It was thirty years ago today …The Reprise

For those who missed the first article, here it is: It was thirty years ago today ….

Re-cap from previous episode. Compaq had the perfect pricing trifecta which is to:

  • beat the competition in delivering demonstrably superior value for money both at list price and end-user price level;
  • provide increased channel discounts for improved channel profitability with clear vendor-channel demarcation;
  • and more co-marketing dollars and support to squeeze the competition out of the channel’s marketing efforts.

The second lesson was that you need to be able to update your pricing strategy and that pricing strategy update should strongly influence – and if necessary change –  your product strategy. Pricing before product.

If you haven’t read Rod Canion’s book “Open – How Compaq ended IBM’s PC domination and helped invent modern computing”1. I highly recommend it. It was enjoyable and enlightening.

What other pricing lessons are there from Compaq’s early history?

Lesson #3 – Maintain a level playing field for the channel: keep pricing flat across the board. Don’t favor the big or – even worse – noisy players with extra discounts and/or disproportionately more of your resources. A good example of this is the Businessland case outlined in Rod’s book (p152-6)1

Lesson #4 – Cover as many price points in your growth markets as possible, but at the same time, don’t neglect customer value and the competitiveness of your product costs. And don’t conflate having a low product cost with best customer value.

Lesson #5 – Get away from speeds and feeds, and articulate a more economically-driven value proposition, one which resonates with customers. Ensure that the value proposition is memorable and snappy enough for the CEO to (want to) cite it.

Lesson #6 – Don’t react to the competition using pricing alone; make pricing the last lever used – and use it sparingly. A large part of pricing is making sure that pricing is the last lever that’s being pulled, not the first. This is why Pricing – as a cross-functional process – uncovers lots of non-pricing issues. Good Pricers check to see if everything that can be done has been done before that expensive pricing lever is pulled.

Lesson #7 – When you do need to be aggressive on pricing, be aggressive. If you are going to get aggressive on price, make sure you know what the end-game looks like before you start. A simple first step is to understand how you would expect the competition to react to your aggressive pricing. Are you trying to provoke a response or not? And if they do respond, what will you then do? You need to think this through before you start.

Pricing is referred to only 12 times in Rod’s book. This reflects an approach in which pricing was used sparingly partly because Compaq could choose to do so. Its price positioning – as described in what I called the perfect pricing trifecta – was well-thought out and robust such that it didn’t wasn’t overly reliant on pricing to succeed.

So here is, without further ado, the Compaq UK price list for portable units from June 1987. Remember that these are list prices in £’s but as luck would have it, a remarkably similar number to what you would have paid as an end-user in US$:

It’s worth noting that it appears that the original Compaq Portable was still on sale in June 1987, 4 years and 3 months after it was first announced, albeit it in small numbers. Very different from today’s brutally brief product cycles.

From a pricing perspective though, the basic Compaq Portable did give the list price the overall perception of a lower starting-at-price (SAP) (£1,895) than it would have done without it (£2,295). Arguably the Compaq Portable II Model 2 also helps lower pricing perceptions because the first portable with meaningful storage capacity – which in 1987 meant a 20MB fixed disc drive – was the Portable II Model 4 at £3,150.

People often ask me if prices should end in a -9 or a -5, and I tell them not to worry about the last digit, but worry about the first. Focus on the digits from left to right. That’s Lesson #8.

Of course, the SAP isn’t what people buy, but it is the tag-line that the sales person will use, be shown in the ad, be in the first – or perhaps even better, the last – paragraph in that press review, be in that headline on the internet, etc. So it is very important in driving perceptions. That’s what takes place in the first quarter of the game. The real game though takes place in the final quarter: how far and how easily can you move customers up the solution stack …..

And here are the portable options:

 

So I still have my Compaq leather carrying case – albeit from a slightly later era – which I still use to today.

Any there any more pricing lessons to be learnt from Compaq’s early years? The products may be old and technologically obsolete now but the pricing ideas behind them are not. Here are a few more.

Lesson #9 – Plan your price moves. You can, and should, plan your business around your pricing roadmap. Your pricing roadmap should also be integrated and into all your integrated, synchronized, functional planning cycles: product planning, demand planning, cost planning, supply planning, financial planning, opex planning, etc.

It’s also worth noting that up until 1990 Compaq rarely gave any additional discounts to customers. Let me repeat, no end-user discounting. In the UK, only two customers got additional end-user discounts. One was Compaq’s largest customer worldwide. From 1987-1991, we only had one product promotion that I can recall. All other pricing was managed through changing the list price. That also made life simpler and easier for Sales and the channel: don’t worry about asking for a discount because you won’t get one: focus on selling the value. Which was great while it lasted! So Lesson #10 – Make your list price do as much of the heavy lifting as possible, then use limited, customer-specific discounting to do the rest.

Competitive price pressure did build-up during 1990 which was partially self-inflicted because of the pricing and margin umbrella that Compaq was providing to new entrants to the market. We were finally forced to offer more and more end-user discounts. The storm clouds were looming.

I hired a high-school leaver to develop a bid-tool application for … well, me. It integrated the Excel-based UK price list and the monthly Lotus 1-2-3 corporate cost file and allowed me to quickly create a customer-specific portfolio of configured solutions so I could then play around with the discounts and X-rates, analyze the product mix and identify deal opportunities. In short, we started to crank out lots of deals. If we were going to go down – and at the time it did feel like that was a distinct possibility – then we weren’t going to go down without a fight.

Paul Charlton is the owner of The Pricing Factory®, a pricing consultancy. He can be can be reached at paul.charlton@thepricingfactory.com

1 “Open – How Compaq ended IBM’s PC domination and helped invent modern computing” by Rod Canion, Benbella Books Inc, Dallas, Texas, USA. 2013

 

It was thirty years ago today

I joined Compaq! For your entertainment, here’s Compaq UK’s desktop price list from June 1987 …..

For the youngsters and those who knew but have forgotten:

  • desktops didn’t come with monitors in those days;
  • nor did they have an operating system: choosing an O/S was a conscious decision then, and Microsoft wasn’t an automatic default for everyone;
  • when a PC booted up in MS-DOS all you got was C:\ prompt and an otherwise blank screen: no GUI, no start menu, no mouse, nothing;
  • a fixed disk drive of 130MB (or 0.13GB) was a huge and seemingly unfillable amount for a PC;
  • and 4 MB of RAM (or 0.004GB) was just colossal.
  • And although they were called Personal Computers and were used mainly as personal productivity devices, they were also beginning to be used as workstations and servers. So today’s equivalent of some of the prices below will be found on a server or workstation price list, not that of a PC.

The prices are UK List Prices – or Suggested Retail Prices as they were called then – and are in £’s. This means – rather coincidentally and conveniently – that it’s pretty much the same number that you would have paid in US$ as an end-user: list price less dealer discount + dealer mark-up @ prevailing X-rate ….

As a pricing person now (and not then), I’m intrigued why 6 of the 10 prices end with an 81.

Anyone not from the UK notice anything unusual on the price list?

I think the stand-outs are the 70MB fixed disk drive for £2,795 …. followed closely by £2,495 for 4MB of RAM. Now while these prices are probably more than you’d pay for a desktop today let alone for a single option or upgrade, they wouldn’t look out of place on a server or workstation price list for an enterprise SSD or memory module.

And here are the desktop options:

Any pricing lessons to be learnt?

The pricing strategy itself was – if I recall it correctly – a thing of simple beauty and is something that is worthy of consideration today even if only as an aspirational goal. It was built around the premise that Compaq’s product quality was as good as if not better than IBM, then:

  • Compaq would have list price parity with IBM plus one or two major features would be significantly better, such as a faster processor and/or larger hard-drive and/or more RAM. This would effectively ensure that Compaq provided much better value for money.
  • Compaq would offer two or three extra points discount to the channel: 41% discount from Compaq v 38% from IBM, meant that a reseller could sell a Compaq product at the same price as they could IBM (they would typically carry both) but with a better spec, while not having to worry about losing the deal to Compaq’s direct sales-force (because – unlike IBM – Compaq didn’t have one), and at the same time make more money
  • A 5% channel rebate program called Salespaq to fund channel co-marketing. If a 5% channel rebate seems like a lot, don’t worry, it was. But as important as the £s were, what was almost as important was that the activity preoccupied the channel dealers’ small marketing teams to the exclusion of IBM, Apricot, etc. who didn’t offer as big a % rebate or as much support.

So Compaq had the perfect pricing trifecta which is to:

  • beat the competition in delivering demonstrably superior value for money both at list price and end-user price level;
  • provide increased channel discounts for improved channel profitability with clear vendor-channel demarcation;
  • and more co-marketing dollars and support to squeeze the competition out of the channel’s marketing efforts.

The first two components are still the key elements that businesses should be striving for today if they really want to grow their businesses: the third one less so today in terms of material impact. All three of them though, need to be continually monitored versus the competition.

Those were the days. Or at least they were until the wheels fell off the bus around 1990 indeed partly due to the pricing strategy which hadn’t been updated and adjusted to take account of newcomers like Dell. If it had been, then Compaq might have realized more quickly and less painfully than it did that it’s product strategy needed changing as well in order to deliver more cost competitive products. Perhaps that’s a second lesson.

All this has been done from recollection following the old maxim: Se non è vero, è molto ben trovato: if it’s not true, then it’s well invented. So let me know if I’m off-track and need to adjust my medication.

 

“Do List Prices Matter?” has now been published by the Professional Pricing Society …

“Do List Prices Matter?” How many times have you heard that? It’s a rhetorical question which is making an oblique statement: “I don’t think list prices matter” and much more besides.

This article will explain why list prices do matter, and provide insight into some of the reasons why people ask this question in the first place.

This is the third article of Paul’s that the Professional Pricing Society has published.

Read the paper ….

Any questions, please contact paul.charlton@thepricingfactory.com

 

Paul’s Pricing Dictionary: Pricing Audit

 

Pricing Audit, n.

Internal Audit’s favorite choice of audit which they do as often as they can because it’s the most interesting thing they can find to audit. It’s an area of the business where they know they least, can learn the most, and it’s actually interesting.

Having said that, I’ve been totally underwhelmed by Pricing Audits either completely missing what’s important – such as critical business processes which weren’t being performed, key metrics not identified let alone measured, and incomplete pricing strategies etc – or avoiding difficult issues, like breaking up audit finds and spreading them across the organization because they didn’t want to appear to be “victimizing” one particularly delinquent group.

If you’re relying on a Pricing Audit by your Internal Audit to identify your pricing issues, don’t. Get someone in who knows something about pricing. Call 281-782-9821.

Paul’s Pricing Dictionary: Why You Might Not Have Uncompetitive Product Costs After All

 

Uncompetitive Product Costs, n.pl.

Have you ever thought that you might have competitive product costs after all, and that it’s your pricing that sucks? Just saying.

Maybe the way your bid team analyzes the deal is different to the competition? Maybe the scope of their analysis is different? Maybe their criteria for what is acceptable is different? Maybe they know how to structure deals better than you do?

Maybe you haven’t structured the deal correctly? Maybe you need to re-structure the deal.

How is sales comp impacting this? Sales management? Sales behavior?

Maybe you need to get a pricing expert in? Someone who can give you a better idea of whether you are cost uncompetitive or not.

Maybe.

Is Your Pricing Holding You Back?

Great products? Lackluster margins? Underwhelming revenue growth? Maybe your pricing is holding you back. Get a Pricing Diagnostic and break free.

 

Paul’s Pricing Dictionary: Uncompetitive Product Costs

 

Uncompetitive Product Costs, n.pl.

Have you ever thought that you might have competitive product costs after all, and that it’s your pricing that sucks? Just saying.

Paul’s Pricing Dictionary: New Product Insanity (NPI)

 

New Product Insanity, n.

Thinking that your next New Product will fix all your business problems when it has never done so in the past.

Paul’s Pricing Dictionary: Meta Price Analysis

Keyboard with hot key for price analysisMeta Price Analysis, n.

Analysis which determines how much and what type of price analysis needs to be done.

It’s not how much analysis you do that matters; it’s how little, quick, repeatable and intelligible the analysis is, and most importantly much insight you create in the process:

Meta Price Analysis Value = f {Insight, Speed, Repeatability, Intelligibility / Effort}

Paul’s Pricing Dictionary: Big Data

P 75x75Big Data, n. pl. but s. or pl. in constr., often attrib.

It doesn’t matter how big your data is, it’s how much insight you get from it that counts.

 

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