A Warning to Finance Directors…


Occasionally we get approached by the CFO rather than the CEO. What is usually on their mind is a need to ‘tidy-up’ pricing in their business. You see hundreds of different prices for different products to different customers seems unnecessary and confusing to them.

It is true that the price file in most mature companies is a deal more complex than it needs to be and could stand some sorting out. However, the CFO is usually forgetting something. They seem to think that the tidy up is an administrative exercise performed by someone sitting at a computer staring at a spreadsheet.

We sometimes have fun shattering this illusion by asking a simple question: “If we are going to harmonise the prices for you, would you like us to harmonise them up or down?”

It takes a mere moment of thought before they say “Up please”. Whereupon, we say “Then someone is going to have to tell some customers they are going to get a price increase… hadn’t we better talk to the Sales Director?”

It had not occurred to them that generally speaking (but not always) customers notice price movements.

A price file filled with lots of different prices might be a sign that someone has carefully assessed the sensitivity of each customer and each product and priced it accordingly. If this were true, the more price combinations the better in theory. However in our experience much of the untidiness comes from poor attempts to price by badly trained salespeople and then negotiated down by customers. Often the deal was done years ago against a promise of mind-boggling volumes that never materialised in a marketplace with different dynamics and a different competitive landscape…. just nobody has had the gumption to go back to the customer and re-negotiate an up-to-date appropriate price.

Tidying up a complex price file can make you a fortune. But our advice is let’s get the Sales Director in on the project at the outset… because sooner or later we are going to need him.

…unless of course you really want to harmonise prices to the lowest common denominator. In which case you probably don’t need our help.

 

 

 

 

Price Elasticity… Wrong Question


It is a bit of a common theme… about a third of new clients come to us and ask us to measure their price elasticity of demand… the amount their volume would drop or increase if they changed their price.

Bless them, they don’t know any better. It is the only thing they remember about price from their economics GCSE. But it is the wrong question to ask. Sure, if you put your price up some customers would probably (but not always) go away. The right question is ‘which would stay?’

I am afraid I struggle with neo-classical economics. Our experience of customer behaviour is never as simple as they would make out. Decisions are seldom based on all available information; seldom logical, rational or driven by utility value. If they were, vast swathes of the economy would have to shut down overnight.

Nobody would buy a Dolce and Gabana handbag, you would see the womenfolk of Knightsbridge carrying their belongings in 5p Tesco carrier bags.

Households would switch their electricity and gas suppliers every four to six weeks and British Gas would be on its knees.

Everyone employed in marketing or sales would find themselves on the dole and Apple would not be the most successful brand in the world.

The other problem with this request is that it requires at least three data points to plot from empirical data in order to draw a curve (two would be a straight line). Although some high volume online businesses can flex their price on a daily basis, for most firms this is simply not possible…. the number transactions is too small or you would simply annoy customers by moving the price all the time.

Our advice is to start from the other end of the thought process and ask the question how far can we move price without losing any customers. Then look at the type of customers you think would be first to go and price them separately…. and keep doing this until you have segmented you customer base.

Keep in mind our motto at Burgin Associates:

Some of your customers would have been perfectly happy to pay higher prices… the trick is to know which ones!

We will offer a modest reward and some online kudos to anyone who can accurately translate this into Latin for our coat of arms.

 

 

 

 

 

 

 

Pricing like you don’t care…


The price someone is prepared to pay resides in their mind, not in your desk calculator and not in your head. This little story shows how when your mind is free from the angst of winning the business you can often get a better price.

Yesterday I was with some customer-facing staff from one of our clients talking about real-life situations where they had managed to get a customer to pay a little bit more.

One of the women described an enquiry that had come in from a customer she had dealt with in the past. She didn’t like him. He was always brusque with her and whenever he had a technical question he demanded to talk to a man as he assumed that her gender precluded her from understanding the technical products she had been selling for years. You can imagine how annoyed this would make a strong and capable woman like our friend.

His second mistake (the first; being rude to her previously) was the barrage he let fly at her to make her understand how just how urgently he needed the product. Having made his point he put the phone down without so much as a please or thank you.

The enquiry was for a product she knew well and could acquire for him quickly and cheaply. All she had to do was to decide how much he should pay.

She added her usual mark-up and looked at the figure. She remembered how rude he was to her… and she added a bit more… then she remembered how desperate he was… and she added a bit more… then with a smile, she pictured him with steam coming out of his ears when he realised that he had no choice but to buy from her…. and she added a bit more.

After letting him stew for ten minutes or so, she called him back. Putting on her best telephone voice and a knowing smile, she told him that she had managed to track down a supply of the product he needed so desperately and she would pull out all the stops to get it to him the same afternoon… then she told him the price (now about four times as much as she would have normally charged). It was still a relatively small amount in his scheme of things and the value of getting the parts to him the same afternoon was that he could get on and finish the job. He didn’t flinch. He placed the order and for once actually thanked her.

There are several morals to this story:

Firstly, don’t be rude to suppliers’ staff if they have discretion to set prices.

Secondly, for people in a hurry time is money and they will pay to save it.

Thirdly, and most importantly, becuase she really didn’t care whether he bought from her or not, her desire to make the sale was taken out of the equation…. all that was left was his desire to buy. It turned out that his desire to buy could be measured in a price that was four times what she would have charged to a customer whose business she really wanted. This means that you should concentrate on what is in the customer’s head not yours… how is he or she benchmarking your price, what are the circumstances of the purchase, what value will he or she derive from the product (including the service you can give), does he or she know where else to go?

I am not saying that you should price customers based on their attitude, although I have a sneaking admiration for her approach. However what this does show is that a polite customer asking for the same product in the same circumstances would have also probably paid four times more than the normal mark-up. It is only when you are genuinely ambivalent about winning the business do you actually push the envelope on price.

Have you ever priced a customer to go away only to find they didn’t?

 

 

 

 

 

 

 

 

Plucking a Price out of Thin Air…


Perhaps you have a product that is so unique that you cannot begin to imagine how much you can charge for it. Perhaps it is a software product that has no direct cost attached to it… so there are no clues to be had there… it is always going to be a 100% margin product whatever the price. Perhaps it is a service for which the customer will have no obvious benchmark. Here is a little technique to help you come up with a figure. We call it Relative Value Comparison and this is how you go about it:

Firstly figure out what benefits your product can deliver that could be expressed financial terms e.g. profit made, money saved, time saved, new customers won.

Next try to lay your hands on the kind of figures the client (or a typical client in the sector) would recognise e.g. if your product helps win new customers, then find out what revenue they would expect from an average customer.

Then craft a little sentence that starts with “If our product only….”

Something like:

If our product only wins you three more customers worth £20k a year, then isn’t it worth giving it a try for £x”

or

If our product only prevents one breakdown in its twenty year life, if that breakdown results in 24 hours of downtime at a cost of £3,000 an hour that is £72,000. Isn’t it worth avoiding that for £x”

Once you have done this, you need to read the statement quickly out loud and without really thinking about it, put in a value for x that seems to make sense. If you are democratic soul have a few colleagues do the same.

This little trick is a good way to find a price that ‘sounds right’ in the context of the selling process. If it sounds right in your head, then the chances are that it will sound right if made as part of similar justification to a prospective customer.

WARNING: The technique does not work if you then plonk the price on your website without the justification.

The moral of the story is that: The means by which you justify value is at least as important as the price figure itself.

PS The technique also works when justifying a higher price than a competitor. Craft a statement that values the risk of an inferior product. “If our product only saves you having to…. Isn’t it worth just another £20 to be sure you wont need to”