Three Ways Companies Decide The Price Of A Product

Pricing is one of the building blocks of marketing that appears to be easy to understand, but is probably one of the most difficult. Many think it is easy because we all buy products that have prices, and many believe all you have to do is sell the product for more than it costs you to earn a profit.

As cost accountants will tell you, determining the real cost is not trivial. More importantly, deciding on the price is so much more difficult because, in addition to the physical factors of cost and profit, price is subject to psychological factors, some of which are out of your company’s control. The best companies can do to have control over these psychological factors is to do a good job of branding. And to get the branding right, companies have to know how to develop the right underlying corporate image and positioning strategies.

In short, creating a brand image of the product that is impossible, or extremely difficult, to copy is the key to having control over your pricing strategies. If you are able to do that, you will be able to employ the most powerful and effective of all pricing strategies – What The Market Will Bear (WTMWB).


What the Market Will Bear

In markets where there is little or no competition, companies can employ a pricing strategy that optimizes profits. It is often called a What The Market Will Bear (WTMWB) price. This strategy sets the price based on the maximum price the market will pay for the product. On the one hand, the company wants to realize the highest profits possible in the shortest amount of time to help recoup high start-up costs, such R&D (research and development), production, and marketing costs.

On the other, it may not want its profits to be so attractive as to entice cutthroat competition to enter the market within the time window it needs to build market share and establish a leadership position. This strategy typically works because those likely to buy a new product – the Innovators and Early Adopters – are not particularly price sensitive. If there is considerable uniqueness and desirability built into the product brand, your company can employ a WTMWB strategy. If not, you might consider other effective pricing strategies.


Gross Profit Margin Target

In almost all cases, pricing strategies should begin with a Gross Profit Margin Target (GPMT) strategy. Companies typically know the gross profit margin they need to pay back their expenses and generate positive net income and cash flow. Once your company knows the cost of sales (cost of goods and services sold) of a particular product and the Gross Profit Margin Target it wants, it can easily employ a GPMT strategy. Gross Profit Margin is defined by the formula (P-C)/P, where P=Price and C=Cost of Sales. Anybody can put this formula into a spreadsheet program, and as costs change, recalculate the price that will produce the targeted Gross Profit Margin. Most companies know the GPMT they want. If you don’t, there are some common guidelines you can follow. 

Manufacturers typically aim for a GPMT of 50%
Distributors (Wholesalers) usually need a GPM of 10 to 15%
Dealers (Retailers) require a GPM of 30 to 50% (the higher percentage is for retailers that have to train people to use the product and the lower margin is for retailers that are selling a product that does not require after-sale support).


The price, or marked-up cost, to achieve these target GPMs is as follows:
Manufacturers P=2C so the formula is (2C-C)/2C = 0.5, yielding a GPM of 50%
Distributors P=1.18C so the formula is (1.18C-C)/1.18, which will give them a 15% GPM
Dealers P=1.5C so the formula is (1.5C-C)/1.5C, for a 33% GPM.


When I develop pricing strategies for a client that is a manufacturer, I always start with a GPMT pricing strategy that is twice their cost, or 2C, since that is an easy calculation that will give them their GPMT of 50%.

 

Most Significant Digit Pricing

For products that will be sold to consumers, most companies employ a Most Significant Digit (MSD) pricing strategy. Why? Studies and experience show that sales will be significantly higher if a product is priced at say $29.95 or $29.99 instead of $30. Most humans focus on the most significant digit – the “2” in this case. To them $29.95 or $29.99 seems a lot less than $30 even though it is only 1 to 5¢ less. Even expensive homes in Beverly Hills might sell for $7,995,000 rather than $8 million. There are exceptions. In upscale restaurants, it is usually a mistake to price an entrée at $31.95. Instead it will be priced at $32-. For some reason, people do not think the food is as good if MSD pricing is used in a high-end restaurant.

 

Combining all three

If a product is positioned as unique, smart marketing companies will typically use all three of these strategies in combination. Depending on the amount of memory the buyer chooses, Apple has priced its new iPhone 5S at $199, $299, and $399 for those that opt for a two-year contract. Apple is using a MSD strategy in addition to a WTMWB strategy because the iPhone has uniqueness built-in since Apple controls the platform. It also aims for a GPMT, which is not officially published, but which is in the 30 to 50% GPM range of well-positioned products in competitive markets. When Johnson & Johnson launched a margarine developed in Finland that lowers cholesterol, it priced a tub of this margarine at between $5.79 and $5.99. At the same time, a tub of regular margarine sold for 99¢. Based on this pricing, which used MSD and WTMWB strategies, many speculated that J&J priced the product at 8C, which gave it a GPMT of roughly 87.5%.


Pricing your products

When you are pricing your products, what gives you control over the price is the uniqueness built into your positioning, or branding, strategy. If you have created a product image that is impossible, or very difficult, to copy, you can employ a WTMWB price that will give you a good GPM that enables you to achieve your desired GPMT. And, if you sell your product in a consumer market, it would be a good idea to also employ an MSD pricing strategy. For example, if you are a manufacturer that is targeting a GPM of 50% and your cost of sales is $15, you might consider selling the product for $29.95 – a nickel less than the price of 2C. Best of luck.

Read more: http://www.businessinsider.com/3-powerful-pricing-strategies-businesses-should-always-consider-2013-10#ixzz2sZINPUL2

10 ways telecom can make money in the future a.k.a. telecom revenue 2.0

LTE roll-outs are taking place in America and Europe. Over-the-top-players are likely to start offering large-scale and free HD mobile VoIP over the next 6-18 months. Steeply declining ARPU will be the result. The telecom industry needs new revenue: telecom revenue 2.0. How can they do it?

1. Become a Telecom Venture Capitalist

Buying the number 2 o 3 player in a new market or creating a copy-cat solution has not worked. Think about Terra/Lycos/Vivendi portals, Keteque, etc. So the better option is to make sure innovative startups get partly funded by telecom operators. This assures that operators will be able to launch innovative solutions in the future. Just being a VC will not be enough. Also investment in quickly launching the new startup services and incorporating them into the existing product catalog are necessary.

2. SaaSification & Monetization

SaaS monetization is not reselling SaaS and keeping a 30-50% revenue share. SaaS monetization means offering others the development/hosting tools, sales channels, support facilities, etc. to quickly launch new SaaS solutions that are targeted at new niche or long tail segments. SaaSification means that existing license-based on-site applications can be quickly converted into subscription-based SaaS offerings. The operator is a SaaS enabler and brings together SaaS creators with SaaS customers.

3. Enterprise Mobilization, BPaaS and BYOD

There are millions of small, medium and large enterprises that have employees which bring smartphones and tablets to work [a.k.a. BYOD - bring-your-own-device]. Managing these solutions (security, provisioning, etc.) as well as mobilizing applications and internal processes [a.k.a. BPaaS - business processes as a service] will be a big opportunity. Corporate mobile app and mobile SaaS stores will be an important starting point. Solutions to quickly mobilize existing solutions, ideally without programming should come next.

4. M2M Monetization Solutions

At the moment M2M is not having big industry standards yet. Operators are ideally positioned to bring standards to quickly connect millions of devices and sensors to value added services. Most of these solutions will not be SIM-based so a pure-SIM strategy is likely to fail. Operators should think about enabling others to take advantage of the M2M revolution instead of building services themselves. Be the restaurant, tool shop and clothing store and not the gold digger during a gold rush.

5. Big Data and Data Intelligence as a Service

Operators are used to manage peta-bytes of data. However converting this data into information and knowledge is the next step towards monetizing data. At the moment big data solutions focus on storing, manipulating and reporting large volume of data. However the Big Data revolution is only just starting. We need big data apps, big data app stores, “big datafication” tools, etc.

6. All-you-can-eat HD Video-on-Demand

Global content distribution can be better done with the help of operators then without. Exporting Netflix-like business models to Europe, Asia, Africa, Latin-America, etc. is urgently necessary if Hollywood wants to avoid the next generation believing “content = free”. All-you-can-eat movies, series and music for €15/month is what should be aimed for.

7. NFC, micro-subscriptions, nano-payments, anonymous digital cash, etc.

Payment solutions are hot. Look at Paypal, Square, Dwolla, etc. Operators could play it nice and ask Visa, Mastercard, etc. how they can assist. However going a more disruptive route and helping Square and Dwolla serve a global marketplace are probably more lucrative. Except for NFC solutions also micro-subscriptions (e.g. €0.05/month) or nano-payments (e.g. €0.001/transaction) should be looked at.

Don’t forget that people will still want to buy things in a digital world which they do not want others to know about or from people or companies they do not trust. Anonymous digital cash solutions are needed when physical cash is no longer available. Unless of course you expect people to buy books about getting a divorce with the family’s credit card…

8. Build your own VAS for consumers and enterprises – iVAS.

Conference calls, PBX, etc. were the most advanced communication solutions offered by operators until recently. However creating visual drag-and-drop environments in which non-technical users can combine telecom and web assets to create new value-added-services can result in a new generation of VAS: iVAS. The VAS in which personal solutions are resolved by the people who suffer them. Especially in emerging countries where wide-spread smartphones and LTE are still some years off, iVAS can still have some good 3-5 years ahead. Examples would be personalized numbering schemas for my family & friends, distorting voices when I call somebody, etc. Let consumers and small enterprises be the creators by offering them visual  do-it-yourself tools. Combine solutions like Invox, OpenVBX, Google’s App Inventor, etc.

9. Software-defined networking solutions & Network as a Service

Networks are changing from hardware to software. This means network virtualization, outsourcing of network solutions (e.g. virtualized firewalls), etc. Operators are in a good position to offer a new generation of complex network solutions that can be very easily managed via a browser. Enterprises could substitute expensive on-site hardware for cheap monthly subscriptions of virtualized network solutions.

10. Long-Tail Solutions

Operators could be offering a large catalog of long-tail solutions that are targeted at specific industries or problem domains. Thousands of companies are building multi-device solutions. Mobile &  SmartTV virtualization and automated testing solutions would be of interest to them. Low-latency solutions could be of interest to the financial sector, e.g. automated trading. Call center and customer support services on-demand and via a subscription model. Many possible services in the collective intelligence, crowd-sourcing, gamification, computer vision, natural language processing, etc. domains.

Basically operators should create new departments that are financially and structurally independent from the main business and that look at new disruptive technologies/business ideas and how either directly or via partners new revenue can be generated with them.

What not to do?

Waste any more time. Do not focus on small or late-to-market solutions, e.g. reselling Microsoft 365, RCS like Joyn, etc. Focus on industry-changers, disruptive innovations, etc.

Yes LTE roll-out is important but without any solutions for telecom revenue 2.0, LTE will just kill ARPU. So action is required now. Action needs to be quick [forget about RFQs], agile [forget about standards - the iPhone / AppStore is a proprietary solution], well subsidized [no supplier will invest big R&D budgets to get a 15% revenue share] and independent [of red tape and corporate control so risk taking is rewarded, unless of course you predicted 5 years ago that Facebook and Angry Bird would be changing industries]…

Refer: http://telruptive.com/2012/03/26/10-ways-telecom-can-make-money-in-the-future-a-k-a-telecom-revenue-2-0/
 

Priciing Strategies

Marketing - Pricing approaches and strategies

There are three main approaches a business takes to setting price:

Cost-based pricing: price is determined by adding a profit element on top of the cost of making the product. 

Customer-based pricing: where prices are determined by what a firm believes customers will be prepared to pay

Competitor-based pricing: where competitor prices are the main influence on the price set Let’s take a brief look at each of these approaches;

Cost based pricing

This involves setting a price by adding a fixed amount or percentage to the cost of making or buying the product.  In some ways this is quite an old-fashioned and somewhat discredited pricing strategy, although it is still widely used. 

After all, customers are not too bothered what it cost to make the product – they are interested in what value the product provides them.  

Cost-plus (or “mark-up”) pricing is widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. An advantage of this approach is that the business will know that its costs are being covered.  The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively.

Here is an example of cost-plus pricing, where a business wishes to ensure that it makes an additional £50 of profit on top of the unit cost of production.

Unit cost	£100
Mark-up	50%
Selling price	£150

How high should the mark-up percentage be? That largely depends on the normal competitive practice in a market and also whether the resulting price is acceptable to customers.

In the UK a standard retail mark-up is 2.4 times the cost the retailer pays to its supplier (normally a wholesaler).  So, if the wholesale cost of a product is £10 per unit, the retailer will look to sell it for 2.4x £10 = £24.  This is equal to a total mark-up of £14 (i.e. the selling price of £24 less the bought cost of £10).

The main advantage of cost-based pricing is that selling prices are relatively easy to calculate.  If the mark-up percentage is applied consistently across product ranges, then the business can also predict more reliably what the overall profit margin will be.

Customer-based pricing

Penetration pricing

You often see the tagline “special introductory offer” – the classic sign of penetration pricing. The aim of penetration pricing is usually to increase market share of a product, providing the opportunity to increase price once this objective has been achieved.

Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price.

Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume.  In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher.  However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified.

Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon. 

Price skimming

Skimming involves setting a high price before other competitors come into the market.  This is often used for the launch of a new product which faces little or no competition – usually due to some technological features.  Such products are often bought by “early adopters” who are prepared to pay a higher price to have the latest or best product in the market.

Good examples of price skimming include innovative electronic products, such as the Apple iPad and Sony PlayStation 3. There are some other problems and challenges with this approach:

Price skimming as a strategy cannot last for long, as competitors soon launch rival products which put pressure on the price (e.g. the launch of rival products to the iPhone or iPod).

Distribution (place) can also be a challenge for an innovative new product. It may be necessary to give retailers higher margins to convince them to stock the product, reducing the improved margins that can be delivered by price skimming. A final problem is that by price skimming, a firm may slow down the volume growth of demand for the product.  This can give competitors more time to develop alternative products ready for the time when market demand (measured in volume) is strongest.

Loss leaders

The use of loss leaders is a method of sales promotion.  A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store. The purpose of making a product a loss leader is to encourage customers to make further purchases of profitable goods while they are in the shop.  But does this strategy work?

Pricing is a key competitive weapon and a very flexible part of the marketing mix.

If a business undercuts its competitors on price, new customers may be attracted and existing customers may become more loyal. So, using a loss leader can help drive customer loyalty.

One risk of using a loss leader is that customers may take the opportunity to “bulk-buy”.  If the price discount is sufficiently deep, then it makes sense for customers to buy as much as they can (assuming the product is not perishable).

Using a loss leader is essentially a short-term pricing tactic for any one product.  Customers will soon get used to the tactic, so it makes sense to change the loss leader or its merchandising every so often.

Predatory pricing (note: this is illegal)

With predatory pricing, prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition.  The price set might even be free, or lead to losses by the predator.  Whatever the approach, predatory pricing is illegal under competition law.

Psychological pricing

Sometimes prices are set at what seem to be unusual price points.  For example, why are DVD’s priced at £12.99 or £14.99? The answer is the perceived price barriers that customers may have.  They will buy something for £9.99, but think that £10 is a little too much.  So a price that is one pence lower can make the difference between closing the sale, or not!

The aim of psychological pricing is to make the customer believe the product is cheaper than it really is.  Pricing in this way is intended to attract customers who are looking for “value”.

Competitor-based pricing

If there is strong competition in a market, customers are faced with a wide choice of who to buy from. They may buy from the cheapest provider or perhaps from the one which offers the best customer service.  But customers will certainly be mindful of what is a reasonable or normal price in the market.

Most firms in a competitive market do not have sufficient power to be able to set prices above their competitors. They tend to use “going-rate” pricing – i.e. setting a price that is in line with the prices charged by direct competitors.  In effect such businesses are “price-takers” – they must accept the going market price as determined by the forces of demand and supply.

An advantage of using competitive pricing is that selling prices should be line with rivals, so price should not be a competitive disadvantage.

The main problem is that the business needs some other way to attract customers.  It has to use non-price methods to compete – e.g. providing distinct customer service or better availability. 

Refer: http://www.tutor2u.net/business/gcse/marketing_pricing_strategies.htm