A dear friend and fellow pricing professional related a story of how he had been assigned to help price an innovation at his company.  The team that developed the new product had invested significant time and dollars in creating the new product, but didn’t have any research data that showed how much the customer would value the improvements.

The first call he made was a shock – no interest at all.  The second call – the same response.  The third call – ditto.  When he reported his findings the plug was immediately pulled on the project and the investment written off as a loss.

How did the company get to this stage before finding that their ‘innovations’ didn’t have value?  More importantly, how do you avoid this costly mistake?

Innovation is risky

Jay Abraham in his book, Getting Everything You Can Out of All That You’ve Got, consistently drives home the importance of testing ideas before launching full blown campaigns.  Whether it’s marketing, sales or pricing strategies, he encourages testing.  The same is true for innovation.

Innovation is an inherently risky business, fraught with investment in ideas that will never work.  We don’t need to compound that risk by embarking on ideas that we believe will create value without first checking the market to see whether consumers of our products/services will actually be willing to pay for the additional ‘value.’

Manageable risk

Typically a few phone calls to some of the customers whom you feel will really benefit from your ‘innovation,’ is all that it takes to evaluate the potential value of that innovation.  Here are a few sample questions to ask:

• How frequently does this (the problem you envision) occur?
• How costly is that problem?
• What solutions do you have in place?
• If our product could (solve the problem) would that be a less expensive alternative to the solutions you currently have?

As you can see, we don’t have to get into the question of price to ascertain whether the market will value the innovation we envision.  All we’re doing is determining what value, if any, we’ll be creating.

From that value calculation we can make reasonable estimates about how much customers are willing to pay and whether the investment we’re anticipating and the return we’re expecting are a good trade off.

In other words, we’ll have minimized the risk in this innovation.

My friend knew that a few phone calls is a small investment when compared to the cost of creating something that has no value.  Unfortunately he didn’t get called into the process until the innovators had made a huge investment.  Don’t let that happen in your organization.

The answer to this question depends upon which market you’re targeting.  There are basically two markets for these improvements, the early adopters and the mass market.

Early adopters

These are folks who simply must have the latest, greatest technology no matter what the price.  Or they’re people who could care less about the technology, but want the image of being on the cutting edge.  Both groups pay handsomely.

Mass market

By far the largest percentage of the population falls into this group.  These consumers buy as long as they perceive a difference in quality.  The owner of a printing company described it this way:

Most people can’t tell the difference between a good print job and a great print job and a great print job costs a whole lot more.  That’s why most people entering my store are looking for a good print job.

There have been rumors that 4K’s resolution enhancement is only noticeable if you’re very close to the screen.  If that’s true, it’s unlikely that the 4K technology is going to enjoy much success in the mass market.

Lesson

As you embark upon product improvement strategies ask yourself “Will the mass market be able to tell the difference between our existing offerings and the improved version?”  If they can, you’re likely to enjoy financial success in both the early adopter and mass markets.

If not, you’re going to have a very small market and all of your money will be made from the early adopter group.  Unless you’ve tracked the sources of early adopter sales in the past, marketing to these folks could be a very expensive proposition.  Whether you decide to pursue the early adopters or not, do NOT create a ‘more affordable’ option for the mass market.  It’ll be a waste of money.

I told him to expect his company’s sales to decline, the margins to drop even more.  He looked at me, agape, and said “That’s exactly what happened.”  How was I able to predict this result? More importantly, how can you develop this skill?

As much as I’d like to lay claim to genius status, it’s really a matter of having observed other companies’ forays into the realm of sales compensation.  Based on these observations here’s what typically happens when a company shifts from a margin-based program to a volume-based program:

• Salespeople are quick to lower the price; they’re compensated on volume not profit margin.
• Lower prices create skepticism in the minds of buyers.  Buyers ask themselves “If this product/service is really so good why did the salesperson cave so quickly on price?”
• Skepticism becomes uncertainty, uncertainty typically results in ‘no sale’.
• No sale means the top line is dropping.
• In those instances in which the salesperson is successful at closing the deal at a lower price, the sales are dropping because the price is lower and margins (which are a percentage of sales) is dropping even more quickly.

If, as a leader in your company, you’d like to avoid this kind of result, pay more attention to the results that other companies are getting whether they’re in your industry or not.  In particular, pay attention to how changes in policy affect their top and bottom line results.

As you see trends developing, you’ll be able to reconstruct cause/effect relationships between the policies and strategies employed, their impact on customer behavior and the financial results the company experiences.  That’s how you develop the ability to effectively predict the results of your own policy or strategy decisions.

Moving target

There is no question that value changes over time and that, in todays’ world, that change occurs more quickly than ever before.  Movement through a product’s life cycle from innovation, to mass market, to saturation occur at an ever-increasing pace.

This reality doesn’t alter the fact that early adopters of innovation often pay 3 to 4 times what the mass market does.  It simply means that the mass market is going to enter the market earlier than it did previously.

Once we realize that basic buying habits haven’t changed, that the only difference is when buyers enter the market, we find that value pricing is easier to implement than expected.  We have the same pricing triggers that let us know when it’s time to lower our price for the mass market or for the late adopters, assuming we even want to serve that group.

The key is to realize that value has always changed over time and that the majority of customers still pay for value when they can see it and quantify it.  Those are our challenges, to identify what our customers value, provide that value, quantify the value for them so they can see it and, then, communicate that value effectively.  When we do this work for them, our customers will reward us with premium prices.

Doubt that?  Then why do Mercedes buyers pay 7.5 times as much as a Chevy Aveo buyer for a sedan?  Why do Nordstrom’s customers pay 12 to 13 times as much for a sweater as a Walmart customer?  Buyers continue to demonstrate a willingness to pay premium prices to get what they want, yet we ignore their pleas and focus our attention and theirs on price instead of value.  Shame on us.

That brings us to the question of price pressures – from our competitors and customers.

Price pressures

Nothing keeps business leaders up at night as much as the fear of not being ‘competitive.’  That’s why competitors’ pricing and customers’ challenge “…but your price is too high” put so much pressure on them to lower prices.

Fear is an ugly thing.  It triggers an emotional reaction.  Emotional reactions preclude objective analysis.  If it didn’t, then why would we see so many businesses following their competitors down the rabbit hole of reverse auctions?  Why do we see earlier and more frequent discounting during peak selling season?  Why do we see businesses giving away ‘improvements’ in their offerings instead of charging for them?  Why do we see businesses invest heavily in process improvements only to give away the savings in lower prices?

Absent the fear, we’d quickly realize that when we relinquish control over our pricing to our competitors and customers we become one of many providers.  We commoditize our offerings which serves to validate our customers’ perception that what we’re offering is a commodity.

Conversely, when we’re able to look those customers in the eye and say “This is how we’re better, this is the value you’ll get and this is why our price is…” we establish ourselves as leaders in our industry.  And leaders, by virtue of their nature, command respect.  When we establish that leadership role, we distinguish ourselves in ways that are attractive to the vast majority of the people in our markets and we do so at higher prices than our competitors get.

The choice is yours, cave to price pressures and commoditize your offerings or distinguish them by demonstrating value and commanding prices commensurate with that value.  Choose wisely.

Lesson

Hopefully I’ve been able to demonstrate that value pricing:

1. Isn’t as vague as previously thought
2. Isn’t as complex as you imagined
3. Can produce measurable results
4. Is no more a moving target than it was a century ago
5. Is the antidote to pricing pressure from competitors and customers alike

If you’re not using value pricing, you’re not only leaving a lot of money on the table; you’re depriving your customers of the ability to make informed buying decisions.  If you truly care about your customers that should be motivation enough.

Value pricing is complex

As we saw last week even though you may be dealing with thousands or hundreds of thousands of customers you’re only dealing with three categories of value.  These categories simplify the identification of market segments and value prices for each of those segments.

I’m sure that some of you are thinking “Dale, you have no idea how many products (SKUs) we sell.  It isn’t just the customer that adds complexity, it’s the array of offerings we have.”

No doubt that what you say is true.  Two questions for you:

1. Why do you have so many SKUs?
2. Adapting Pareto’s principle, which 20% of them are producing 80% of your profits?

Regardless of your answers, the solution is to establish a process for identifying your 20% most profitable offerings, identify who’s buying them and eliminate the rest.  Not only will you simplify your life you’ll use your marketing dollars a lot more effectively.  You’ll very likely free up a considerable amount of cash as well.

If that strategy is a little frightening to you, then eliminate the 20% least profitable SKUs.  From experience I can tell you that once you see how little impact it has on your sales and what a dramatic improvement is has on your profits, cash flow and employee productivity, you’ll quickly eliminate the next 20% least profitable until you arrive at my initial suggestion.

Which brings us to the next concern that many business leaders have, being able to determine which results can be traced to value pricing and which are related to other operating decisions.

Demonstrable results

Often business leaders point to the fact that margin improvements can be achieved from a variety of operational changes including:

• Productivity improvements
• Sales force compensation arrangements
• More effective marketing
• Improved offerings

Or simply from an improving economy.  So the question they ask is “How do we know that the margin improvement came from value pricing?

The answer is that all of these factors are, or should be, part of your value pricing strategy.  You can’t establish an effective pricing policy without evaluating all of the factors that influence value creation.  Recently I helped a client improve his margin on one line of business from 24.8% to 41% by streamlining the sales process and eliminating back office processing.  We accomplished this without raising prices.

While we were evaluating his value creation process we were also able to justify a 12.5% price increase by calculating the value of his offering.  How?  By identifying that what he was selling was time savings and using demographics to identify the value that buyers in his market were placing on their time.

With the 12.5% price increase his margins more than doubled from 24.8% to 53.5%.  If that isn’t a demonstrable result I don’t know what is.

Next week, well discuss the two remaining reasons why business leaders avoid value pricing – the perception that value is a moving target and price pressures.

Is it because:

• The term ‘value’ is so vague that it defies comprehension?
• Value pricing is complex?  Instinctively we know that different market segments view value differently.
• Providing demonstrable results is difficult?  It often feels like you’re trying to prove a negative.
• That value is a moving target?  Given how quickly economic conditions and customer interests change as well as how short product life cycles are today, does it even make sense to calculate value and pricing that reflects that value?
• Senior leaders feel that the pricing pressures they’re getting from their competitors and their customers make it nigh on impossible to get premium prices?

Of course there are other reasons.  As a senior leader you might be:

• A price buyer and logically assume everyone else is as well.
• Volume focused.  He/she prefers to own a large share of the market even though a smaller share would be more profitable.
• Concerned that your organization isn’t providing the value necessary to warrant higher prices.

If you’re a senior leader and any these last three conditions resonate with you I’m going to save you a lot of time and energy.  STOP READING!  The likelihood of you employing value pricing is so small that reading the rest of this blog will be a waste of your time.

For the rest of you, we’re going to address each of the concerns highlighted in the opening.

Value is ‘vague’

Value is personal.  Each of us determines the value that a given product or service has for us and it’s often much different for us than for our family and friends.  Naturally the question that comes to mind is “How do I establish value prices when everyone values things differently?”

The answer lies in the commonality of our humanity which is manifest in our buying behaviors.  There are only three things that any of us buys – image, innovation and time savings.

As sellers, any benefit we claim to provide fits into one of these three categories.  For example, quality can enhance our customers’ image, save them time by helping them avoid repairs or a combination of the two.

Some of Apple’s customers by iPhones and iPads because they love the innovations that Apple builds into their products.  Others buy because they love the look and feel of those products.  Why?  Because it enhances their self image.

The good news is that customers who value image are willing to pay as much as those buying innovation.  Indeed there is readily available buyer data to show exactly what premiums people are willing to pay depending upon where they fit on the image, innovation or time savings spectrum.

So while value is personal, there is enough commonality to our humanity and enough buying data to allow us to categorize markets, design offerings and price based on the value to each of those market segments.

For those of you selling B2B, don’t forget that you’re selling to people not organizations.  Those people represent organizations, but each also possesses a self-interest motive that influences their buying decisions.  So don’t dismiss the commonality of our humanity as a B2C phenomenon.

Next week, we’ll explore the complexity of value pricing to see whether or not it’s a valid reason to avoid adopting value pricing.

I’d analyze the profitability of their offerings and find that their greatest investment in marketing dollars and production capacity were in their least profitable lines.  When confronted with this fact they’d say “That’s our primary business, can we raise prices?”  And I’d show them how to raise prices.

I realize that you could care less about how I got into the pricing business, my point in telling this story is to let you know that the vast majority of business owners/CEOs don’t know what’s really making money for them.  Without that information it’s nigh on impossible to:

• Identify your ideal customer – those who value your offerings enough to pay a premium price to get them.
• Create marketing messages to attract those customers.
• Develop sales scripts that can quantify the value customers perceive and communicate it in ways that your competitors can’t.
• Establish pricing that reflects the value your customers desire.

Given these circumstances is it any wonder that so many companies default to industry pricing?  More importantly, is it any wonder that consumers view your offerings as commodities and look for the lowest price possible?

Here are a few simple steps that will help you avoid being just one more source for whatever you’re offering:

• Identify your most profitable customers, offerings and salespeople (not the highest revenue, the most profitable.)
• Using this information, create a profile of your ideal customer.  Don’t limit yourself to a demographic profile, demographics are helpful but they only tell part of the story.  Develop a psychographic profile as well – a list of characteristics that define your most profitable customers’ behavior.
• Translate the psychographic profile into marketing messages designed to attract more of your most profitable customers.  By targeting your marketing more effectively you produce greater profits off a smaller marketing investment.  You also avoid confusing the market.
• Create sales scripts that not only communicate the value your customers desire, but quantify that value for them so that your price seems fair in light of the value they’ll receive.  For those of you who are online retailers, you may not feel that sales scripts are relevant in your business.  I’d like to suggest that this is a great way to distinguish your site from your competitors’ sites.  Use FAQs and comment boxes to differentiate your higher priced offerings from those of lower value.
• Establish pricing that is slightly less than the value than the customer receives.  Most companies price well below the value they provide which diminishes that value in their customers’ eyes.

Imagine how much simpler your life and the lives of your customers will be when you have and present that kind of clarity to them – when your brand promise (what they value), your marketing messages (touting what they value), your sales scripts (quantifying that value) and your pricing (their investment in that value) are all congruent.

The choice is yours.  You can continue to invest time, energy and resources and take whatever business comes your way.  Or you can take control of your destiny.  You can employ the steps outlined above and dramatically increase your company’s profits and your customers’ delight.  Choose well.

Positioning.  The way healthcare companies position themselves in the marketplace can have a dramatic impact on the demand for their offerings.  Unfortunately, most do not position themselves well.  Here’s a quick example.

Recently I had some surgery at a well-known, well-respected St. Louis hospital.  One of the things that struck both my wife and I was the care and concern they had for family members.  Pre-op they told my wife that the actual surgery wouldn’t begin for almost an hour after they took me to the operating room.  They went on to say that they had a screen in the waiting room that was updated periodically to let family members know how the surgery was progressing, when I was being moved to recovery, etc.

This system dramatically reduced my wife’s anxiety.  This hospital’s system had removed one of the more stressful aspects of surgery for the family.  Indeed, my wife was so impressed that when she began searching for a new internist, she insisted that the internist be a member of that group.

The hospital’s system is a powerful engine for growth, yet nowhere in their advertising did they tout this tremendous benefit.  By merely talking about ways in which they’ve removed irritations that have plagued patients and their families for decades, this hospital could be position itself as one of the more caring and innovative hospitals/medical groups out there.

Is this hospital the only one employing this surgical update system?  Probably not.  In today’s world best practices are often emulated.  But no one is talking about it.  The first to employ a practice that delight patients and their families can position themselves to be the healthcare provider of choice by touting these advancements in their marketing materials.  Any hospital that adopts these practices will appear to be mimicking the innovator.  Which would you prefer as your healthcare provider, the caring innovator or the copycat?

Positioning works equally well in any industries in which price is regulated or, at least, limited – wealth advisory services and utilities to name a couple.  If you’re looking for ways to increase revenues when you have limited ability to adjust prices, there’s a great deal of potential for you in the way you position your offerings.  Don’t overlook them.

Here’s a quick way to tell whether or not you’re being strategic in your pricing:

• When you create a new offering do you establish one price or a series of prices?
• When you change your prices, is it typically your initiative or a reaction to your competitors’ pricing?
• Do you match your competitors’ pricing?
• Does your product’s/service’s life cycle influence your pricing decisions?

The answers to these questions will tell you all you need to know about whether or not you’re using a price strategy or merely reacting to your competitors’ pricing.

One price or series of prices?

If you’re establishing a single price for new offerings, you’re not developing a pricing strategy.  Effective price strategies must include a series of prices that reflect:

• Your product’s/service’s life cycle.
• Changing customer tastes.
• Competitor offerings – current and anticipated.
• Value (pricing) by market segment.
• Offerings of companies outside your industry that compete for your market’s dollars.

This is not an all-inclusive list, but it gives you a sense for what’s involved in establishing a pricing strategy.  Each of the items on the list indicate why we don’t live in a one price fits all world.  Here are some examples to illustrate this point.

Early adopters of innovation willingly pay multiples of what the mass market pays.  That’s why it’s important to know what price you’ll charge at each phase of your product’s/service’s life cycle as well as how you’ll know to when it’s time to change your price.

Similarly, prices can be dramatically different for different market segments.  Why?  Because the value to each segment can be dramatically different, as can the willingness of each segment to embrace change (new offerings).  Some markets are more progressive than others.

When a competitor comes out with a new offering, especially one that appears to be superior to yours, how do you respond?  How does that influence your pricing?  More importantly, should it?

Many companies ‘improve’ their offerings only to find that their customers are unwilling to pay for the improvement.  Do you have a mechanism in place to evaluate the value of a competitor’s improvement?  If not, you’re likely to follow them down the rabbit hole or you’ll lower prices when there’s no need to do so.

Hopefully these illustrations demonstrate the importance of having a pricing strategy, one that incorporates a series of prices and price change triggers.

Now, let’s contrast this approach to reactionary pricing.

Price matching

Regardless of whether or not you’ve promulgated a price-matching program, if you regularly raise or lower your prices to reflect your competitors’ price changes you’re price matching.  There’s nothing strategic about price matching.  You have relinquished control to your competitors.

Yes, I’ve heard business leaders’ claims that they need to be competitive, that products eventually become commodities and that buyers are price conscious.  Unfortunately the business ‘leaders’ making those claims aren’t defining their terms.

What does it mean to be competitive?  When does a product become a commodity?  Are buyers really price conscious?  Let’s explore each of these questions in more detail.

Competitive

What does it mean to be competitive?  Offering more for the same price as your competitors are getting is not being competitive, it’s folly.  It confuses your customer!  Here’s what they’re thinking – “If your product/service is so much better than why doesn’t it cost more?”

That’s right.  Despite all the claims that customers are price sensitive, this price/value comparison gets made, if not consciously, then subconsciously.  It’s intrinsic to human psyche.  Here’s a situation that many of us have experienced.

You stop at your favorite ice cream shop and order your usual.  The clerk says “That’ll be $3.75.”  It’s $.25 more than you have been paying.

Do you hesitate, even if for only a few seconds, before completing the purchase?  Of course you do.  You’re mind did a quick price/value calculation.  If this is really your favorite ice cream, you’ll quickly decide that you’re worth it and treat yourself despite the higher price.  We do this all the time.

Because this thought process occurs subconsciously we don’t realize that we’re making these calculations.  Nor do our customers.

The moral of the story is to stop listening to the white noise of public opinion and pay attention to what our human nature tells us – to get more, you have to pay more.  Then tout your value and price accordingly.

Commodities

I can’t tell you how often business owners/leaders tell me that their offerings have become commodities in the eyes of their buyers.  My response is always the same “If that’s really true, if you can’t add any value to that product, why are you still selling it?”

Come on folks, if what you’re offering is so readily available, if it’s of so little value to the customer, if customers view it as a necessary evil instead of something they desire, then why devote time, energy and resources to selling it?  Why aren’t you shifting your resources to producing and selling what your customers really want?

Conversely, if you are able to add value to the product, then why don’t your customers see that value?  Why aren’t they willing to pay more to get that value?

More often than not it’s because you’ve devoted your marketing dollars to touting your low prices instead of the value you’re adding.  Shift the focus of your marketing messages and you’ll shift your customers’ focus as well.

Price conscious customers

I’m not going to belabor the point.  The reason that customers are price conscious is that we’ve trained them to be so.  The vast majority of our marketing messages focus our customers’ attention on price instead of the value we provide.  We’ve trained them to be price conscious, not it’s time to train them to be value oriented.

Is strategic pricing dead?

Almost, though it needn’t be.  We have it within our power to become more strategic in our pricing.  The knowledge and tools already exist and are readily available, we simply need to employ them.

The choice is simple – either you take control of one of the greatest drivers of your company’s profitability, your pricing, or you allow your competitors to control it.  To me, that’s a no-brainer.

Is this perception accurate?

While I believe that it is accurate, I believe that men do more shopping than most retailers realize.  Just not for the same things or in the same way women do.

I know that I’m stepping into the abyss with these generalizations, but here goes.  Men shop for toys and gadgets.  If he’s career conscious and understand the importance of image in creating career opportunities, they may also shop for their own business attire in order to create the look they need to meet their career goals.  Other than that, they simply aren’t interested.

Toys and gadgets

Men love to play.  That’s why they get lost for a full day at Cabela’s, Bass Pro or Dick’s.  Of course, what constitutes play varies widely.  My brother-in-law’s passion is reading.  When he visits Barnes & Noble time stops.  Two of my nephews are into cooking and brewing their own beer.  They enjoy experimenting with both and will spend considerable time shopping for unusual ingredients as well as kitchen gadgets.

Other guys enjoy seeing the latest, greatest tools at work and can spend hours exploring the tool isles at hardware stores.  If they’re like me, the appeal wears off quickly when I have to actually use the tool.

Clothing

While some men will spend time creating a look, most, upon having found something they like will return to the same store when that item of clothing needs to be replaced.  Fortunately men’s clothing doesn’t change all that frequently allowing them to avoid lengthy visits to the clothing department.

Let’s contrast that with women shoppers.  Women shoppers fall into two categories – those that enjoy shopping and those that don’t.  Another generalization that will probably bite me.

Women who enjoy shopping typically get their enjoyment from playing with different looks.  For these women shopping for clothing is play time whether they’re shopping for themselves, their children or their husbands.  It’s no different than men shopping for toys and gadgets.  It’s fun!

Women who don’t enjoy shopping are likely to shop like men.  They’re only going to visit your store when they need something.  They’ll try to spend as little time as possible finding what they need, buy it, then get out of Dodge.

Implications

What does this mean for your store?  First, it means that you have to emphasize the fun in purchasing whatever you’re selling.  As we saw in the examples above, both men and women are likely to spend significant amounts of time in your store if it’s fun for them.

By the way, these are also the people who are likely to pay full price for what you offer.  Why?  Because kids don’t care about price, they only want what they want and you just fed the kid in them.

Second, make finding things easy.  For those non-shoppers who want a quick in and out, make it easy for them to find what they’re seeking.  These are the folks that welcome the question “What can I help you find?”  This is not fun for them and they want to get back to something that is fun so help them do so.  They, too, will pay a premium if you help them accomplish an unpleasant task quickly.

Finally, recognize that on any given day each of us can fall into either category depending on what we’re buying and how pressed for time we are.  Their demeanor will give you significant clues into which frame of mind they possess.  Don’t underestimate your natural ability to read whether a visitor in your store is in a playful mood or when they’re on a mission.

Will these insights attract more male customers to your store?  Maybe not, but by tailoring your approach to your customers’ mood you’ll create a favorable memory that increases the likelihood they’ll return whether they’re male or female.

B2B

On the surface this may not seem to have much relevance for the business-to-business (B2B)community, but that assumption would be wrong.  You can use these same observations about who is having fun and whose focus is on getting the job done to help you frame your sales pitch to demonstrate enhanced value in working with you.  Who among us doesn’t want to work with someone who understands us and helps us achieve that goal whether that goal is having fun or getting through an unpleasant task quickly?

• Who dictates the pricing in your business, you or your customers?
• How frequently do you monitor your competitors’ pricing?
• How do you use your knowledge of competitors’ pricing?
• Who is more likely to initiate a price increase, you or your competitors?

Dictating prices

Recently I met the CEO of a staffing firm.  He asked what I did.  When I told him he said, “That’s great if you’re in an industry where you control your pricing.  Our customers dictate our pricing.”

Obviously this man is not in control of his destiny.  Sadder yet is the fact that he doesn’t respect himself.  The reality is that we can’t expect others to respect (and value) us if we don’t respect (value) ourselves.

If you find that you’re regularly caving to customers’ price demands, discover your value.  Get help if you must – if you can’t see the value yourself.  Until you learn to say “No” to those who don’t value what you offer, you’ll never master your destiny.

Competitors’ pricing

How much time do you spend monitoring competitors’ pricing?  My experience is that there is a direct correlation between the amount of time a company spends monitoring its competitors’ pricing and how reactive their pricing is.  Why?

The intense focus on pricing makes it the focal point in leadership’s mind; inevitably, the value perspective gets lost.  I’m not suggesting that you be ignorant of your competitors’ pricing, but don’t let that knowledge dictate your pricing.

Using competitors’ pricing

Understanding how you respond to competitors’ price changes will help you assess the mastery you have over your destiny.  These questions will help you make that assessment.

Do drops in their pricing cause you to respond in kind or, worse yet, with ever greater discounts?  Does their pricing cause you to be reactive instead of proactive?  Does your mind go to “I have to lower prices to retain market share.” or “They must be struggling to lower prices so dramatically.”?

When a competitor drops his/her price, it should trigger the thought “How do I capitalize on this price move to demonstrate the value of our offerings over theirs?”  In other words, what is their customer giving up to get the lower price?

Initiating price increases

If you’re not the industry leader when it comes to pricing, you have no control over your own destiny.  Interestingly many of your competitors are praying for someone to be bold enough to raise prices so that they can raise theirs as well.

Know your ideal customer profile, what it is they value and how much they value it and you’ll be very confident in initiating price increases.  You’ll be in control of your own destiny and the envy of your industry.

I’ll be the first to admit that what I’m about to suggest is what I surmise rather than the result of scientific study.  I believe that retailers have, finally, come to understand two things:

1. Creating and marketing ‘sales’ is expensive.
2. ‘Sales’ focus customers’ attention on price.

Marketing costs

Imagine for a moment that you’re the chief marketing officer of your company and you’ve been tasked with coming up with two ‘sales’ a month for the next year, 24 in all.  These sales are expected to:

• Bring additional traffic to the store.
• Increase the number of ‘non-sale’ items purchased.
• Increase the frequency of existing customer visits.

Here are a few of the decisions you’d have to make:

• How many items do I put on sale?
• Which items should I put on sale?
• How much do I discount them?
• How much traffic do I expect from each ‘sale’ item?
• How often do my customers buy the ‘sale’ item?
• What’s the likelihood that, if I make the discount too high, they’ll hoard this product and return less frequently?
• Will these ‘sale’ items bring in only price buyers or will I attract people who’ll pay full price for non-sale items?
• What non-sale items do I expect to sell in conjunction with the ‘sale’ items and in what quantity?
• Is the profit margin on the non-sale items to allow me to maintain, if not enhance, my overall profit margin?
• How will my competitors respond to my ‘sales’?
• What media will I use to communicate the ‘sale’?
• To whom will I communicate the ‘sale’?  To existing customers only or to others as well?
• Which ‘sale’ items will I feature?  Which will be secondary?
• How will I know which items are bringing in the traffic?

Enough!  I’ve belabored the point, haven’t I?  The cost of your staff’s time, effort and energy in answering these questions (which are only a sample of what needs to be considered) as well as the cost of printing and mailing ads, coupons or the cost of TV or radio ads are enormous.

And you’re doing all this work, incurring all these costs while accepting lower prices on these ‘sale’ items.  Ouch!

That’s not the whole picture, is it?  We still haven’t talked about the effect these ‘sales’ have on your customers.

Focus on price

These ‘sales’ focus your customers attention so completely on price that they often aren’t aware of the other things you’ve done to enhance their experience with you.  The look and feel of your store, the quality of your merchandise, the friendliness and helpfulness of your sales staff, the visual appeal of your displays all get lost because you’ve focused your customers’ attention on price.  In other words, you’ve wasted these investments as well.

Now that we have a sense for the ‘sudden’ interest, let’ find out why it’s not working.

Wrong approach

The reason why Macy’s, JCPenney’s and, now, Lowe’s everyday low price strategies aren’t working isn’t, as the leaders of all three of these companies suggest, that customers have gotten used to ‘sales,’ it’s because they’re continuing to focus their customers’ attention on price.

When you hear the phrase ‘everyday low prices’ your mind immediately goes to price.  As discussed earlier in this post, that means that most other aspects of your offering are overshadowed by price.

The second thing that’s wrong is the word, low.  It’s not only a non-specific term that is subject to interpretation by the consumer, it links your company to others that use that phrase.  When Macy’s talks about everyday low prices, doesn’t your mind want to shift to Walmart?  They’re not even targeting the same markets, yet they’re using the same language.  That confuses buyers.

The third thing that’s wrong with these everyday low prices strategies is that these companies aren’t replacing their ‘sale’ ads with other marketing messages.  Out of sight, out of mind.  Or, if they are offering replacement ads, they’re not focusing on what’s important to their customers – image, innovation or time savings.  As I’ve discussed in earlier posts and in my book, those are the only three things any business sells.

Finally, I haven’t seen any evidence that Macy’s, JCPenney’s or Lowe’s made any significant changes in their offerings (read customer experience) for their customers to get a sense for why the prices changed.

Here are typical customer reactions when, in their minds, nothing changes but the price:

• The price has gone up even though they say it hasn’t.
• Maybe the price didn’t go up, but I know I’m going to give up something in quality or service that I used to get.
• I’m glad I stocked up on the last sale so I don’t have to pay these higher prices.

Given these reactions is it any wonder that, absent a reason for the change in pricing, customers are going to resist?

Here’s the morale of the story.  Customers, consumers and B2B, would love everyday pricing if they could feel that their experience with the seller was enhanced in ways that are meaningful to them.  Given the huge sums spent on creating ‘sales’ don’t you think you could allocate a small part of that budget to enhancing the customer experience while banking the rest of the savings for future growth?

As I’ve stated in many of my earlier blogs we, as sellers, have trained buyers to be price conscious because we place price at the heart of every marketing piece we create.  What I hadn’t, until recently, realized is that we’ve been drinking that Kool-Aid so long that we’ve become addicted to low price strategies.

This realization came as I watched yet another JCPenney’s square deal adds that highlighted the days when their customers could get the ‘best’ prices.  These ‘deals’ come from a company that recently declared itself different than other retailers by ‘eliminating’ discounting.

Why is it that we, as sellers, have become so addicted to low prices?  There are several reasons that come to mind:

• Walmart’s success
• Poor customer profiles
• Internalizing our beliefs

Walmart’s Success

Certainly Walmart’s success with a low-price strategy has been greater than any company in the history of commerce.  Companies trying to emulate Walmart’s success overlook several realities.

First, there is only one low-price leader in any industry.  Unless you have a plan for leapfrogging your industry’s low-price leader, you’re setting yourself up for failure.

Second, low-price strategies eventually fail.  Yes Walmart is still enjoying revenue and profit growth, but it’s in countries in which they are still adding new stores.  For those countries in which they’ve saturated the market Walmart is struggling to maintain revenues and, here in the U.S., could only do so by giving up over 2% of their profit margin.  That’s roughly 10% of their original margin.

Third, their customers don’t value the same things that Walmart customers do.  Which brings us to the second reality, most companies do a very poor job of profiling their ideal customers.

Poor Customer Profiles

I’ve spoken to JCPenney customers who say they wouldn’t be caught dead in Walmart.  Others tell me that they go to Walmart for cleaning supplies, but not for their clothing.  What do these comments tell us?

That these consumers have an image of themselves that’s quite different than what they perceive to be Walmart’s ideal customer.  The questions that JCPenney should be asking their customers are:

• What items do you go to Walmart to get?
• Why do you pay more for items than the low price you get at Walmart?
• What items are those?
• Why don’t you purchase those items at Target?  Macy’s?  Nordstrom?

These are the kinds of questions that help a company create a clear, concise profile of their ideal customers.  With this profile it’s much easier to craft marketing messages to attract customers who like what you have to offer and sales scripts to close the sale.

This brings us to the third reality of our price addiction – internalizing our own beliefs.

Internalizing Our Beliefs

Years ago I had a client comprised of seven entrepreneurs who had pooled some of their resources and invested in businesses around the country.  Each of the seven was responsible for running a different business.

One of the seven would craft stories to explain his company’s performance (or lack thereof) to the other members of the group.  These stories always had some element of truth, but were designed to hide some critical facts.

I watched this man relate the story so convincingly that even I, who knew better, felt myself being drawn into believing what he was saying.  How was he able to accomplish this?  He rehearsed the story so frequently that he actually came to believe it himself.  That’s what’s happening to retailers suffering price addiction.

These retailers have trained their customers to be price conscious and, in the process, come to believe that customers are price conscious – of their own volition.  Consequently they’ve stopped trying to differentiate themselves on anything other than price.  In the process they’re ignoring the things that are truly important to their customers’ self-image.

By the way, the situation I outlined above afforded me one of the greatest learning experiences I’ve ever had.  I had to learn how to introduce facts that contradicted some of the story being told without making that partner appear to be misleading his fellow partners.

Lesson Learned

Don’t become addicted to low prices!  If you are, use the questions in ‘Poor Customer Profile’ section to overcome your addiction.  You’ll quickly get back on track to serving your customers in the way they’d like to be served.

When the restaurant was rebuilt, a few blocks from its original location, it had the same seating capacity as the previous location.  Initially I was dumbfounded by that fact given that there was always a waiting list to get in.  Why wouldn’t the owners build a larger restaurant to serve more customers?

Then I realized that it was my original reaction that was dumb.  By limiting capacity, while maintaining the high level of quality and service their customers enjoyed, the owners were assuring that demand would remain high.  It also gave them great pricing flexibility.

Price increases would be readily accepted by customers because their perception of value was affirmed, if not enhanced, by the number of people waiting to be seated.  This strategy would also make it easier for the owners to resist the temptation to reduce prices during challenging economic times.

Finally, limiting capacity would increase the sales of both food and drink.  More drinks were sold to waiting patrons.  More drinks typically lead to a greater appetite for food which increases food sales.  Clever folks, these restaurant owners.

What does that have to do with the Reuters report on India’s airlines?  At least a couple of these airlines are learning that decreasing supply will help them raise airfares.  By increasing demand in relation to supply, the airlines will become more efficient in providing the routes customers truly desire and enable themselves to command higher prices based on that demand.  This is the point I’ve tried to make repeatedly in my blog posts on the airline industry’s dynamic pricing model.

In both instances, the restaurant and the airlines, limiting capacity (creating scarcity) is a key to long-term revenue growth and profitability.  Unfortunately, that’s counter-intuitive, the opposite of what our human nature suggests.  Our natural ‘belief’ is that growth means serving more and more people when, indeed, it involves increasing demand by limiting supply.

I’ll give you a chance to gnaw on that a bit as I head to my favorite restaurant and the inevitable wait it requires.

A few weeks later I saw an article in stltoday.com entitled Could medical pricing transparency control runaway costs?  The article cited the fact that healthcare consumers are bearing more of the cost of healthcare in the form of higher co-pays and deductibles.  The article went on to suggest that United Healthcare’s new online cost estimator could allow healthcare consumers greater control over the prices they pay for healthcare.

Are these new trends in pricing?  Has control shifted to consumers?  These are the questions were going to explore today.

New trends?

There are movements afoot that are driving providers away from their traditional pricing models.     In some instances the change is long overdue.  In others buyers are completely unrealistic in their expectations.

The legal profession is being pushed to a fixed fee pricing model instead of the their hourly rate model.  The only surprise here is that it has taken so long for consumers to press for this change.

In essence, the hourly rate model has basically said to the consumer “You have to take all the risk.  We don’t know what the outcome will be, how long it will take or what the total cost will be, but here’s what you’ll be paying per hour.”  What consumer wouldn’t rail against that kind of arrangement?

On the other end of the spectrum I know of one Fortune 500 company that has demanded to see its vendor’s costs so that they can assess whether or not they’re getting a fair price.  The vendor is also a Fortune 500 company.

That’s over the top.  Why would you want to penalize an efficient company for being efficient?  That’s exactly what would happen if the customer knew the vendor’s costs.  The customer would take the cost and add what they felt was a ‘fair’ margin to it which has the effect of penalizing their more efficient vendors.  That’s crazy.  We need to incentivize efficiency both for our own welfare and for competitive advantage in the world economy.

Has control shifted?

The short answer is ‘not really.’  In the case of the legal profession consumers are simply pushing for more transparency, more predictability in the pricing.  There will still be buyers who will pay multiples over the lowest price alternatives to get the ‘name’ firms, the political connections they have or to create the image of success that comes from using the most expensive firms available.

Similarly, United Healthcare’s push is designed to help consumers become more aware of what their options are so they can make an informed decision.  The consumer will still choose a higher priced alternative based on other factors like speed of access, care and concern of the physicians, nurses and staff, convenience of location and the provider’s reputation in the market place.

It’s no different than buyers choosing Walmart over Nordstrom or vice versa.  Each buyer places a value on the products/services they’re buying.  Some are very valuable to them and they’ll choose the top of the line because it is important.  Others are necessities they’d just as soon avoid, consequently they’re going to choose the lowest-priced alternative.

I’m sure you’re wondering about the staffing company’s CEO’s claim that customers control his pricing.  That’s absurd.

Without realizing it this CEO is, in essence, saying that he doesn’t see the difference between what he’s offering and what his competitors are offering.  If he saw a difference he’d be able to communicate it in a way that would help buyers decide whether or not it was important to them.

Because he can’t see the difference, they can’t either.  That simple reality explains why he feels he’s at his customers’ mercy when it comes to pricing.  Indeed, it’s why any business, in any industry, feels trapped by industry pricing.

The seller doesn’t understand how is offering is different than his competitors or he doesn’t know how to convert that value to dollars and cents.  Either way, the buyer doesn’t have the information he/she needs to make an informed decision.  The result is the consumer pushes for lower prices.

Sellers will control pricing as long as they:

• Provide value that their competitors don’t.
• Communicate that value effectively in their marketing materials and sales scripts.
• Price in a way that reflects that value.
• Understand which buyers value what they offer and why they value it.
• Target only those buyers who value what they offer.

Consumers will make their decisions based on the information the seller provides and what’s important to them within the context of the lifestyle they’ve chosen.  It’s their choice where they spend their money, the seller controls the price.

Their response told me that they didn’t have a clear idea of who their ideal customer is, which means that they were taking any business that came their way instead of using targeted marketing to attract more of the most profitable customers they have.

Another construction company was traveling over two hours to bid work in a smaller, more price conscious community.  They got the work and wondered why they weren’t making money.

Unfortunately this lack of clarity (this ignorance) about who the ideal customer is, permeates business, not just the construction industry.  The question is “How expensive is it?”

The results these two construction companies experienced are typical of companies that haven’t profiled their ideal customers.  Investments are made in additional infrastructure to handle the additional sales volume, but little, if any, profit is generated from these additional investments.

To make matters worse, any slow down in revenues causes them to take on work at even lower prices to help support the additional infrastructure.  You can see it, can’t you?  That downward spiral?  The eddy in the stream that is sucking the life out of the business?

Let’s contrast these results with a company at the other end of the spectrum, Apple.  Apple’s philosophy is that they’re producing products that they enjoy using, knowing that those products will appeal to others like them.  That’s their ideal customer.  That’s their brand focus.  That’s their target market.  That’s to whom their marketing is directed.

Prior to 2004, when it’s focus became clear, Apple’s earnings ranged from a loss to 10 cents a share.  Since then it’s profits have grown from the paltry 10 cents a share to $27.68 per share in 2011.

Similarly, the only time in Toyota’s history that it didn’t enjoy profit growth is when they decided that they wanted to overtake GM as the #1 automobile producer.  Losing sight of their ideal customer and what those customers valued cost them roughly $1 billion in profit as their earnings per share dropped from $12.93 to a $2.94 loss.

As you can see, neither the size of the company nor the industry matter, when you lose sight of who your ideal customer is, the consequences are huge.

If your business is experiencing any of the results outlined above, step back and ask yourself  “Who’s my ideal customer?”  If you find yourself struggling to answer that question or even if there’s only a slight hesitation before you begin to respond, you’ve lost sight of your ideal customer.  It’s time to create that customer profile and explore how well your offerings are serving them.

Most companies have a pretty good sense where they fit on the spectrum versus competitors.  Using the image spectrum:

• Walmart is the low-price provider.
• Target is viewed as more hip and can command higher prices to reflect that image.
• JCPenney used to be (who knows where they’re headed today) known for dependable, but not readily recognizable brands and their pricing was 3 to 5 times the Walmart alternative.
• Macy’s carried very recognizable brands that had strong image appeal and was able to get prices 6 to 8 times the Walmart alternative.
• Nordstrom is the most upscale of these five companies and commands premiums of 12 to 14 times what a Walmart alternative would be.

Using image as the focal point for each of these companies, their initial price positioning makes a lot of sense.  Unfortunately it’s all down hill from there.

The first mistake they make is to price ‘competitively’.  That typically means at, or below, industry pricing for their segment of the spectrum.  They choose to price this way despite the fact that they claim to offer ‘more’ or ‘better’ of whatever they deem their value to be.

The second mistake that most retailers, indeed companies in every industry, make stems from the extremely poor job they do communicating value.  You don’t have to trust me on this.  All that you have to do is look at the ads the companies cited above then answer this question “Does the ad emphasize their position on the image scale?”

Of course not, with the possible exception of Nordstrom, most of their ads are about their latest sale.  If their marketing messages did a better job of helping their customers experience their stores without being there, they’d be able to command higher prices than is typical for the area of the spectrum they occupy.

The third mistake is the sales these retailers regularly run.  Fluctuating prices confuse consumers about the real image value of their offerings.  These sales take many forms including discounts, rewards programs, coupons and loyalty programs to name a few.

These sales muddy the water for customers.  The concept of value, whether that value is image, innovation or time savings, gets lost in the myriad of sales that companies offer.  In the process we train our customers to wait until we offer a discount to buy.

That means that the customer is postponing the satisfaction of owning your products/services.  For you it means lower profit margins and additional marketing costs to acquire enough new customers to not only replace those lost profits, but to grow them.

Now back to the original question “Who [among retailers] does a good job of pricing?”  Companies that I think do a good job of pricing are:

Panera

They repeatedly raised their prices throughout the recession and experienced sales growth in excess of the price increase.

The only criticism I have of Panera’s pricing is their rewards program.  Reward programs are effectively discounts.  Rewards programs do not increase my desire for their offerings.  I’m not going to visit any more frequently or buy larger quantities because of the reward.  That means that they’re offering me a discount to buy what I’d have bought at a higher price.  Rewards programs increase retailers costs in two ways – establishing and maintaining the reward program and providing a discount to customers who are willing to pay higher prices.  Ouch!

Apple

The key word with Apple is consistency.  They consistently charge premium prices on all new offerings and tend to hold those premiums throughout the product life cycle.

The one faux pas I recall was reducing the price of the original iPhone by $100 within 60 days of its release.  The hue and cry of the early adopters resulted in a refund of roughly $100 million to those early customers.  That’s what happens when you move away from your value proposition in an attempt to garner market share which is what I believe the motivation was for the price reduction.

Apple may be on the verge of making another pricing mistake.  Rumor has it that they’re coming out with a new tablet to compete with Google’s Nexus 7.  If they do, it’ll be interesting to see how they launch that offering.  If they offer a better product and price it accordingly, the market will continue to view them as an industry leader who is entitled to premium prices.

If, however, they price the new tablet to compete with the Nexus 7, they’ll appear to have relinquished their industry lead and become an also ran in the eyes of the consumer.

Kraft Foods

I don’t recall Kraft having raised prices during the recession, but as soon as it appeared that the recovery was under way they immediately began raising prices and continue to do so with some frequency.  Like Panera, they’ve experienced sales growth in excess of their price increases.  Indeed, their sales growth was 50% higher than their price increase in the 3rd quarter of 2011.

The keys to these companies’ success in pricing are:

• Consistency in their customers’ experience.
• Charging prices that reflect that consistency and support their value claims.
• Raising prices in good times and bad, further reinforcing the perception of value in their customers’ minds.
• Continuously finding new ways to serve their customers in ways those customers want to be served.
• Initiating change in their markets instead of mimicking others changes.

The pricing mistakes that companies like these are most likely to make are:

• Focusing on market share growth instead of customers’ needs/interests.
• Discounting in any form (sales, rewards programs, loyalty programs) confuses the customer.  It’s hard to tell what something is really worth when the price fluctuates for no apparent reason.  Can anyone tell me what a gallon of gasoline is worth?
• Failing to raise prices in good times and bad.
• Losing sight of who its ideal customer is.  Think JCPenney.

Basically, any company that:

• Charges a premium to the market.
• Continues to raise prices regardless of what the economy is doing.
• Stays focused on its ideal customer.
• Avoids the temptation to discount, reward their customers or create loyalty in ways other than a superior experiences.

is doing a good job of pricing.

For those at the summit, my apologies for the fumble.  Hopefully I’ve recovered the ball with this post.

Do these concerns reflect good business sense or the lack of will to lead?

I find it interesting that, in the midst of all this uncertainty, Apple is setting astounding new revenue and profit records?  Equally fascinating is that the automotive industry is enjoying one of the longest cycles of sales growth and profits in decades.  Then there are regular news reports of manufacturing returning to the U.S.  What do these results demonstrate?

Consumer spending

First, that consumers spend, in good times and bad.  As human beings we’re acquisitive by nature; we’re not happy unless we’re spending money to acquire things.  If you doubt that, recall a time when you cut back on your spending for an extended period of time – a few weeks to several months – and remember how good you felt when you resumed spending.  This simple fact explains the sales growth the auto industry is experiencing despite all the economic uncertainty.

Apple’s experience

Second, consumers and businesses spend money on the things that are most important to them.  The iPhone was introduced in 2007, just ahead of the worst recession in 7 decades, and has consistently led the field in sales and profitability ever since.  If consumers were guided by uncertainty, they would have shunned the iPhone as being expensive and unnecessary.  But they didn’t did they?

Imagine what would have happened if Apple had decided to postpone the introduction of the iPhone until the economic outlook had improved.  The sales and profit growth they would have forgone is staggering.  Not to mention the joy consumers experienced using the iPhone.

Return of manufacturing

The return of manufacturing to the U.S. is, in part, a testament to the higher quality available here.  Of course, there are other factors as well.  Labor costs are rising in China and oil prices are driving up the cost of shipping.

But the desire for quality and the willingness to pay a premium price to get that quality is undeniable.  Consumers have demonstrated, time and again, the willingness to return to the higher quality products/services and pay a premium price when the lower priced alternative disappoints.

Uncertainty

What does this mean for business leaders’ claims that they can’t hire more people because of the uncertainty in the marketplace?  It’s hogwash!

These ‘leaders’ have chosen not to lead.  They’re not exploring their customers changing needs.  Instead they’re focusing on the customer’s natural desire for lower prices.  They’re definitely not making any attempt to see how their customers’ customers needs are changing so that they can help their customers enjoy greater success.  Instead, they’ve adopted the role of victim.

What we need in this country are business owners/CEOs that are willing to lead.  People who are so determined, so focused on fulfilling a dream, so committed to finding new ways to serve their customers that nothing will stand in their way.

Anyone who has enjoyed success, at any level, knows that the path is fraught with obstacles that challenge resolve and test the limits of passion.  Knowing that these conditions are the norm for success, why in the world would we shy from a little uncertainty?

If you allow today’s uncertainty to drive your decision making, you’re accepting the victim’s role and you will assure that victimology.  Conversely, if you believe that you and your organization are creative and can overcome any obstacle, whether of your creation or not, you’ll thrive in even the most challenging times.  The choice is yours.  Choose wisely.

More than you might think.

I received some gentle chiding recently when someone asked me to “send a case of what I was smoking.”  This was in response to my statement that “my goal is to provide such a WOW experience that I don’t have the need for collection efforts.”

That request prompted me to reflect on whether my statement was arrogance, a lofty goal or whether it had some merit.  As I looked back on my 21+ years in business I realized that there was only one instance in which I wasn’t paid in full for my services.  That statistic amazed me.  I didn’t realize how accurate my earlier statement had been.  This reality has given me additional insights into how this happened and I want to share them with you.

The key to minimizing collection costs is to create WOW experiences, yet most companies preclude that possibility by taking on customers that don’t value what they have to offer.  Imagine for a moment that you purchase something in which you’re only moderately interested.  You almost didn’t make the purchase, but the price was so low that you thought “Why not?”

Now let’s assume that something goes wrong – some expectation you had wasn’t met.  Are you going to pay for that purchase or are you going to sit on the vendor’s invoice until they contact you for payment?  If you’ve already paid aren’t you going to seek a refund?  If the vendor is unwilling to refund the money are you likely to call the credit card company or your bank to stop payment?

That’s exactly what your customers will do as well.  If you want to get a sense for how costly this is, talk to your collection staff about how much effort they put into collecting this money.  Ask your sales force how much time they spend trying to salvage these customer relationships and how successful they are.  Now consider the fact that you discounted your price to get these customers in the first place and you’ll quickly discover that you would have been better off without them.

How do you minimize these collection costs, the hits to your company’s reputation and regain the profits you so richly deserve?  First, have a clear picture of whom it is that values what you offer – values it enough to pay premium prices to get it.  These are the only people for whom you can create a WOW experience.

Second, exceed their expectations.  That’s much easier to do when you’re getting premium pricing.  You not only have the financial resources to exceed their expectations, your staff has more time to spend on each of your customers because they’re not dealing with collection issues.  Plus your sales force can spend more time finding new ways to serve these customers rather than spending that time in futile attempts to salvage customers who’ll only buy at discounted prices.

One of the ways to define your ideal customer is to look at those customers with whom you enjoy your greatest success.  Define those customer values and qualities that allow you and them to enjoy such great success.  Then adjust your marketing messages to attract more of those customers.

It’s counter-intuitive, but being more selective in accepting new customers can dramatically reduce your collection costs.

The reality is that pricing can enhance (or lose) a buyer’s trust in your offerings, but it can’t create it.  Why?  Because a price, without the context of value, has no meaning.  In my blog post, The Dangers of Cost+ Pricing, I used a milk example.  To families with young children milk has a great deal of value, to those who are lactose intolerant it has no value.  What that means is that we have to lay the contextual framework for our pricing in order to build trust.  How do we do that?

Customer Profile

It begins with a clear customer profile.  If we’re selling whole milk our customers are family with young children, not the lactose intolerant or seniors who are trying to remain heart healthy and stroke free.  Once we’ve profiled the customer it’s much easier to create a clear brand promise – a result that the customer can expect.

Brand Promise

What result do these families want?  Healthy physical and mental growth and development for their children.  Once we understand what’s important to our customers, what they value, we can shape our offerings to provide that value.  Communicating that brand promise in a tagline is the first step in creating the value context for customers to later assess the price.  That leads to the second phase of communicating value – our marketing messages.

Marketing Messages

To create an effective marketing message we need to keep our brand promise, healthy growth and development, as the focal point of our messaging.  When we stray, as many companies do, into areas of what we do or how we do it, we lose buyers’ interest and their trust.  Why?  Because we’re no longer speaking to what’s important to them – the promise our brand made to them.

When we focus on our company or our products instead of our customers we, in essence, tell them that we’re more important than they are.  Who among us trusts someone who puts their interests ahead of ours?  You have only to contrast the experience you had in dealing with a salesperson who was genuinely interested in helping you make an informed decision with one whose interest was in making a sale to know that what I’m saying is true.

That brings us to phase three of building trust – the sales experience.

Selling

Whether your involved in face-to-face selling or using point-of-sale devices, your message has to support the message the customer has received in your brand promise and marketing messages.  You can feel the trust building, can’t you?  The more consistent the messaging, the greater your customers’ confidence in the product or service you’re offering.  It’s human nature, we trust consistency just as we tune out messages that overwhelm us with irrelevant information or, worse yet, offer conflicting information.  That brings us to pricing.

Pricing

Once we’ve created a clear value context with our brand promise, marketing messages and sales scripts (materials), we want our pricing to reflect that value.  If we price our offerings too low in relation to the value, we lose buyers’ trust.  Conversely, pricing that reflects the value provided enhances customers’ trust in our offerings.  That’s why I said at the beginning of this post that pricing can enhance (or lose) trust, but not create it.

Byproducts

Not only will these four phases of building trust – branding/marketing/sales/pricing – help you attract and win more value buyers, it’ll help you build a more successful business.  Through this process you define and communicate your value system for all the world to see.  Workers who share your passion for these values will want to join your company.  Vendors who appreciate your values are also going to prize their working relationships with you.

You don’t need much of an imagination to see how much more fun running a business can be when you’ve surrounded yourself with people who share your passion, interests and values.  It all begins with knowing how to build trust with prospective customers.  Now you have the formula to do just that.

Background

Before we get into the why, allow me to give you a little background information.  The luxury travel packages cited in this piece were 45% to 50% off their regular price.  These discounted prices didn’t make the trips inexpensive, just more affordable.  Now we can begin the discussion of why you’re not their ideal customer.

Not ideal customers

First, those of you who don’t believe you can afford luxury travel, or simply don’t feel that it’s a good use of your money, may be intrigued by how the other half lives, but you’re not going to pay for this level of luxury even at the lower prices.

Yes, you’ll watch the news piece.  You may even decide to visit one of the destinations, but you’re not going to pay luxury prices to stay there.

Second, if you are inclined to purchase luxury at lower prices, whether it’s to treat yourselves to a rare experience or impress your friends at the next cocktail party, you’re not going to be frequent purchasers of this luxury.

Business impact

What does this mean to the companies offering these deals?  Let’s frame this in the form of a risk/reward analysis.

Rewards

The company may gain additional revenues from people who want a rare treat or bragging rights.  But their profit margins are going to be significantly lower.

Risks

These promotions (discounts) may not generate additional revenues.  If they don’t the company has cheapened its offerings without gaining anything in return.

If the company is successful in selling these discounted packages, they’re likely to experience more customer dissatisfaction.  It’s not difficult to imagine these price buyers walking into their room and thinking “It’s beautiful, but I don’t know that it’s worth x.”  Nor would it be unusual to hear them complain that service wasn’t instantaneous, after all that’s what luxury means to them.  Oh, by the way, these are the same folks that will be very vocal about their dissatisfaction.  Ouch!

Then there’s the fact that the company cheapened its offering in the eyes of its ideal customers.  Their existing customer base can’t help but wonder whether or not they’d previously been over charged or why they should pay full price going forward.  A luxury car buyer told me that he questioned whether or not he would continue buying Mercedes cars after Mercedes announced its C-class.  Image is an important element in buying luxury.  To cheapen that image is to reduce its value.

Finally, people like to surround themselves with people who are like them.  That means that these companies’ ideal customers prefer to be around other people who enjoy, appreciate and can afford luxury.  Being around people who don’t appreciate or know how to enjoy luxury would diminish their experience.

Hopefully this simple analysis will help you understand the risks you, as a seller, take when you offer deals to attract buyers that typically wouldn’t buy from you.  It’s an expensive trap, one that I’d like you to avoid.

The question was “What about the bargain hunter?”

Background

An audience member had just made the comment that having ‘sales’ and offering discounts penalized customers who paid full price when another audience member brought up Macy’s and JCPenney’s failed attempts at everyday pricing.

I asked him which of the two customer groups were more profitable, the customers paying full price or those waiting for ‘sales.’  He grudgingly acknowledged that the former were more profitable.  That’s when he asked “what about the bargain hunter” – the people who enjoy finding deals?

This question sums up everything that’s wrong in retail today.  We’re willing to ignore the needs and interests of our most profitable customers to cater to people who don’t really value what we have to offer and won’t buy unless we offer them a discount.  Let’s see what kinds of behaviors this mindset produces.

Implications

Instead of focusing our marketing on finding new ways to serve our most profitable customers and attracting more customers like them, we spend obscene amounts of money trying to attract people who won’t buy unless we offer them a significant discount.

As we continue to employ this marketing ‘strategy’ we train our most profitable customers to wait for deals.  We train them to become bargain hunters.

Then when we’re reviewing our financials, we bemoan the fact that our customers only care about price.  How could we possibly expected a different outcome?  And we have no one to blame but ourselves.

Oh, by the way, aren’t these bargain hunters the same customers who:

• Are most likely to return merchandise?
• Absorb your employees’ time getting the information they need, then going on line to a competitor and buying from them?
• Cost you more to acquire and are less likely to remain loyal?
• Complain to anyone who’ll listen about what a lousy experience they had at your store?

Oh yeah, those are the people I want as customers.

Digging out

The obvious question, assuming that you agree that pursuing bargain hunters is folly, is “How do we get out of this mess?”

The simple answer is to shift your focus to your most profitable customers and allow the bargain hunters to hunt in someone else’s field.  Yes, that means that you’re likely to see a significant drop in sales.  If you raise your prices 3% to 5% at the same time, you’ll offset some of the revenue loss, improve your company’s profitability and solidify the perception of value in the minds of your most profitable customers.

Next, ask your customers what would make the experience even more enjoyable for them?  They may not have an idea immediately so make it easy for them to contact you with ideas whenever they surface.  If you’re not dealing with the end user, spend time with your customer to discover how their customers’ needs are changing.  That way you’ll position them and yourselves to be on the leading edge of innovation – a very profitable place to be.

Finally, raise prices regularly in smaller increments.  Panera repeatedly raised prices during the recession and experienced revenue growth in excess of the price increases.  Kraft Foods has had similar results with sales growth at times being 50% more than the price increase.  All of Apple’s new offerings during the recession carried the same premiums they did previously and at one point Apple’s cash reserves exceeded those of the U.S. Treasury.

For the skeptics

For those of you whose thoughts continue to drift back to the JCPenney/Macy’s everyday pricing failures, hopefully I can put your concerns to rest.

JCPenney, in my opinion, has made several mistakes that prevented their everyday pricing from working.  First, they don’t have a clear picture of who their ideal customer is.  Their attempts at being ‘hip’ and adding ‘wi-fi’ to eliminate checkout lanes don’t jibe with traditional JCPenney customers’ interests.

Historically JCP customers have been middle-class wage earners who enjoy having a dependable brand.  One that is consistent in quality and keeps them in line with current fashion trends.  They don’t buy brands like Tommy Hilfiger or Polo to enhance their image.  Indeed, they may think that behavior ostentatious.

JCP’s traditional customers prefer not to be on the leading edge of anything including technology which makes the wi-fi ‘check out’ of questionable value to them.

Second, the real benefit of JCP’s everyday pricing was convenience – being able to get what you want when you want it without wondering what the price was going to be an hour from now.  They didn’t tout that in their marketing.  Instead, they talked about a square deal which has no meaning to customers – who among us buys something that doesn’t feel like a square deal.

Finally, JCP put the cart before the horse.  You’ve got to be clear about who your ideal customer is, what it is they value and how much they value it before you change your pricing.  These other factors provide customers with a context for evaluating changes in pricing.  By changing the pricing without changing the context JCP simply confused its customers.

I’m not as familiar with Macy’s attempt at everyday pricing, but I suspect its failure was similar to JCPenney’s in this regard, they didn’t change the customer experience (product mix, service levels, ambiance) in ways that would allow customers to see a reason for the change in pricing.

Human nature being what it is, when only one aspect of an offer changes we wonder “Why?”  If multiple aspects of an offer changes, we expect a change in pricing and evaluate the new offering in light of our needs/interests.

The only question remaining is “Given the awareness of the problem, what are you going to do with it?”  I’ve given you a clear picture of what happens when you cater to bargain hunters.  I’ve also offered tips for reversing the trend.  The rest is up to you.

That’s not what I’m seeing today.  Today we’re discounting everything during our peak selling seasons.  Grocery stores not only offer low prices on turkeys at Thanksgiving, they discount the cranberries, candied yams, pumpkin pie filling, pie crusts and rolls – anything and everything you might need for your Thanksgiving feast.

Oh, let’s not forget the pre-meal drinks and snacks.  All of the soda, beer, wine, bourbon, scotch and other alcoholic beverages are on sale too.  As are the chips, dip, peanuts and pretzels.

This madness isn’t limited to grocery retailers.  Years ago I had helped a client purchase a franchise from a well-known chain.  He called one day and said “The home office is offering a promotion on our crabmeat sandwich during lent (a period of peak demand) that is basically break even for me.  Does that make sense to you?”

Unfortunately it did.  The franchisor gets a percentage of the total revenues generated whether the franchisee is profitable or not.  Fortunately, the franchise agreement did not require my client to accept this promotions.  He held his prices on the crabmeat sandwich while offering other loss leaders.  My client generated significantly higher profits for his store using this strategy.

These two examples show that we’ve lost sight of the true purpose of loss leaders.  How did this happen?  Here are the reasons I hear:

• We’ll lose sales if we don’t match our competitors’ low prices
• Buyers only care about low prices
• We can increase market share with lower prices

Here are the realities:

1. Buyers, particularly retail buyers, place great value on convenience
2. If you are the most convenient location and you’re losing sales to a competitor over low prices, you obviously aren’t providing an enjoyable experience
3. When you lower your prices just 10% you increased the number of customers you need from 10 to 11

Let’s look at these realities in greater detail.

Time is the only non-replaceable commodity any of us has.  That’s why buyers go to the most convenient location that has employees who demonstrate some care and concern for their welfare.  Which brings us to reality #2, the customer experience.

You’re a buyer.  You’ve made purchases that cost you more simply because the people at the store greeted you warmly, remembered your name, made you laugh.  For a truly great experience you’ve probably driven 10 minutes, 15 minutes or more out of your way and paid a higher price for the exceptional experience.  Your customers have as well.  Blaming your competitors’ low prices instead of examining gaps in your service level is akin to the child’s excuse – the dog ate my homework.

Speaking of customer experience, if yours isn’t good enough to retain your customers when your competitors lower their prices, how in the world are you going to attract that 11th buyer you need to recoup you the 10% discount you gave?  Your competitors face the same dilemma.  If you’re providing a richer experience than your competitors, their low prices won’t draw your customers away from you, making it nigh on impossible for them to recoup their discount losses.

If the above isn’t enough to get you to reexamine your loss-leader strategy, let me share a news brief with you.  During the late-evening newscast on Black Friday the newscaster said that retailers were offering huge discounts in hopes of at least matching the previous years’ sales.  How does that compute?  Buyers don’t increase their spending budgets when prices drop.  If anything, you may have just given them an incentive to hold onto some of that budget.

We wouldn’t be doing justice to this discussion if we weren’t looking at these loss leaders from the buyers’ perspective.  When retailers lower prices on everything, instead of just a few loss leaders, how does the buyer react?  I doubt that any of you have had a customer come up to you and thank you for the low prices.  It’s more likely that they have come to expect that kind of pricing every year during peak demand.

In every human interaction one person is training another how to behave.  Because we’ve lost the art of the loss leader we’ve trained our customers to expect low prices on everything they want, when they want it most.  Ouch!

Don’t fall into that trap again!  Begin creating customer experiences that make them willing to pay more for both the experience and the convenience you offer.  Then hold your prices.  You’ll enjoy greater revenues, higher profits and greater customer loyalty.

In order for a pricing strategy to be effective, there needs to be congruency among four elements of that strategy.  These elements are

• A clear brand promise.
• Marketing messages that attract customers who desire what the brand offers.
• Sales scripts that communicate the value.
• Pricing that reflects the value.

Let’s see how JCP stacks up against these.

Brand promise

Before you answer the following question, let’s make sure that we’re on the same page about what a brand promise is.  To me it’s the result the customer can expect from dealing with the business.  In this case, JCP.

Can you tell me what JCPenney’s brand promise is?  Nor can I.  I can surmise what it has historically been, but I can’t say that I know what it is now.  Why?

JCP’s strategy, when first announced, was three-pronged:

1. Adding brands not available in other stores.
2. Modernizing the look of existing stores.
3. Establishing everyday prices.

The only part of the strategy that has been effected thus far is the everyday pricing.  That does not give us, as consumers, a sense for where the company is headed, what offerings we can expect or what the ‘new look’ will be.

Without that information we have no way of knowing what JCP’s brand promise is.

Marketing messages

Further evidence of the lack of a clear brand promise is JCPenney’s marketing messages.  Their focus on a ‘square deal’ in their ads doesn’t indicate that JCP’s leadership has a clear direction.  If they have one, then why are they continuing to focus on price (square deal) instead of the look and feel of the JCPenney experience?

JCP’s leadership seems to overlook is the fact that we, consumers, don’t buy anything unless we feel that we’re getting a ‘square deal.’  When’s the last time that you bought something knowing that you were being ripped off?

Having made these observations, I can’t say that the poor quality of the marketing messages surprises me.  How can the marketing folks be expected to create effective marketing messages without a clear brand promise?  I do this for a living and I won’t begin to develop marketing messages for my clients until we’ve established that brand promise.

Sales scripts

Like the marketing messages it’s nigh on impossible for sales clerks to distinguish the value for interested customers when they don’t know the brand promise.  How much easier would it be for them if they did have brands that couldn’t be found elsewhere or if they could feel the difference in atmosphere of their surroundings?

Pricing

Establishing pricing should be the last step in the process.  Until you have a clear understanding of:

• Who your ideal customer is.
• What it is they value.
• How much they value it.

how can you possibly establish a price?  All three of the above are developed when a company creates:

• A clear brand promise.
• Marketing messages to attract those customers.
• Sales scripts to support your brand and marketing claims.

much less the pricing.

Lesson

What can we learn from the JCP experience?  Two things:

1. That there has to be congruency between the four elements of a pricing strategy – brand promise, marketing messages, sales scripts and pricing.
2. That there is a sequence – brand promise, marketing messages, sales scripts, then pricing – that must be followed in order for the strategy to be effective.

Unfortunately JCP’s leadership violated both of these rules.  If you want to avoid the pain and turmoil the folks at JCPenney are experiencing, make sure that you use the sequence outlined above in developing your pricing strategy.  Your customers will reward you handsomely for the effort.

In my February 28, 2011 post, Buying Customer Loyalty, I railed against reward programs.  One restaurant chain, Panera Bread, has proven my point via the type of rewards it offers.  Yes, I have a Panera card.  I’m not above taking discounts offered even though I don’t advocate discounting to my clients.

In the earlier post I stated that customers’ need/desire for offerings don’t increase just because they’re receiving a reward.  What does that mean for sellers?  They’re giving discounts to customers who would have bought anyway – at full price.  Unfortunately this reality doesn’t hit home until the reward program is already in place.

What I’ve noticed recently with the Panera program is that the rewards offered aren’t what I typically purchase.  Based on the rewards offered Panera is encouraging me to try new things or to visit at times I don’t normally visit.  That’s not a reward, that’s a marketing strategy.

While I don’t have a problem with marketing strategies that encourage buyers to try new things or to return more frequently, I resent a ‘reward’ program that tries to accomplish the same goal.  Maybe I’m too stringent in my definition of reward, but to me it’s something that has value to the recipient.  When that ‘reward’ places the welfare of the presenter over the recipient it loses the right to be called a reward.

The question is “How do you offset the revenue losses your reward program created while maintaining credibility with your customers?”  Keep your marketing efforts and reward programs separate.  It’s all right to announce new offerings, encourage customers to visit at times they typically don’t, to explore alternative uses of your offerings in your marketing materials in any media you choose, just not in the rewards program.

Converting a reward program to a marketing program is a violation of your customers’ trust.  Losing their trust is one of the quickest ways to drive your customers to your competitors.  If you’ve fallen victim to the temptation of reward programs, don’t compound the problem by converting it to a marketing program.