2010 February | Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing

Archive for February, 2010

Verizon and AT&T

Tuesday, February 23rd, 2010

Verizon and AT&T

Break the bonds of industry pricing!

Get compensated well for the value you provide.

If you want a better understanding of the market share dilemma…

…watch the Verizon and AT&T ads.

For years Verizon has been hammering AT&T with its coverage map, almost with impunity. Finally, AT&T is fighting back. Why the delay? AT&T didn’t understand what market it was serving.

Verizon has been touting the reliability of its phone service over that of AT&T. Indeed, from it’s ads it appears that Verizon created its network with the intent to minimize dropped calls and assure connections in the most remote locations, something that AT&T’s network is not designed to do.

It’s Verizon’s success in its mission, not to mention its reputation for superior customer service, that caused me to wonder why Steve Jobs chose AT&T over Verizon when he introduced the iPhone.

AT&T’s recent ads may be answering, at least in part, that question for me. AT&T’s ads indicate that it built its infrastructure in highly populated areas. That’s how they can claim to reach the vast majority of users, roughly 300 million people with a smaller network. AT&T has also been touting its faster download speeds. That could be what Steve Jobs was looking at – reaching the majority of the users with a network that made his apps programs run faster. Faster speeds encourage greater usage of those apps.

Based on their ads, Verizon and AT&T seem to be pursuing two different strategies. Yet they seem to be viewing market share as if all cellphone/PDA users were equally valuable. Obviously that’s not the case. What can we learn from this example?

It’s counter-intuitive, but understanding what your customers really value can help you avoid competing for customers who don’t value what you offer. This knowledge will save you huge investments in marketing dollars, infrastructure costs, heavy discounts to attract customers who don’t value what you offer and investments in ill-conceived future strategic initiatives.

All of these benefits are available by simply avoiding the market share trap – defining market share by number of customers or percentage of industry revenue dollars. If your organization has fallen into this trap and you’d like to climb back out, but aren’t sure where the ladder is, give me a call at 314-707-3771.

For more information on how you can command higher prices for your products and services, please post your questions or comments below, send Dale an email at dale@furtwengler.com or call him at 314-707-3771.

ATTRACT opportunities instead of pursuing them using counter-intuitive thinking. Visit www.furtwengler.com/theinvaluableleader/.

If you want a better understanding of the market share dilemma…

…watch the Verizon and AT&T ads.

For years Verizon has been hammering AT&T with its coverage map, almost with impunity. Finally, AT&T is fighting back. (more…)

Tags: counter-intuitive pricing, price management, Pricing, pricing for profit, pricing for profitability, pricing management, pricing strategies, pricing strategy
Posted in Branding, Pricing | No Comments »

The Discount Economy

Tuesday, February 16th, 2010

The Discount Economy

…and it’s implications for the future

by Dale Furtwengler

We’ve been in a discount economy for several decades. There are a number of factors contributing to this reality:

Market saturation in developed countries requiring the creation of higher paying jobs in developing countries.

Six Sigma and Lean Manufacturing practices for removing fat from processes.

Walmart’s low-price strategy.

The intent of these efforts is laudable. Creating new jobs, and consequently, new markets in developing countries produces long-term benefits for all of us. Removing waste from inefficient processes improves resource utilization and, typically, creates a healthier economy. Walmart’s low-prices are designed to increase its customers’ buying power. As I said, all laudable goals.

In pursuing these goals, Walmart and companies engaged in Six Sigma and Lean Manufacturing cost-reduction strategies placed a great deal of pressure on their suppliers to lower their prices. During this process we, as a society, became obsessed with low prices. So much so that we’ve lost sight of value. What are the implications of this loss?

We’ve hampered economic growth, not just in the U.S., but in all developed countries. In order to offer lower prices companies have to reduce costs. Since the largest cost for most companies is labor, it means that, in the past decade, salaries have actually declined leaving employees with less discretionary income to spend. The lack of discretionary funds limits economic growth by limiting spending to essentials. In terms of Maslow’s Hierarchy of Needs seen below:

The discount economy is driving ever-increasing numbers of people in developed countries toward the physiological (survival) needs and away from the self-actualization peak we desire.

One side effect of this discount economy is that we’re devaluing education. For a dozen years or so I’ve worked with juniors and seniors in a local high school to help them gain an understanding of how business works. In the past two years I’ve repeatedly been asked “Is it worthwhile to get an MBA?” That doesn’t bode well for the United States’ ability to compete in the future. I can’t help but wonder whether students in other developed countries are asking the same question.

Combine the question of whether there is sufficient ROI on education with declining salaries, less discretionary income and lower profit margins and we are poised to experience:

A paucity of talent.

Lower R&D investments.

Less innovation.

Difficulty in competing globally in the future.

A diminished lifestyle.

I doubt that this is the future any of us wants for ourselves much less for our children. There is a remedy. Companies need to refocus their and their buyers’ attention on value. Specifically they need to:

Quantify the value they’re providing.

Create sales scripts that educate buyers’ on value.

Hold their prices in the face of buyer pressure to lower them.

Avoid the market-share trap.

Develop marketing messages to attract the buyers who value what they offer.

Invest profits in finding new ways to serve the customers who value what they offer.

One of the reasons most of my clients feel trapped by industry pricing is that they don’t know how to quantify value. So the first step in the process is to discover how to do those calculations. Those formulae appear in my book, Pricing for Profit. The second mistake they make is to look at their competitors when determining what pricing is available to them. A better approach is to look at the price premiums that non-competing businesses are getting for their offerings.

The sales scripts that are used by most salespeople talk about a broad array of benefits, each of which is difficult for both the seller and buyer to quantify. In reality there are only three things that any organization sells – image, innovation or time-savings. Once sellers understand what they’re selling it’s much easier to quantify and communicate their value to their customers which helps their customers make better buying decisions.

Holding prices in the face of buyer pressure requires a clear understanding of what your most profitable customers value and the ability to say “No” to buyers who don’t fit that profile. There are simple scripts that allow sellers to exit gracefully from prospects who don’t fit the profile while retaining a good relationship and positive impression with that person – an impression that often translates into quality referrals.

Unfortunately many companies get caught in the “market share” trap – they get so caught up in who has the most customers that they lose sight of who their ideal customers are. This trap causes them to lower prices to increase customer head count. In essence, they’re reducing their revenues from their ideal customers to garner lower revenues and profit margins from customers who don’t really value what they offer and they increase their infrastructure cost to handle the additional volume – nasty one-two punch that we inflict upon ourselves.

Because companies lose sight of their ideal customers, their marketing messages become less effective, their marketing costs rise and their ROI on marketing declines.

Finally, companies invest in expansions that don’t make sense because they can’t identify new ways to serve their existing customer base. We need look no farther than Walmart’s, and now Target’s, entry into the grocery business. Both companies are or have moved into an industry that sports 5% lower gross margins and low to mid single digit operating margins.

Expansion should be designed to enhance profit margins, not cut into them. Companies that have money to invest need to find new and innovative ways to serve their existing ideal customer base. They shouldn’t invest in offerings that don’t add at least as much value as they’re currently offering. That value is evidenced by profit margins.

We have two choices available to us as we move forward in the current recovery. We can wait for the recovery to progress at its naturally slow pace or we can accelerate the recovery through modest price increase and utilization of the higher profits to invest in new and exciting ways to serve our ideal customers while accelerating job creation.

Dale Furtwengler is a professional speaker, internationally-acclaimed author, business consultant and CPA. His latest book, Pricing for Profit, is dedicated to helping organizations break the bonds of industry pricing. For more examples of how pricing impacts the customer experience, visit his Pricing for Profit blog at www.pricingforprofitbook.com.

Dale Furtwengler, by this writing, grants permission to retailcustomerexperience.com to publish this article on its website. He further agrees not to submit this article to competing publications.

How we got here…

…and it’s implications for the future

We’ve been in a discount economy for several decades. There are a number of factors contributing to this reality: (more…)

Tags: counter-intuitive pricing, price management, Pricing, pricing for profit, pricing for profitability, pricing management, pricing strategies, pricing strategy, value pricing, value-based pricing
Posted in Economy, Pricing | No Comments »

Pricing and Economic Recovery

Tuesday, February 9th, 2010

Pricing and Economic Recovery

If you’re serious about accelerating the recovery…

…raise your prices.

Break the bonds of industry pricing!

Get compensated well for the value you provide.

Let’s stop waiting for government officials to get us out of this recession. We can do a more effective job than they can. How? By raising our prices. Before you write me off as a lunatic, let’s take a quick look at the realities.

You’ve already lost the customers who don’t value what you offer.

The customers who do value your offerings are still with you.

Assume that you raise prices by 3%. That’s typically not enough to cause your customers to switch. There are three reasons why they won’t switch besides the fact that they may like you:

Human beings naturally resist change.

Change involves risk – fear of the unknown is one of our greatest fears.

There is additional paperwork associated with changing suppliers.

When we apply that 3% price increase to the 2009 GDP (Gross Domestic Product) of $14.2 trillion dollars here’s what we get:

$427 billion in additional revenues.

$171 billion in tax revenues based on a combined 40% federal and state income tax rate.

$256 billion in profits available for further business investment.

Now let’s assume that enlightened business leaders take half of that $256 billion of profit and hire workers to help them develop new offerings and provide more valuable service to their ideal customers going forward. We can expect 2. 5 million in new jobs from investing $128 billion of $256 billion in additional profits. This calculation assumes a modest $50,000 pay and benefit package.

There’s one more factor to consider – the velocity of money. When the Federal Reserve is trying to figure out how much money to allow into the system they consider the fact that every dollar in the system typically creates $7.00 of revenues throughout the system. So when you hire me to coach you on how to get higher prices, I’ll take that money and buy groceries. The grocery store buys their products from food distributors, who buy them from food producers, who buy seeds, fertilizer and equipment. You get the picture.

While the velocity of money does vary, it typically hovers around 7. Given the pent up demand that the recession created, I think it’s reasonable to assume that we can expect the velocity of money to be 7 in the near future.

With that in mind, the $128 billion invested in hiring people will generate $896 billion in new spending which means new revenues for companies. If we assume that a quarter of that $896 billion ($224 billion) gets invested in hiring, that would add 4.5 million in new jobs assuming the same $50,000 pay and benefit package.

Between the 2.5 million of jobs created with the 3% price increase and 4.5 million of new jobs created through the velocity of money we’d cut our current unemployment in half and generate billions in additional tax revenues instead of adding billions to the deficit in failed attempts to “stimulate” the economy.

It’s counter-intuitive, but a modest price increase can be more effective in accelerating the economy than any government program envisioned.

For more information on how you can command higher prices for your products and services, please post your questions or comments below, send Dale an email @ dale@furtwengler.com or call him at 314-707-3771.

To see how counter-intuitive thinking can be applied to other business issues, visit Dale’s blog, The Invaluable Leader at www.furtwengler.com/theinvaluableleader/.

If you’re serious about accelerating the recovery…

…raise your prices.

Let’s stop waiting for government officials to get us out of this recession. We can do a more effective job than they can. How? (more…)

Annoying Customer Behaviors

Tuesday, February 2nd, 2010

Annoying Customer Behaviors

A thorn in your side…

…or an opportunity for higher prices?

Break the bonds of industry pricing!

Get compensated well for the value you provide.

“Why can’t they just…?” For the umpteenth time a customer has:

Waited to the last minute to order.

Failed to provide specifications on time.

Returned your product.

Refused to pay for services rendered.

Regardless of what they’re doing, your customers are driving you nuts and costing you a lot of money. You can turn those annoying behaviors into gold. Just remember this little tidbit of wisdom – we live in a reciprocal world.

In other words if I treat you well, you’ll treat me well. But if I frustrate you, you’ll find a way to balance the scales. With that in mind, if we list the ways that our customers annoy us, then ask ourselves “What am I doing to contribute to this problem?” And we always do. We’ll discover some simple, inexpensive, easy-to-implement solutions that will eliminate the frustration for both parties. When you do that your customers enjoy a richer, more satisfying experience and you get to charge a premium.

Please don’t tell me that you can’t raise prices because your competitors won’t raise theirs. Most businesses within an industry operate according to industry practices. If the source of frustration is an industry practice, and it often is, your competitors’ customers are experiencing the same frustrations your customers were before you made the change.

Now you not only have the opportunity to raise prices, you have a competitive advantage to offer the market. Repeat this process regularly and you’ll maintain competitive advantages for years to come.

It’s counter-intuitive, but one of the ways to get premium prices is to spend time with your most annoying customers. If that doesn’t sound like very pleasant advice, let’s look at the alternatives. You can continue to live with the pain and suffer low prices as your “reward.” Or you can fire the customer and not only lose those revenues and profits, but the price premiums you could have earned as well.

Having said that, if a customer still isn’t happy after you’ve made changes that have delighted the majority of your customers, by all means refer them to your competitors. Some people you just can’t please.

To see how counter-intuitive thinking can be applied to other business issues, visit Dale’s blog, The Invaluable Leader at www.furtwengler.com/theinvaluableleader/.

A thorn in your side…

…or an opportunity for higher prices?

“Why can’t they just…?” For the umpteenth time a customer has: (more…)