, one with a great emphasis on value and even a new value-conscious consumer.  But more than a little debate surrounds the questions of what really constitutes value and whether the so-called value-driven consumer actually exists.

Over the years, some have argued that today’s consumer is no more value driven than Cro-Magnon man was or space colonists are likely to be.  In other words, the erosion of brand equity is nothing more or less than bad marketing.

Does value equal price?

Cost-vs-ValueMuch of today’s ineffective marketing stems from confusion between the words “value” and “price.”  Every consumer purchase can be seen as an equation in which value equals what you get divided by what you pay – and too many people mistakenly use “value” to describe the denominator of the equation rather than the result.  This leads to tactics like price reductions and promotional discounts, “value” strategies that can actually erode a brand’s value.

On the other hand, by building up the “what you get” part of the equation rather than reducing the “what you pay” portion, smart marketers know they can get a stronger response over time.

How does prestige factor in?

Value Driven ConsumersAdmittedly it has become fashionable to consumers to demonstrate smart buying.  Yet prestige remains an important part of the value equation.  In marketing terms, it’s senseless to cut price and quality in order to maintain margins.  Smart marketers maintain prestige imagery as part of their brand equity, while shifting their marketing emphasis to communicate the quality of their brand in more tangible terms.

Economists who think value equals price miss the point.  In many cases, price is a secondary, sometimes limiting factor rather than the essence of value. For example, while builders are notoriously price conscious, this does not keep a high-priced entry-door supplier from being the market leaders.  A builder may actually consider the line low-priced because its decorative glass enhances the look of a home so much that its selling price is boosted far beyond the extra cost of the door.

Who defines quality?

Value-as-shown-in-dictionaryThen there is the manufacturer’s mistake: defining value as quality. Wrong again.  In a nutshell, value to a consumer is the satisfaction of a desire, not quality as defined by the manufacturer.  What manufacturers consider a quality product may be irrelevant to the consumer, nothing but waste and useless expense.  Manufacturers may see this as irrational, but business common sense says there are no irrational consumers; they all behave rationally in terms of their own priorities.

There is nothing esoteric about this concept.  Value merely means different things to different people at different times.

For more posts on value from Channel Instincts, see Are You Ready For A Dog Eat Dog World? and Are You Your Customer’s Biggest Fan?

Photo credit: StuartPilbrow via Flickr

8 Steps to Building a Customer-Focused Commercialization Strategy

8 Steps to a Commercialization StrategyBefore a commercialization plan can be developed and implemented, it must be driven by an overall commercialization strategy.  By taking a strategic approach to your commercialization strategy, you will be better positioned to be successful with your new product launch.

The commercialization strategy should not contain a lot of financial detail or “how to,” but it must be consumer focused and customer centered and not technology focused.  A key issue in a commercialization strategy is to set the direction to explore and understand the market.  The commercialization strategy must focus on what satisfies the needs of the customer.

8 questions you need to answer in your commercialization strategy

1. What’s the Offering? (What are we trying to provide or create?)

Commercialization Strategy TipsAt a high level, clearly state what products and services are being offered to the market.

Identify what other products/services may need to be provided to be a credible supplier to the customer and the channel.  Identify, at a high level the anticipated pricing strategy at the end-user level and for the expected distribution channels.

2. What is the Adjacency Assessment of the product or service? (How does the product or service align with the core business areas?)

Chris Zook in, Beyond the Core, addresses the concept of Adjacency or the relationship of an opportunity to your core business and competencies.  Zook defines several things when looking at an opportunity:

1)    Core – Known business strengths and competencies

2)    Adjacency – Relationship to the Core ranked from 0 (identical to the core) to Diversification (a completely new area).

 3)    Shared Economics – There are five dimensions that when evaluated and measure the distance from the core and can be used to determine the degree of relationship to the core:

    • Customers – Are they the same as, or different from, customers currently served?
    • Competitors – Are they the same as, or different from, competitors currently encountered?
    • Cost Structure – Is the cost structure (infrastructure) the same or different?
    • Channels of distribution –Are these the same or different?
    • Singular capability/technology – If there is a singular capability (brand, asset, technology) that gives the core business its uniqueness, then is this relevant in the new opportunity?

3. Who is (are) the Targeted Customer(s)? (Who do we really think will want the product/service and Why?)

Identify who is (are) the targeted customer(s) – end-user, big box retailer, distributor, internal business unit, etc.  Who are we trying to sell this product or service?  Keep in mind that the targeted customer(s) may change as more marketing and Voice of the Customer data is collected.

Why is this customer believed to be the real customer?  It is toward this customer that the Business Proposition will be initially oriented.  It is toward this customer that the Business Plan will be structured.

4. State the “Business Proposition”

Strategy and Marketing traffic sign in the handThe business proposition describes what the product or service offers that no other product can.

It is important that the Business Proposition be benefit focused. For example, Coke quenches thirst.  Coke is also a good rust remover but it will NEVER advertised as such.

The Business Proposition should take caution not to over advertise advantages – in other words, DON’T clutter the message. The more focused the message, the more likely to clearly communicate it.

Have a single Value Proposition – Keep It Simple – the KISS principle.

When developing a business proposition think of what people are buying.

Customers are not buying a product – they are buying what that product does for them.  Customers don’t typically buy a product because they fall in love with the technology.  Customers buy the SATISFACTION OF NEEDS.  The Business Proposition MUST clearly state how that need will be satisfied.

Doug Hall, in his book, Jump Start Your Business Brain, addresses three key elements to Stating Value:

1) Overt Benefit to the Customer – What is the real benefit to be realized? Engineers love to talk specifications – “This car will go from zero to 60 in 3.2 seconds.”  Buyers want to feel the wind in their hair and the thrill of feeling the force of their heads being pushed against the back of the seat.

2) Dynamic Difference – What makes our product/service any different that what is now available?  Unless this product is for a total new and untapped market, customers have choices.

3) Real Reason to Believe – What gives the customer confidence that we can deliver the product or service we are offering?  For example, “We have had Z years of 100% customer satisfaction as measured by JD Powers.”

5. State the “VALUE CHAIN”

Sales leadership stepsThe Value Chain relates to the business processes of the company selling the product.

Questions to be answered are:

  • Who will sell the product?  Whoever has sales responsibility must be aligned with the Value Proposition – they must care that the product/service really does meet the customer’s real need.
  • Where will the product be sold?  This may need to be clarified in later, but initially, choose the logical area(s) that fits in with your Value Proposition.
  • How do you distribute your product? What is (are) the expected distribution channel(s)?

The Value Chain and Business Processes must be aligned as close as possible to the Value Proposition.  The closer the alignment, the greater the probability of success.

6. How will the product/service be Marketed?

Brand idea chartAt a high level, what is the basic marketing approach? Consider the following:

  • Who will provide the marketing activities?
  • Who internally will oversee that the marketing activities are done correctly?
  • Identify logical points to test assumptions, validate alignment with the Value Chain and/or Business Proposition, and logical changes/adjustments to the marketing approach, the Value Chain, or the Business Proposition.
  • What is the overall Communication Strategy for getting the message out to potential customers?

7. Provide a rough-order-of-magnitude Business Plan

Given the information available, give a high-level assessment of the business potential for the three years after commercial launch.  Try to be realistic, meaning not overly optimistic nor overly conservative.

Items to consider are:

  • Sales
  • Gross Margin and Gross Margin as a percent of Sales
  • Operating Income and Operating Income as a percent of Sales
  • CAPEX
  • RONA

8. Major Commercialization Risks/Issues/Obstacles/Support Requirements?

What significant commercialization items can keep this effort from being successful? What support is needed from management, gatekeepers, resource managers, etc.

Write out what the risks are and rate them High, Medium or Low.  Put a few ideas down on how you can mitigate these risk.

Don’t use a Ready, Fire, Aim commercialization strategy

readyfireaimTo maximize your chances for success, you need to be thoughtful in developing the strategies behind your new products.  Innovations can happen in the commercialization of a product as easily as in the product itself.  Think about all the ways you can build upon and leverage your commercialization strategy and you might find your sales teams more engaged in the product launch, your customers understanding what’s in it for them, and ultimately your new product goals being achieved.

A special thanks to Lowell Dye for his help in better understanding the product development process and in writing this post.

Is Pricing Making You Go Bananas?

bananasLet’s face it.  The CFO is always the first to suggest raising prices.  And we in sales and marketing aren’t always willing to stand up and salute.  We really want any other solution besides a price increase.  What we really want is:

  • New products
  • New promotions
  • New packaging
  • New services
  • New advertising
  • New news of any sort

Almost anything new beats the pants off asking for a new, higher price

But when business is off and capacity underutilized, commodity costs always seem to pick that moment to rise as well.  The CFO was right, it was time to raise prices and execution was absolutely critical.

That means the first one that need to be convinced is the sales and marketing team.  Without their full support, the customers won’t be swayed and the situation will get worse, not better.

What do you need to support a price increase?

Ideally, you have these tools to support your price increase message:

  • A letter from the CEO (or other senior exec) announcing the increase with:
    • The amount of the increase
    • What products are affected
    • The timing of the increase
  • Charts showing rising commodities over time
  • Proof that you have done your best offsetting the cost increases internally
  • A new printed price list
  • Any customer-specific special net pricing
  • Any changes to policies
  • Other support that helps make your case (maybe a competitor’s price increase letter)

Winning the confidence of the sales team is critical to execution

Engaged sales teamHaving the right tools to inform and educate the customer is critical but do you take the time to inform and educate the sales team?

Taking the time to enroll the sales team is a critical step to successful pricing execution.

Owens Corning undertook one of the best examples of this enrollment back in the 1990’s when their asphalt roofing business desperately needed a price increase.  As it turned out, the business needed a price increase that basically worked out to a one cent price increase per pound of shingles.  (It should be noted that this was not a common measure of how shingles were priced.)

The leadership team made the price increase goal come alive and seem achievable

banana2What was special about the one cent number is how small it seemed to the sales team.

The Owens Corning team kept up the math game and worked out what the average cost per pound shingles worked out to be.  At the time it was roughly the price of a pound of bananas.

An analogy was born.  Bananas came in only three colors: green, yellow and brown.  Shingles came in over 30 colors yet were the same price.

At a national sales meeting, the banana case was made.  After a presentation featuring a roof illustrated with bunches of bananas, the sales team took a morning break to find tables set outside the meeting room filled with bananas (some even were stickered with the OC logo).

Creating a rallying cry helps create engagement

After the sales meeting, the division president reinforced the urgency of his price increase message with a letter to each sales person.  Included with his note was a t-shirt with a banana on it (complete with the company logo).

Bananas quickly showed up on presentations, buttons and pins to show solidarity with the critical mission of achieving a one cent per pound price increase.

The roofing product manager demonstrated that adding value changes the underlying pricing assumption.  In this case, he showed the price per pound of a banana is far, far less than the price per pound of banana bread or banana cream pie.

Keep the team informed on execution success

chart-up-increaseThe team worked hard to execute the price increase.  The one cent per pound was never fully realized although they were able to achieve about half the goal.

The leadership team posted a chart that was used to visibly track progress at the headquarter location and was broadly shared with the remote sales teams.  Progress was celebrated even though the full goal was never achieved.

Which goes to show that even in a tough environment, a motivated sales team can rally around the need for a tough-to-deliver price increase.  Management can make the goals seem highly achievable and create a rallying point that can help the entire team understand the urgency and critical need for the price increase.

For other Channel Instincts posts on pricing, see What Does “Your Price is Too High” Really Mean? or Are You Pricing for Volume or Profit?

Good selling!

Are You Pricing for Volume or Profit?

imagesCAMM6VP4Your costs are rising and your margins are declining.  Worse, your retail partners are demanding greater margins and it’s a scorecard measure.  You need a price increase but you run the risk of triggering a line review or losing placement.

Let’s start with a basic premise: our job in Sales and Marketing is not to merely generate volume but rather to generate gross margin.  How then can we overcome pricing issues?

Profitability without growth will only serve to create an environment with no opportunity.  Growth without profitability only serves to create a poor performing large company.  Profitability without growth will only serve to create an environment with no opportunity.  Understanding the balance between volume and price is your job!

Survey after survey of retailers, dealers, distributors, contractors and homeowners shows that price is rarely the key driver in the decision process.  In fact, it is usually 4th or 5th.

When you buy a shirt or blouse, what factors do you consider?

  • Is price the key?
  • or style, color, fit, brand, or image?

How many of you buy clothes or anything else based on price as the #1 criteria?

Let’s take another example: a motorcycle helmet.  Is price the deciding factor? Who buys the cheapest motorcycle helmet?

Business is a Game of Margin – Not Volume!

Business is a gameToo many companies believe that volume and market share are the secrets to business success.  Yet regularly billion dollar corporations file for bankruptcy in the U.S.  When financial trouble comes, companies “cut price” in an effort to drive top line sales.

Remember, it is the buyer’s job to discount your value, while simultaneously securing it.

Your goal: Implement a pricing plan that provides leadership to the industry and communicates your desire to . . .

  1. Stabilize the market
  2. Capture your value
  3. Incentivize your customers to trade up
  4. Earn a reasonable return

To maximize your pricing and profitability you must:

  • Take a leadership role
  • Understand what price is
  • Sell your value
  • Recognize that being competitive is more than just price

It starts with pricing leadership.  You must take a leadership role…

  • Price leaders generally have brand preference.
  • Price leaders generally have the largest and strongest distribution system.
  • Price leaders generally have a technological advantage or leadership that customers generally want to be associated with.
  • Price leaders generally have scale.
  • Price leaders generally have created either real or perceived value for their goods and/or services.
  • Price leaders have a competitive cost position.

Finally and most importantly,

  • Price leaders have the courage to lead.

The ultimate goal in managing price competition is to create a stable competitive environment where you can earn the best possible sustainable return on investment.

The forgotten elements of price

trade-show-specialsMost everyone thinks of the invoice price and terms.  But these are the forgotten values of price:

  • Growth rebates
  • Promotional allowances
  • Show specials
  • “Buys”
  • Advertising allowances
  • Co-op plans
  • Pallet configurations
  • Terms
  • Price protection
  • Builder rebates
  • Contractor rebates
  • Parade of Home/Model Home allowances
  • Pick-up allowances
  • Guaranteed service cycles
  • Merchandising allowances
  • Service
  • Packaging
  • Customer accommodations
  • And more that are unique to your industry

Each of these elements makes up your pricing – and your value – to the buyer.  Don’t forget them when negotiating and remember they all are eating away at your account profitability.

Sell your real value

Your real value to your customer is the incremental advantage they get from doing business with you.  This list is generic, but you can use it to start building your own:

  • Deep customer relationships
  • Intimate customer knowledge
  • Shopper Knowledge
  • Broad product lines
  • Facilities nationwide to provide service and consistency
  • Technology and innovation
  • Outstanding quality
  • Packaging leadership
  • Brand awareness
  • Retail expertise
  • Merchandising and promotional ability
  • Lead generation
  • Customer service support
  • Web-based dealer portals
  • EDI
  • Industry integrity and financial clout
  • Multi-product accessibility
  • Accessibility to senior management
  • Online consumer education and support
  • And others unique to your company and position

You should already have an idea based on the market.  YOU own the process.  Homework is critical, so ask a lot of questions…starting with what do we get for making the price move?  That’s the biggest question of all!

Being competitive is more than just price

"What's the price?"Another key question is to ask what’s the competitive situation?  Don’t just shout “we’re not competitive! to the product manager or your sales manager.  Being competitive is more than just price.  Competitiveness is in the eyes of the beholder!

  • What’s the customer’s commitment to us — 25% or 100%
  • What’s the overall volume compared to other customers in the market?
  • What’s the competitive price on “like” product?
  • Who’s the competitive manufacturer?
  • Who is the distributor involved who quoted the price?
  • Is this the price on the invoice?
  • Is freight included?
  • What’s the price after all rebates, discounts, etc.?
  • Is this one time only?  For a job?  What’s the duration of the quote?
  • How does the competitor go to market?  Do they have brand identity, service programs, marketing support etc.  What does the customer like about the competition?
  • How will the competitor respond if we make a price move?
  • Will the competitor respond by taking our new price offer to accounts we do not have positioned at this price – in other words, lateralize the offer?
  • What other of our customers will be affected by this lower price?

What added value can you offer?

  • What else can we bring to the party other than price?
  • How can we help grow the customer’s sales?
  • How can we lower their cost?
  • Can we use any of our unique capabilities to keep from cutting the price?

Marketing is all about 4 P’s, one of which is Price

Make sure you spend as much time understanding pricing as any other one of the P’s.  Pricing deserves respect, attention and creativity.  You will be rewarded with greater profitability and be more competitive in the marketplace as a result.

For other Channel Instincts posts on pricing, see What Does “Your Price Is Too High” Really Mean? or Is Pricing Making You Go Bananas?  

For a Channel Instincts post on expanding the 4 P’s of marketing to 13 P’s, see The 4 P’s of Marketing Aren’t Enough Anymore!