Small Business Pricing – 5 Steps To Effective Price Management

Linda runs a sewing business that does works like alterations and hemming.  Unlike most small business owners, Linda writes a blog that is about “Sewing for profit” in which she shares her ideas and practices to help others like her to run an alterations business.

In the down economy when people postpone purchases, alterations should be good business. But the barriers to entry are low, there are many individuals and businesses offering this service and the market alters (pun intended) with the economy. There are also challenges in reaching the right customer segments. All these make this a highly competitive market with challenges in communicating differentiation and price list becomes the main piece of any messaging.

Linda is thinking about pricing and wrote about it recently. A very well written article that considers factors like opportunity cost of the business owner’s time, competitive analysis and a pricing model for someone starting new in this business. Linda recommends a pricing that is based on the time it takes the individual to do the work and based on pricing from other competitors in the area.

If I were to suggest changes, it is avoiding what Mr. James Mason described as the 8 deadly pricing sins and practicing what I described in Effective Price Management. Pricing a product or service based on what it takes to produce and deliver it is cost based pricing. The risk is that in any undifferentiated market there will always be someone willing to price it lower and quickly prices will spiral down.

What can a small business, like an alterations or any such business, can do to practice effective price management in a highly competitive environment? Here are five steps to get there:

1. Recognize that cost to produce is not relevant to your customers. Your costs are relevant only to see if you can run a profitable business given the addresable market and prices you can charge.
2. Recognize that price is not differentiation. Competing on price does not let you have a conversation about the value you add.
3. Identify the different customer segments and the economic value to them from your service.In the case of alterations the segmentation is based on usage scenarios, sometimes a customer would want to get their work pants altered and other times their expensive evening wear. The economic value is different for each case. Practice a pricing model that is based on this value add.
4. What is “ownable”? When many other competitors are in the same market, what sets you apart from the rest? Is that defensible and unique and no one else can claim the same? In other words is that “ownable”? Identify that and make the marketing conversations about this and not lower prices. On the last point, salons excel in offering multiple prices based for the same service based on who does the work.
5. Offer multiple versions of your product/service, be it based on material that is worked on, raw materials you use, convenience or based on person who is doing the work in your business.

Do we know value when we see it?

In past few articles I wrote about the price consumers pay and the price marketers get to charge. Those explanations depended on the value consumers get from buying the product. In B2B segments and in some  utilitarian product categories (like a light bulb) it is fairly easy to calculate economic value to the consumers.  But how can a marketer find the value added for the rest of the products? Do the consumers even know the value they get? I would like to remind you here that there is no magic value reader that is available.

I was looking at a JCPenney survey that asked, “Did you get value from your purchase?”. If customers do not know the value how can they answer this? Even if they did, this question does not help find what that value was.

There is one advanced analytical method, it is called by an esoteric and not so relevant name – conjoint analysis. Stated in simple terms the method is about

1. Consumers do not know the absolute value of products they buy but we can deduce that from their preferences and likelihood of purchase. Instead of asking  consumes for how much they value ask them about how likely are they to purchase a given product on a scale of 1 to 100. This is called “Utility” in conjoint analysis. Note that the use of the term Utility does not imply that the product is  utilitarian.
2. Any product can be modeled as a sum of its components, not just utilitarian features (like price and screen size of a TV) but hedonistic features like 1080 dpi and conspicuous features like diamond studded TV. The price should always be a component in your modeling.
3. Show consumes a series of products with different feature set and ask for their rating. From these ratings we can deduce not only the  utility values  of different products but also the relative weights they assign to the components.

This explanation barely scratches the surface, you can find more information on this in a SlideShare presentation I published.  The net is that there are analytical methods that can be employed to get consumers to reveal the values and what components go into that value equation.

With this setup and my previous classification of consumption I will try to model consumer behavior with respect to  utilitarian, hedonistic and conspicuous consumptions and the shift in consumer buying patterns from luxury product categories to “premium” or  utilitarian categories.

The Personal Brand

Every day when I drop off my child at school I read her a few books before I leave. Usually  few other children gather around as I read.  One day I had the largest audience, about 10 children.  I used all different kinds of voices I knew and held their attention throughout my reading. Then I decided to try something different, I told them that instead of reading another book I would tell them a story, something I had read from a library book about a man, a tiger and a fox. Five seconds into the story my audience vanished, only my own child stayed with me.

I realized that my customers, yes the children who were listening to my readings are my customers, had defined me and categorized me as a reader, someone who can verbally reproduce published works of others. They did not trust me, yet,  to produce something interesting without the help of books. My brand as a story reader did not extend to that of a story-teller.

That is a realization that I did not control my brand, my listeners  did. That is because I had not actively managed it when I started reading stories. If I had wanted to be seen as more than a story reader, to be an entertainer (my brand vision) I should have approached this more strategically. Immersed in reading stories,  I had allowed my brand to be defined for me.

Every opportunity you have to interact is an opportunity to build your brand based on your brand vision. Now that is power of personal brand management, be it reading stories to school children or working in an enterprise.

Are you actively managing your brand? If not, would you accept the same if your business’s brands are not actively managed and left to be defined by the market?  Start having a brand vision for your personal brand and build it with every interaction.

Multi Price Point Strategy From Nestle’s Playbook

Versioning

Update: I learned today from a boom about Cadbury’s that Nestlé sells 1 billion products worldwide. That is at least one billion prices. That is mind boggling. But the number sounds suspect to me considering their total revenue. Can someone fact check?

In the Nestle 2009 roadshow presentation (PDF) there are three slides that read like a lesson on multi-version pricing. One of the slides is shown in this post (advance thanks to Nestle). The numbers are not exact currency numbers but rather a price index showing relative price position. Nestle says in the transcript of the presentation,

You see here an example of PetCare which has shown and proven also to be a very strong resilient and defensive sector in bad times. And you see how we through the brands are allowing the consumer to have different price points. These are all Purina products. You see it in dog food; you see it in cat food how we have spread over different price points the product portfolio and yet using the Purina brands there rightfully.

Nestle is one of the few companies to report profits this quarter. As I wrote in my previous post, one reason is their price increase. Nestle’s multi-price point strategy seems almost so simple and easy that it will not be a surprise if anyone reading this raised the following questions:

1. If it is this simple why not everyone do just this?
2. If this works for Nestle why would it disclose this secret to the rest of the world?
3. If this is so effective why not have more products at different price points, in fact take it to the extreme and have one price per person?

The answer to the first two question is the the same,

• This works for Nestle only because of the brand equity and the strong brand loyalty of its customers. Neither of these can be build overnight.
• Pricing and multi version products are aligned perfectly with the core strategy. In the case of Nestle its competitive advantage comes from a tight integration of its R&D, product innovations, comprehensive geographic presence and from its people, culture and values.

Multi-price point may seem easy to copy but without getting every strategic component right simply copying it is not going to help a competitor.

So why not take multi-price point to the extreme? This requires much longer discussion and I will write on it in a later post. But if you have your thoughts on this please share.

Retailer Going After CPG Price Increases

While the leading CPG brands (Heinz, Nestle, Unilever, Del Monte) are reporting increase in profits from price increases, the retailers are not happy with the price increase. Safeway is asking the brands to  rollback their prices and is using their private label leverage. Safeway executive Steve Burd, told analysts,

I say wait and see, because we’re going to chew  up on corporate brands

Mr. Burd makes his case based on falling input costs and hence the brands must pass on the savings to the customers. Again to repeat for the umpteenth time, costs are not relevant to pricing. These food brands were able to retain their price increase and grow their profits despite the drop in sales volume. This is because of the change in customer mix, the price sensitive segment has already moved on to private labels. The brands are doing the most rational thing, price products at what customers are willing to pay.

The retailers have a higher gross margin on the private labels and most private label products are produced by the same corporate brands Mr. Burd was talking about. The retailer margins are so thin that they need the large volume to make up for their high fixed costs. The retail operations are measured by dollars per cubic (or square) inch.  The fall in volume of name brands due to their  price increase is starting to affect retailers despite the increase in sales of private labels.

One questions we should ask is if a retailer can “chew the corporate brands” with their private labels, why not do just that? Why threaten to do this? I believe the loss to retailers with this move will be larger than it would be from a negotiated price agreement with the brands. Retailers depend on the same brands for supplying private labels, they need to spend more on promotion and stand to lose customer traffic if brands are pulled out of their stores.

What is the likely outcome? Brands are happy with their price increase and know that those who are buying now are their brand loyal customers. If a retailer pulls the brand off the shelves most customers will seek another store. But the risk exists that the brands will lose out in the long term. The most likely scenarios to happen are

1. Brands will allow retailers to keep more of the price increase in the form of trade promotion
2. Brands cut a better price deal with retailers on the wholesale price of private labels manufactured in their factories.

In any case it is time for retailers to start thinking about reducing their operational costs.

Making a living out of wordonomics

There is a proliferation of made up words that tack on the word onomics to a brand name., all inspired by Reagonomics and Freakonomics. All these initiated by the brands themselves. This of course an attempt to position the brand as most suitable for the current economic conditions. Examples include

1. 3conomics  (Wendy’s 3 meals under $3 deal)
2. Suaveonomics
3. DiGiornomics

Does this help the brand to associate with something that is not doing so well?

Why position your brand for tough economic conditions? So are the products the equivalent of what economists call Giffen goods?

When the economy improves will people switch from your brands to what they perceive as better brands?