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Your Pricing Policy: Opportunities and Dangers

Posted By Ron Sidman, Thursday, July 21, 2011
Updated: Tuesday, July 21, 2015

Considering how critical pricing policy is as a component of a business’s design, it is surprising how many companies of all sizes often make pricing decisions in a reactive, inconsistent way as opposed to being directed by a thoughtful, long-term policy tied to corporate purpose, vision, and values. The potential negative results can include:

·         Failing to optimize retail price points

·         Encouraging retail buyers to always bargain your price down

·         Destroying credibility with buyers

·         Communicating a lack of confidence in a product’s potential

·         Undermining the value perception of consumers

·         Inability to sustain consistent overall profit margin because of profit disparity between customers

A well-crafted policy should address both how you initially set your base prices product by product as well as how you vary prices for the same product customer to customer. This is a complex topic that I can only touch on briefly in this blog. But, let me give you some suggestions from my own experience that might help you improve your profitability.

1.       Set base prices for products based on consumer perceived value not cost. Money is often left on the table by not pricing products high enough when you have the added value to support it. Consumer surveys and/or focus groups comparing your offering to the competition, if any, can help you get a sense for consumer perceptions before you finalize the price. The results may surprise you. On new products, if in doubt, go out at the higher price. You can always come down but you can’t go up. Remember that the price you set communicates both to retailers and consumers the level of quality and the confidence you have in the product. 

2.      Understand current marketplace reality. You’ve got to do your homework long before you start walking into those lions’ dens known as buyer’s offices. Retailers tell me they are shocked at how poorly prepared company personnel or sales reps often are. If you can’t offer a retailer pricing that allows them to meet their margin requirements while being competitive at retail with their principal competitors, maybe you shouldn’t be presenting the product to them at all. If you don’t have at least a sense of what your competition is charging for comparable products, you could be embarrassed. If you don’t know the retailer’s requirements up front with respect to sales allowances, special requirements, and other deductions, you might be pricing too low from the get go. 

3.      Assume that buyers and employees are going to change companies. Being able to sleep nights was always one of my priorities and I assume it’s one of yours. There’s no reason why you can’t or shouldn’t establish a pricing policy that can be justified no matter who becomes aware of it. You should expect that the prices you charge different customers for your products are going to become public at some time. And, trying to explain it by saying to buyer B that buyer A got a better price because she threatened to drop the product is not going to make anyone happy. Does that mean you have to charge everyone the same? No! But there ought to be an acceptable rationale, a set of guidelines, to justify the differences. Any customer that meets the guidelines should get the same price.

4.      Aim to equalize profitability by customer. Arguably the best basis for price variation by customer is equalization of profit contribution percentage*. It’s also the fairest. Why shouldn’t every customer contribute proportionately to your bottom line? Why should customers that pressure you for extra allowances, are costly to service, or abuse return policies get a better deal than other equal volume customers? Instead, build these costs into your price. Of course, you typically want to give better prices to your larger customers. Profit contribution-based pricing justifies and enables that because economies of scale reduce direct costs. Another benefit to equalizing profit contribution by customer is that you won’t find your margin suddenly eroding because the balance of your sales shifts to lower profitability customers. 
* Profit Contribution Percentage = (Sales – Direct Costs) ÷ Sales

5.       Be willing to walk away.This is a tough one, but if you or your salesmen are routinely lowering prices strictly based on pressure from customers, you’ve got serious problems. If you can’t set and hold to fair prices for your products, you better take a cold hard look at your competitive advantage product by product and your overall business model. Personally, I think you need to establish a reputation with buyers that the price you quote is the price they pay—unless the buyer is willing to work with you to pull some cost out of the product in some way so profit contribution is maintained (package change, minimum quantities, etc.). If you simply crumble under the pressure, guess what’s going to happen every time you quote a price to that buyer for evermore? You may lose some business in the short term with this approach but you’ll be better off overall by far!

6.      Proactively add value to your products. Products have a life cycle. You should enjoy the widest profit margin when the product is new and your competitive advantage is greatest. But, as you know, nature abhors a vacuum and competitors will flock to grab a piece of the action. Don’t wait for this to happen and then react. Create a product improvement process, if you don’t have one, and systematically improve especially your higher volume and most profitable products at least annually so that you can preempt competition without having to lower price. Don’t let your products become commodities.

Establishing an effective pricing policy can have an enormous impact on your level of business success. It’s well worth taking the time to think it through with your staff, document it, communicate it, and enforce it. Have you done this yet?

Questions? Comments? Let me know what you think.

Want to learn more? Sign up for a Skype session through the JPMA CEO Mentoring Program Page. It is a cost effective way to learn some tricks of the trade!

      

Disclaimer: No warranties, express or implied, are contained herein. Purchasers, or users, of this information acknowledge that any errors or omission in the performance of the material contained herein or, any injuries resulting from its use, are the sole responsibility of the purchaser or user, and not JPMA or the author. Opinions expressed are those of the author only.

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Working with Toys R Us

Posted By Ron Sidman, Thursday, July 14, 2011
Updated: Tuesday, July 21, 2015

Jerry Storch, Chairman and CEO of Toys"R"Us, is a very impressive and successful leader. In his breakfast keynote presentation at JPMA’s recent Summit in DC, he made it clear that his company, already one of the dominant retail forces in the industry, intends to continue to try to gain market share wherever it can in the US and abroad. The phrase, "We’re playing to win", has been used very successfully by Mr. Storch to motivate his company in this direction, evidenced most recently by reported market share increases in 2010 at the expense of his competitors.

But while leading in toy and baby market share and becoming the industry "voice of authority" is their goal, it was also clear from Mr. Storch’s very presence at our Summit and his comments about vendor partnerships that they also recognize how important branded suppliers are to their business model.

Having said that, it’s possible his comments about the critical importance of exclusive products and their intent to accelerate their private label program sent shivers up the spines of some of the manufacturers in attendance. This is not new news or a change in strategy for TRU. These strategic themes go back to at least the Marty Fogelman era if not before. As Mr. Storch admitted, TRU simply does not have the cost structure to compete with the likes of Walmart head to head on price and therefore needs as much as possible to have a different set of products in their stores. He highlighted Mayborn’s Tommee Tippee feeding line as an example of an exclusive TRU/BRU program that has been successful for both Toys"R"Us and the supplier.

The Challenges:

·         Those of you who count TRU/BRU among your customers are very fortunate in many respects but you also have some hairy issues to deal with.

·         Can you and should you create exclusive products for them?

·         Is it possible that one of your high volume, high profit products could appear some day in a Babies"R"Us private label package—a brand that Mr. Storch says scores very well with consumers.

·         Should you take the initiative and provide private label products to them yourself as Mr. Storch suggests?

·         What are the implications of TRU/BRU becoming a higher and higher percentage of your total business?

Some Suggestions:

Keep working at maximizing your competitive advantage.

Unless you’re Procter and Gamble, you are never in a great bargaining position with large retailers. And even P&G occasionally gets put in their place by the big guys. However, the more appealing your brand and products are to consumers versus the other guys, the stronger stand you can take on all these issues and still remain a supplier. Increasing competitive advantage is what strategic planning is all about.

Design your products with the ability to create multiple versions.

Exclusives of one sort or another are a fact of life in this industry. When you are in the design stage, plan for multiple versions in a way that minimizes tooling, production, and inventory costs.

Continually improve high volume products.

You can’t totally stop knock-offs either by competitors or retailers, but you can stay ahead of the game by annually upgrading your key products. That way they are always superior to copies whether by competitors or private label. Of course, you should patent whenever you can as long as the patent is strong enough.

Stay true to your core competencies and strategy.

Be careful about trying to be all things to all retailers. If your competitive advantage comes from being the low cost producer, it might make sense to consider being a private label provider to retailers. However, if your culture and product line is all about superior quality and performance, think three times before getting into it because you won’t be leading you’re your strength and you’ll dilute the focus of your staff.

Diversify, diversify, diversify.

That maxim that applies to investing applies just as much to your business. As the big retailers get bigger it becomes more difficult, but you will sleep better at night to the extent you can keep any customer from getting so big that losing all or part of their business could be fatal. Diversifying your customer portfolio needs to always be a strategic priority.

What are your thoughts? Submit a comment or question and I’ll respond to it.

 

Disclaimer: No warranties, express or implied, are contained herein. Purchasers, or users, of this information acknowledge that any errors or omission in the performance of the material contained herein or, any injuries resulting from its use, are the sole responsibility of the purchaser or user, and not JPMA or the author. Opinions expressed are those of the author only.

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