Defining Costs
They didn’t define their costs well.  They had included production costs in the operating expense category, consequently when they added the traditional industry profit margin to their production costs their prices were too low to cover their costs.

Lest you think this an aberration, I’ve worked with hundreds of companies over the years and most don’t know what their costs are.  Why?  There are a variety of reasons, some:

• Don’t have a clear understanding of how to categorize costs.
• Allocate overhead costs to production using subjective, irrelevant bases for the allocation.
• Use standard costs which typically include ‘cushions’ to protect the production group from being criticized for cost overruns.

Indeed, one VP of production had included a 60% cushion in his standard costs and no one in finance knew it.

Costing Myth
As if those weren’t enough reasons, Eliyahu Goldratt in his famous book, The Goal, shows that traditional cost accounting drives up operating costs rather than reducing them.  His book, It’s Not Luck, demonstrated that the same is true for service organizations.

Finally, and most importantly, production costs have nothing to do with the value to the consumer.  That’s true whether you’re selling B2B or B2C.  Allow me to illustrate this point.

Cost/Value Not Related
Let’s say that I’m a milk producer.  I buy milk from farmers, process it and distribute it through grocery stores.  Let’s assume that it costs me $1.12 to produce a gallon of milk.  Now, let’s look at the various markets available to me as a milk producer.

Young families will typically place great value on milk because it’s essential for the child’s development.  The elderly also have a health issue, osteoporosis, that adds value to milk for them.

Many adults, whose children are grown and aren’t yet concerned about osteoporosis, value milk only if they enjoy it’s taste.  For the others in this group, milk has little, if any, value.

For people who are lactose intolerant, milk has no value.  Indeed, it’s a health risk for them.
As you can see, the fact that it costs me $1.12 to produce a gallon of milk has no relationship to the value customers place on it.

Hopefully this simple example, along with the challenges in defining costs outlined above, will be enough to dissuade you from cost plus pricing.

If you’d like to increase your prices, profits and customer base, call Dale at 314-707-3771.

The Dangers of Cost+ Pricing is a post from: Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing | private equity |

• Updating its stores
• Focusing on brands that ‘can’t be found elsewhere’
• Reducing it’s prices by 40% or more on all merchandise

These are bold moves, will they succeed?

The simple answer is a resounding “Yes!”  Here’s why:

First, Mr. Johnson’s plan involves rebranding the store to meet its customers’ expectations.  This isn’t just a price ploy.  Both the stores themselves and the brands they carry will create a clearer brand image and distinguish JCP from other retailers.

Second, JCPenney is going to stop the madness of offering frequent ‘discounts’ to get buyers in the doors.  We can but imagine the millions, if not hundreds of millions of dollars, spent designing, printing, mailing and tracking the various ‘sales’ that JCP used to train their customers to focus on price.  Under the new plan, the price is intended to reflect the value that customers perceive.

Third, JCP will be simplifying their customers lives.  When the need arises, customers will simply stop by the store and pick it up instead of waiting for the inevitable sale.  This new strategy also allows customers to ascertain quickly whether or not an item they’re considering is worth the price.  Customers will feel that it’s easier to make an informed decision about value.

Finally, the dissatisfaction, that customers experience from having missed a ‘sale’ or having bought too early only to find greater discounts later, go away.  In a world as complex as the one in which we live today, I can’t help but think that JCP will be rewarded for making our lives easier.

Kudos to Mr. Johnson and his team for a well-reasoned approach to retailing.  It’s one that I hope more retailers, indeed more businesses, adopt.

Don’t feel trapped by industry pricing, call Dale at 314-707-3771, and see how you, too, can get compensated well for the value you provide.

JCPenney: A New Retail Trend? is a post from: Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing | private equity |

Does this news fly in the face of my September 19, 2011 post Higher Prices = Lost Customers? in which I cited business owners whose price increases resulted in growth in their customer bases?

I don’t think it does.  Price is an easy scapegoat.  Here are some other possible explanations:

These companies could have:

• Accelerated sales into a previous quarter through discounts.
• Cut back on their marketing during that time period.
• Experienced a new entrant to the market.
• Failed to pass along all their cost increases in their pricing.
• Disappointed distributors in an earlier quarter and experienced the backlash in the fourth quarter.
• Experienced a typical seasonal downturn.
• Invested heavily in marketing for the benefit of future quarters.
• Experienced unfavorable currency translation charges.
• Had a lapse in quality in the products.

Any and all of these are possible explanations for the declining profits in the face of rising prices.

My reason for pointing this out is that these headlines affirm a myth that raising prices results in lost customers.  That simply isn’t true.  Don’t take my word for it, look at the success Panera Bread, Starbuck’s and Chipotle experienced while raising prices throughout the worst economy in seven decades.

Price increases are an easy scapegoat for declining profits.  Don’t fall into that trap.  Use the list above to explore the real reasons why you’re experience declining profits despite rising prices.

If you’d like to increase your prices, profits and customer base, call Dale at 314-707-3771.

Prices Up, Profits Down? is a post from: Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing | private equity |

Charles Bankhead’s article, Economics at Heart of Drug Shortages, in MedPage Today quoted two other industry experts.  Here’s what they said “The main cause of drug shortages is economic,” wrote Mandy L. Gatesman, PharmD, of Virginia Commonwealth University in Richmond, and Thomas J. Smith, MD, of Johns Hopkins. “If manufacturers don’t make enough profit, they won’t make generic drugs.”

This is a classic example of where the race to ‘free’ is taking us.  When sellers focus their customers’ attention on price and customers respond by pressuring sellers for lower and lower prices, you end up with shortages like those outlined above.

Unfortunately that’s a mild precursor of what’s to come.  In today’s global economy and easy access to anything you want online, we’re going to find opportunists who will fill the gap.  These folks aren’t going to care about health and safety.  Nor do they care about the regulations that exist to protect your health.

Their production processes won’t be as sterile as those of the manufacturers we’ve come to know and trust.  They’re also more likely to use some variation of the primary component of the drug you’ve been taking.  Fillers, which add nothing to the effectiveness of the drug, will become a more significant component of the drug to keep costs down.

This is just one example of the world we’re creating for ourselves.   As sellers we have to take the lead and retrain customers to appreciate the value we provide.  Better yet we need to quantify that value for them so that they can see what a bargain our offerings are, even at premium prices.

We, as sellers, also need to say ‘No‘ to customers who demand lower prices.  That’s what the generic drug companies are doing now.  Too bad they didn’t make that tack before it reached this stage.

As consumers, we need to be aware of the risks of low prices.  Not just in regards to our safety, as in the case of drugs, but in terms of the enjoyment our purchases should afford us.

If we continue this race to ‘free’ we’re going to create misery for ourselves and others and we’ll have no one to blame but ourselves.

If you’d like to increase your prices, profits and customer base, call Dale at 314-707-3771.

Low Prices and Drug Shortages is a post from: Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing | private equity |

That means that Kraft’s revenues grew a whopping 64% more than the price increase.  For many business leaders that seems impossible.  After all, conventional wisdom says that buyers tend to find alternatives when prices go up, right?  In reality customers have greater confidence in a product or service when its price reflects the value they’ll receive.

What does this mean for you?  That you, too, can enjoy the results Kraft experienced.  Here are the keys:

• A reputation for quality.
• Knowing who values that quality.
• Pricing that reflects that value.

Let’s continue with the Kraft example to see how these apply.

Reputation
Kraft has a reputation for quality that’s span more than a century.  The good news is that you don’t have to be around that long to develop a reputation for quality.  But consistent delivery of quality, however you and your customers define it, is essential to having revenues grow faster than your price increases.

Knowing Your Customer
Kraft knows that its customers have discerning tastes and are willing to pay a premium to get that taste.  Their customers also value consistency in the product.  In addition, their customers have an intuitive sense that Kraft has their best interests at heart – that Kraft wouldn’t take risks in the manufacturing of their products that might cause the consumer problems.

Pricing
Kraft’s premium pricing adds further assurance of the quality, consistency and concern for their customers.  Higher prices affirm customers’ beliefs and attracts even more buyers to Kraft’s products.  That’s how Kraft can enjoy 11.5% revenue growth with a 7% price increase.

As you can see, there’s nothing magical about what Kraft has done.  This approach will work for any business, of any size, in any industry.  It’s up to you to employ these keys so that you, too, can enjoy the success Kraft has.

If you’d like to increase your prices, profits and your customer base, call Dale at 314-707-3771.

Revenue Grows > Price Increases is a post from: Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing | private equity |

You’d tell me to take a flying leap off the highest cliff.  And rightfully so.  Yet literally thousands of very successful businesses do this voluntarily every day.

What am I talking about?  Rewards programs.

Let’s see if this sounds familiar.  You have some very loyal customers and you want to reward them for their loyalty.  You decide to offer a discount in the form of a rewards program.  The more frequently they do business with you the higher the reward.  Everybody wins, right?

The consumer yes.  You, not so much so.  Here’s what really happens.  You don’t have to trust me on this you’re a consumer.  As a consumer:

• You appreciate the fact that your business is appreciated.
• You even make it a point to go an extra time or two to that business to show your appreciation.
• Then you find that there are only so many times that you can use those products/services.
• You fall back into your traditional buying habits.
• You wonder if the portions are smaller or the quality isn’t quite as good as it was prior to the rewards program.
• If the portions/quality haven’t changed, you wonder whether they were gouging you before.

The result is that customers will avail themselves of your rewards program, but they’re not buying any more than they had historically.  So you’ve added the cost of the rewards tracking system and the additional time your employees spend dealing with it, yet you’re not gaining enough sales to offset the discounts you’re offering.  Ouch!

By the way, your customers eventually resent having to lug all those rewards cards around so they either:

• Leave them behind forcing your employees to spend time locating and updating their accounts.
• Slow the checkout process i.e. slowing sales.
• Waste customer’s time declining something they didn’t want in the first place.
• Find the whole program so annoying that they go elsewhere.
• Pay full price and ignore the program (not a bad result except for the investment you made in the program.)

It’s counter-intuitive, but rewards programs lend credence to the old adage “The path to hell is paved with good intentions.”  These programs are established with the best of intentions, but, as you can see, produce little good for either you or your customers.

If you truly want to reward your customers, continue to WOW them with the things that bring them back in the first place.  That’s a true rewards program.

If you want to be the Nordstrom of your industry or if you find yourself thinking “I’m tired of working my tail off without making any money,” call Dale at 314-707-3771.

What If I Insisted… is a post from: Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing | private equity |

Marketing’s role
In many companies, marketing’s role is to:

• Get the word out.
• Create a buzz for your offerings.
• Create front of mind awareness.
• Attract new customers.

Yet a simple review of profitability by customer shows great disparities in profitability.  The same is true for the various products/services the company offers.  Indeed, often the greatest investment in marketing dollars and production capacity are often in the least profitable lines the company has.  These realities beg the following questions:

• Are our marketing messages targeting the right customers?
• Are we touting the right offerings?
• If so, how is it that we end up with so many low-margin customers and offerings?

Market research is another of marketing’s roles.  Product innovations and improvements are often supported by, if not initiated trough research done by the marketing group.  Should this be, as one sales director said, marketing’s province exclusively?  We’ll take up that question a little later.  For now, let’s look at the sales role.

Sales’ role  
Simplistically, to generate sales.  Unfortunately, too many companies operate from this very view.  When asked, the sales force can rarely tell you:

• Who their ideal customer is.
• What it is that those customers value.
• What that value is in dollars and cents.

To make matters worse, sales force compensation and quotas encourage salespeople to pursue anyone who’ll listen and do anything that they need to do to make the sale.  This is true whether marketing is targeting the right markets or not, whether it’s touting the most profitable products or not.

How do we stop this madness?  Here are some thoughts.

Cross pollination
At least quarterly, marketing and sales should meet to discuss the profitability by customer and product line/service category.  A caveat here – often the finance group calculates profits in ways that make it easy for them to report financial results under external reporting requirements.  Make sure that the numbers you, as marketing and sales people, are comfortable that the profit numbers reflect the economics of the various markets you serve.

In this meeting you should be discussing:

• Why are some customers paying more than others for your offerings?
• What is it that they see that other customers don’t?
• Are our marketing messages designed to attract more of these customers?
• How can this information help our salespeople focus their efforts toward this market?
• How can we make our marketing messages and sales scripts more congruent to increase the likelihood of sales in this market?
• What opportunities are we seeing in the market for innovation or product improvement?
• Are these opportunities something that buyers are willing to pay extra to get or are they simply nice to have?
• Which of our offerings are languishing?
• Should we invigorate them or abandon them?

Unfortunately in many companies, the marketing folks aren’t privy to profitability information.  They are simply tasked with getting the message out.  The market research they do, if any, is often based on their and leadership’s perceptions of what the customer values.  If you doubt that this really goes on in corporate America, allow me to share this quick example with you.

I was presenting to a group of CEOs with companies ranging from $80 million to $100 million in revenues.  I had just made the statement that many companies don’t really know what their customers value when one of the CEOs said “Our customers say that they love what we do.  I say ‘Thank you.’  What you’re telling me is that I should be asking why.”  Yes, that’s what I was telling him.

If the CEOs aren’t asking the question, what’s the likelihood that the marketing folks have the information they need to launch an effective marketing campaign.

Beside, why should market research be the exclusive domain of marketing as the sales director I mentioned earlier suggested?

Salespeople should have a stronger rapport with the customer than the marketing folks.  They also have access to the shop floor to see first hand how the products are being used and what modifications might have been made to accommodate that customer’s production process.

These observations can be extremely valuable in finding new uses and new markets for your offerings as well as ideas for improving your offerings in ways the customer values.

The rapport that salespeople develop with their customers allows for more candid exchanges than might be had with the less-familiar marketing person.  Don’t trust me on this, ask yourself the following questions:

• Aren’t you more likely to tell a salesperson you like what his/her company needs to do to be successful?
• Aren’t you more likely to share trends you see in your customers’ preferences?
• Aren’t you more likely to let them know when one of his/her competitor’s is about to come out with something value?

Of course, you are; you value the relationship as much as they do.

In this meeting salespeople can relate:

• Language that opens doors for them.
• Language they’re using that helps close the sale.
• The complaints they get.
• The kudos they receive.

All of these can help shape the messages your marketing folks create, messages that you know will resonate with your most profitable markets.  With marketing and sales both targeting the same, highly-profitable markets, you’ll generate higher revenues, more quickly and at premium prices.  How’s that for a peace treaty?

If you’d like to increase your prices, profits and customer base, call Dale at 314-707-3771.

Waging War: Marketing vs. Sales? is a post from: Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing | private equity |

Imagine for a moment that you’d spent your valuable time clipping coupons for things you’d normally buy.  You keep them with you at all times so that when you’re ready to buy, you have the coupon with you.  You’re in the store selecting an item for which you have a coupon.  You begin flipping through the coupons, find the one for the item you’re purchasing only to find that it’s expired.  Ahhhhh!  It’s precisely this sequence of events that triggered the outcry.

As sellers, we’re making purchasing our offerings more difficult when we offer coupons as evidenced by the aforementioned sequence.  On top of that we’re increasing the likelihood of customer dissatisfaction.  When our customers really need what we have to offer and they’re in possession of an expired coupon, they feel like they’re overpaying.  The ultimate insanity, though, lies in the fact that we’re foregoing revenues and profits to make our customers’ live miserable.

Sellers who utilize coupons as part of their marketing/pricing strategy point to the high level of coupon usage.  Indeed, roughly 76% of consumers report using coupons ‘regularly.’  For more information on this see my blog post, Coupons: Another Perspective? (link at end of post).

Why is coupon usage so high when the experience itself can be so frustrating?  Consumers:

• Will take advantage of a deal when it’s offered.
• Don’t really track the time they spend clipping, sorting and updating their coupon ‘files.’
• Don’t calculate the return on investment on their time.

The fact that customers ‘regularly’ use coupons doesn’t alter the fact that you’re making your customers work harder to purchase your products/services.  If you really don’t believe that your offering is worth the price you’re asking, lower it to the levels that a consumer would pay with the coupon.

If, however, you know that your offering is worth the price, demonstrate that value by leaving your price alone and stop offering coupons.  You make your customers lives easier, avoid the dissatisfaction they experience when they’re holding an expired coupon and you enjoy higher revenues and profits.

Still not convinced?  Then answer this question, which of the following would you rather have your customers telling their friends?

• I really like (your offering), but it’s expensive so I wait for a coupon.
• I buy (your offering).  It’s a little higher, but it’s worth it.’

Which of the above statements are more likely to generate new customers for you?  The latter, because it’s an overwhelming endorsement of the quality of your offering.

Stop making your customers’ lives more difficult.  Put an end to the needless drain on your revenues.  Use those additional profit dollars to find new ways to serve your customers that add value to their lives.  Who knows, in this economy, you might just be able to hire an extra worker or two and accelerate economic recovery.

If you’d like to increase your prices, profits and customer base, call Dale at 314-707-3771.

I Hate Coupons! is a post from: Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing | private equity |

“But Target isn’t without its own challenges. Analyst David Strasser at Janney Capital Markets said Wal-Mart’s aggressive pricing matching guarantees this holiday season may pose a challenge to Target.”

The implication is that consumers’ buying habits are swayed by price-matching guarantees?  Is that true?  You’re a consumer.  How heavily does that price guarantee weigh in your decision on where to shop?  My guess is very little.  Why?

Extra work

You’re required to do extra work to get the price guarantee.  Most price guarantees are for advertised prices which means you have to scour ads prior to beginning your shopping trip.

No substitutes

These guarantees require that the competitor’s offering be exactly the same as what you’re buying.  How often do we find slight differences products between retailers?  I recall looking for digital cameras years ago when Circuit City was still in existence.  The models that they carried were different than those at Best Buy even though the manufacturer was the same.  It’s one of the ways manufacturers help their retail customers differentiate themselves.

Convenience

If the store offering the price match guarantee is not as convenient as your favorite store, are you going to go the extra distance for that savings?  In today’s world the few cents saved is more than offset by the price of the gas needed to get there.  And let’s not forget the time involved.  You don’t have anything better to do, right?

Different experiences

These price-match guarantees assume that the experience at competing stores is exactly the same – that ambiance doesn’t matter.  In other words, the experience at Target is the same as that at Walmart.  The reality is that every consumer has store preferences.  They may not be able to articulate the reasons for their preference, but that doesn’t make it any less real.

Buyer reluctance

Many consumers prefer to pay a little extra to avoid asking for the price-match guarantee.  Why?  They don’t want to appear cheap, they don’t like to negotiate, they don’t want to tie up the line  or it simply feels confrontational to them.  Regardless of the reason, these consumers are not going to be swayed by the price-match guarantee.

Violated trust

This is my favorite.   Do you really want to reward a company by buying from them when they’ve just admitted to trying to charge you extra?  Really, do you want to do business with a company that in essence says ‘we’re charging you more than it’s worth?‘

A better way

What’s the alternative?  Continue to tout your value in all of your marketing materials.  If a consumer asks you to match a competitor’s price simply tell them, then we wouldn’t be able to provide you with (the value touted in your marketing materials.)  Help them realize that they’re in your store because they prefer it to your competitor’s store.  You’ll not only make the sale, you’ll get your price as well.

If you’d like to increase your prices, profits and customer base, call Dale at 314-707-3771.

Price-Matching Guarantees is a post from: Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing | private equity |

Since most of my materials are sent electronically these days, I don’t use much paper. Three reams will be a 4 to 6 month supply for me. I took advantage of the offer to save me a couple of trips to the store.

Let’s think about that for a moment. I took advantage of the deal to save myself a couple of trips to the store. If I’m not going to the store, what are the odds of my making an impulse purchase? Zero, right?

There’s no opportunity for that sleek new computer or digital device to catch my eye, no chance for those ‘cool’ desk accessories to grab my attention, no question in my mind about whether or not I’m running low on padded envelopes. Any of those could translate into additional sales, but my absence from the store precludes these possibilities.

To make matters worse, to get me back into the store you’re going to have to market to me more frequently. In essence, you’re paying me (vis-a-vis discounts) to stay away, then your spending money to get me back. Talk about a vicious cycle.

Oh, by the way, the more I spend on quantities I don’t need, the fewer dollars I have left for the impulse buys. So if you’re looking for the killer of your customers’ impulse buys, look in the mirror.

If you’d like to increase your prices, profits and customer base, call Dale at 314-707-3771.

Wanted: Impulse-Buy Killer is a post from: Pricing For Profit Book | pricing strategy | branding | value based pricing | value pricing | private equity |