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.

 

Beginning to See the Light Through the Cloud

 

scale-computing-river-cruise-at-spiceworld2016-low-res-3612x2032Spiceheads enjoying Scale Computing’s on-premise hospitality at Spiceworks 2016 @ScaleComputing #Spiceworld2016

Paul’s Pricing Dictionary: Cost-plus Pricing (Part 2)

P 75x75Cost-plus pricing, n. gerund, delusional.

Going beyond Nagle & Holden … cost-plus prices:

– miss psychological price points

– effectively destabilize the business because they’re set with no perception of customer value in mind (if the prices are set irrationally, customer behavior will be irrational)

– assume that all the costs are cost-competitive, right? Wrong.

– temporarily shield uncompetitive procurement/costing/product management

– prevent the necessary and creative tension between pricing (“these products are not cost competitive!”) and costing/procurement (“oh yes they are!”) to help improve the business as whole

– are very apparent to professional purchasers & purchasing depts. and can be exploited accordingly

– would be severely lagged and ineffective when used for life-cycle and X-rate management

– can be easily gamed by the competition: it’s very obvious when a company doesn’t set its price competitively

– wait, don’t tell me that with cost-plus pricing you don’t even bother with competitive analysis either ….?

Any more?

Paul’s Pricing Dictionary: Cost-plus Pricing

P 75x75Cost-plus pricing, n. gerund, delusional.

 

 

  1. From “The Strategy & Tactics of Pricing” Nagle & Holden, 2nd edition (1987 & 1995):

Cost-plus Pricing:

– “carries an aura of financial prudence”

– “blueprint for mediocre financial performance”

– “impossible to determine product’s cost before a price has been set”

cost = ƒ(volume) = ƒ(price) but if price = ƒ(cost) then you create an infinite loop which can will lead to the wrong solution (“flawed circularity” or – speaking in engineering rather than tabloid terms – catastrophic)

– creates a catastrophic cycle of a decline when competition increases: volumes decline, then overheads allocated to the products will increase leading to increased prices, which in turn will drive volumes down, increases overheads …. etc

2. Cost-plus pricing assumes costs are accurate, which is rarely the case, and, in reality, there is no good way of defining – let alone allocating – overheads:

cost = ƒ(allocations) = ƒ(volume) = ƒ(price), and again, if price = ƒ(cost) then you create an infinite loop which can will lead to the wrong solution (“flawed circularity” or – again, speaking in engineering rather than tabloid terms – catastrophic)

3. Sub-optimized pricing. Every price created by cost-plus pricing is either too high or too low. Every price could and should be improved.

 

Paul’s Pricing Dictionary: Folgers Coffee

P 75x75Folgers Coffee, n. apocryphal, euphemism.

“You don’t want to end up like a Product Manager at Folgers Coffee”. As a way of encouraging and warning Product Managers that their role in not only in resisting commoditization – but also not being enablers of it – was vital, I would often relay what I presumed had happened at Folgers with Product Managers there stumbling around the office and mumbling into their coffee:

“Well, it’s just a commodity” while overlooking a thriving Starbucks …. Well here’s a view of Folgers HQ and the Starbucks across the street that they may well have looked over … and over-looked:

folgers-1173-x-742

View of the Starbucks opposite Folgers Coffee’s old HQ in San Francisco.

Part 1 of a series of escalations about commodities.

 

 

 

Paul’s Pricing Dictionary: Remuneration

P 75x75Remuneration, n. A euphemism for kickbacks, particularly in Big Pharma.

Check out what Big Pharma is giving your doctor for  kickbacks. Find Your Doctor’s Payments out of the $7.52 billion/year that gets  kicked-back to doctors in the USA.

The first doctor I mentioned this to was fascinated that (a) I knew how much he was getting – which was basically only $500-$1000/year in sandwiches for the people in the office – but he was really excited to find out (b) how much his ex-wife who was a specialist in …. was getting, and he explained exactly why for medical reasons she’d be getting a ton and indeed she was.

Now, another doctor I use got $18,156 in 2013 in mainly “consultancy” from one supplier; the $44,644 in 2014 followed by only $373 in 2015. It makes you wonder what is going on …. and should I be concerned that my doctor’s kickbacks are going down?!? Does it affect the treatment he provides to me? … how much of this is reflected in what I pay my doctor for? Do I pay less or more because of the kickback? Do all patients have the same adjustment to their payments because of his kickbacks?

Another doctor of mine received little in 2013 & 2014 and all of a sudden gets $33K for Associated Research Funding. Am I part of the research? Before I accept any treatment or fulfill a prescription I presumably now need to check to see if his OEM is the company which paid him the $33K. So these kickbacks are certainly doing a good job undermining trust in one’s physicians.

In case you’re wondering why this is relevant to pricing, well, a lot of pricing roles in Big Pharma also include  kickback management: Director, Global Pricing & Market Access (Reimbursement Director) – Oncology for Amgen is just one example.

The length of the job description is interesting. To paraphrase Spike Milligan, it should have just said “Director, Pricing & Kickbacks” and saved us (me) the effort of reading it.

What’s the alternative? How about no kick-backs and lower prices?

 

 

Do List Prices Matter? The real question is why do execs ask this in the first place? Final installment!

The Pricing Factory @ GTDC EMEA 2016 - Cropped 355x288@PaulCharlton of  presenting at .

There was a great question from Howard Davies of @Contextworld at the GTDC meeting in EMEA in June: Do list prices matter? Here’s the final installment!

All the blogs so far have focused on answering the question. As is often the case with pricing, the answer to the question is actually of secondary importance. What is of greater importance is why the question was asked in the first place. You see, the question itself reveals that there is a pricing a problem, and immediately offers clues as to what the problem might be. When execs ask the question, they are very obliquely flagging one or more the following

  • They don’t want you to change list prices;
  • They are unsure that they will meet their targets, particularly if you change their list prices; their sales targets may indeed have been set too high, or the revenue and margin may be significantly out-of-balance; it’s highly likely the target setting did not take list price or discount reductions into account;
  • They are thinking only about this quarter, and not even beginning to think about trying to set themselves up for success in the following quarter;
  • They want more discretion & flexibility in discounting;
  • They would like you to leave them alone mainly because they intend to dig themselves out of hole through discounting (which will invariably turn out to be inconsistent and unpredictable);
  • They think they can haggle their way out of this by screwing good/friendly/weak customers.
  • They are negotiating with you.

So they don’t realize it, but to me when they ask this question, it immediately raises a pricing red flag in my mind. There is a pricing problem here which needs fixing urgently. But while list prices aren’t the problem, they are definitely part of the solution.

Thank you Howard! Great question!

Do List Prices Matter? If you want a broad lever for your business, then yes, they do …

The Pricing Factory @ GTDC EMEA 2016 - Cropped 355x288It is the only quick and simple across-the-board price lever, and so it is also one of the only quick and simple across-the-board business levers. By the way, if an across-the board list price move isn’t quick and simple, that’s something you need to fix asap. Here are a few applications:

List prices are particularly useful to mitigate adverse X-rate movements, for example a 4.5% increase across the board due to weakening of the pound, euro, Aussie $, whatever. It can be applied quickly with a clear rationale and justification to Sales, the channel and customers. It can also be combined with some product specific exceptions on specific items or categories which customers are either more list price sensitive to and/or require competitive adjustment. This type of price move combination will also check to see if your competition is on the ball by analyzing their response – or even the lack of it.

It is also useful as a lever to use in conjunction with a change in channel discounts. For instance, a reduction in channel discounts may be combined with a list price reduction to ensure that channel buy prices are the same or have some slight across-the-board decrease. This would mitigate the impact on the channel. There is no other way to do this in a subtle and refined way.

You should be able to use your “average-weighted list price premium” as a broad lever to drive your business as well. Make sure that not just each product is price positioned where you want them to be, but also that at an aggregated level – by product line, product group and total level – your pricing is competitively set. And you should know where those premium levels are for gaining share, holding share, losing share and shedding share. And if you’re a channel partner, shouldn’t you know what those price levels are for each of your vendors? And even if you don’t know, does your vendor?

Now tell me again, list prices don’t matter ……

More to follow!

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