Heading to the Professional Pricing Society conference in Miami

I'm about to head to the airport for the big fall pricing conference-- the Professional Pricing Society conference in Miami. Mimiran will be in booth #1. If you're going to be there, stop by and say hello, exchange pricing stories, take some chip shots, and register to win a $300 Amazon.com gift card. I'm mostly confined to our booth, so I miss the speakers, but there's always lots of good pricing discussion. Especially during happy hour. Hope to see a lot of you there, although I know the economic situation means that many regulars will not be making the trip this time.

Sometimes it's about deciding who your customers aren't

On a recent Apple earnings call, CEO Steve Jobs took a question from an analyst wondering why

Apple did not introduce a lower priced laptop. Jobs' response (thanks to CNet):
What we want to do is deliver an increasing level of value to these customers, but there are some customers which we choose not to serve. We don't know how to make a $500 computer that's not a piece of junk; our DNA will not let us do that. We've seen great success by focusing on certain segments of the market and not trying to be everything to everybody, and you can expect us to stick with that winning strategy.

You can always expand your market by going after "adjacent" segments. But sometimes that expansion causes you to lose focus on the value differentiators in your core market. Dell suffered a similar fate when it finally moved into low priced PCs. For years, Dell basically sold great (high-end) PCs at a reasonable price. When it started selling reasonable PCs at great prices, it had to cut costs and lost a lot of the product and service quality that had made Dell so popular in the first place.

From a pricing perspective, the question is not "can we grow our volume?", or "can we grow our revenue?" or even "can we grow our profit?" by entering new markets. It's "can we grow the value we deliver to customers and the value we can capture?"

3 Approaches to Pricing in the Downturn

The economy is in turmoil, credit markets are in terrible shape, inflation is high, and consumer confidence is low. If you just received billions of dollars in taxpayer money as a reward for your part in wrecking the world financial system, you may be partying at a 5-star resort. If not, you have some tough choices ahead. Good pricing strategy and solid execution are more important than ever, since small changes in prices will mean the difference between profit and loss. Businesses have three main choices for how to price in the downturn, each with advantages and drawbacks. Knowing which strategy you will pursue will remove a lot of uncertainty from your tasks and allow you to focus on executing successfully.

The first option is to maintain a hard line on pricing to protect margins.
Many companies' prices have still not caught up with recent run-ups in input costs. Buyers are used to inflation and conditioned to expect price increases. One of our clients in a hard-hit sector of the economy nervously floated the idea of price increases to key partners. The response was: "We were wondering when you were going to do that. What took you so long?"

This approach works well for specialized markets where customers have little ability to substitute alternative products, such as oil field services, if everyone in the industry is willing to hold the line on prices. A defection by one vendor can trigger a collapse in prices without changing market share.

Even with a potential loss in volume, this strategy may yield the highest profit.

Action items:

• Define break even volume change.
• Identify potential cost savings if the business can shed low profit customers.
• Define a contingency plan so that if volume falls faster than expected, the business can make a measured adjustment, rather than panicking.

The second option is to be aggressive on pricing to protect volume and market share.
Companies with large fixed costs in factories and labor may find this approach most appealing.
This works well if you have structural cost advantages. However, note that if you cut your prices, competitors may follow suit, transferring profit from producers to buyers without significantly changing market share.

Action Items:

• Identify markets where you have a structural cost advantage or where competitors lack the production or distribution capacity to fully supply the market.
  
• Unbundle what you can to drive down costs.
  

The third option is to take a hybrid approach: maintain high prices in some areas and lower prices in others, depending on the profit trade-offs. Managing this level of complexity requires the appropriate tools to crunch massive amounts of data, automate pieces of the puzzle and flag others for human intervention. This approach also requires the organizational sophistication to handle product and customer portfolios with a range of pricing strategies. If you can pull it off, this approach provides the best of both worlds.

Action items:

• Identify products with large spreads of price points, indicating opportunities for more disciplined pricing and/or unbundling.
• Eliminate "out-of-sight, out-of-mind" discounts in shipping, payment terms, services, samples and other areas not subject to review.

Regardless of the approach you take, there are a few more action items you should take:

• Now is a good time to check your organizational incentives. Make sure the sales team and others get paid to execute the strategy, not to countermand it.
• Monitor customer compliance on earned discounts. Clearly communicate and enforce the consequences of not living up to commitments on purchase volumes, payment terms, or other clauses where you have traded money in return for something else.
• Clearly define the differential value you offer. Internally, this will help you set the right prices points (premium pricing when you have strong differentiators, value pricing when you offer value parity or even a small value deficit, appropriate discounting to adjust for different market conditions).

If you're not getting a multi-billion dollar bailout, now is the time to get your pricing house in order.

What good is a price if you can't invoice it?

About a decade ago, at the height of the dot-com boom, I was doing some work for a tech industry heavyweight that sold some of the most sophisticated technology on the planet. Unfortunately, despite their technological prowess, they had trouble figuring out how to calculate prices for their customers, and how to bill customers appropriately. Nevermind whether the prices were optimal.

Fast forward to today. We recently used an online service to help us complete a project for a client. The vendor was very web-savvy, with a solid website, online contracts, and glossy brochures. We asked for some work, they gave us a quote, did the work, and sent us a bill. Then, we did what every vendor hopes their clients do. We asked them to do more work. We asked them to resend the updated bill, because we couldn't seem to find it. We got an apologetic note saying they were having trouble generating the new bill, but that someone in finance was working on it. A couple days later, another apologetic note, just asking us to pay the initial bill. (In fact, the work they had done to attempt to redo the bill probably wiped out the profit they would have earned even if they had sent us an updated bill.)

At the end of the day, pricing is not just about what marketing thinks is the optimal price, or even what the sales team negotiates. It's about what you actually get from your customers. And with the credit crunch, when you get it will be more important than ever.