July 2

In last week's post How to Raise Prices, I referenced two interesting articles on techniques for raising prices, and also suggested using unbundling to differentiate between customers who want maximum value and customers who want minimum price. Today, let's look at three interesting price increases-- Oracle's list price increases, Apple's iPhone price "decrease", and airline surcharges.

Oracle raises list prices by 15% or more
Oracle is making waves with double-digit price increases (see "Oracle increases prices 15 to 20 percent: The joys of pricing power" on CNet), but what does this really mean? Are they really getting customers to pay 15-20% more? Probably not.

Oracle is unusual in the software industry in that they publish a global list price. Most enterprise software companies (Mimiran included) vary pricing by region and don't publish prices to avoid focusing on price early in the sales cycle. Oracle's prices and earnings are dollar-denominated, meaning that overseas software sales have been getting cheaper for customers in Europe and Asia, while Oracle's local expenses have gone up in dollar terms. In other words, a nominal price increase was necessary just to reverse the price decrease brought on the falling dollar.

Second, enterprise software deals rarely close at list price. The price increases provide more room for negotiation. One of the most important aspects of list price changes in B2B environments is how much of the price change flows through to the actual price the customer pays.

Third, the move serves as a nice signal to SAP and other vendors to stop driving prices into the ground.

The software industry is consolidating, especially around Oracle, which has been gobbling up competitors, but they won't get a real 20% price increase. However, if they end up netting 1 or 2%, that's still a few hundred million dollars in incremental profit.

Apple's "Cheaper" iPhone 3G
Apple made a big splash by announcing that their new iPhone would not only support faster 3G internet access and GPS, but would also sell for the magic price point of $199. This represents a $200 price drop, along with more functionality. Isn't the rapid march of technology amazing? Not so fast. At the same time Steve Jobs announced that he was making the iPhone more affordable, AT&T upped the price of data plans for the iPhone by $10/month. To get the discounting price, customers must commit for 2 years. So you might save $200 up front, but you spend an additional $240 over the next 2 years, and an additional incremental $10/month after that. Basically, Apple and AT&T are financing your iPhone purchase for you with a very high interest payment plan. The beauty of it is that the lower upfront cost only happens once, while the ongoing revenue stream stays as long they can keep the customer. And while everyone who does the math knows that this is actually a price increase, what sticks in consumers' minds is "wow, an iPhone for $199."

On the backend, AT&T's payments to Apple make it a strong pricing move for Apple, as well, and analysts seem bullish on the revenue potential.

Airline Surcharges
And now let's get to everyone's favorite pricing punching bag-- the airlines. American, United, and other carriers have introduced fees on checked luggage to go along with fees for fuel prices, talking to a person, using curb-side checkin, and buying inedible snacks on planes. Delta also announced fuel surcharges on redeeming frequent flier miles. Naturally, travelers are unhappy. Checking a bag on some carriers will now cost you an extra $15, while the second bag will cost $25. And it's an extra $50 if you actually want to pick it up at your destination. (Just kidding about that last part.)

While this is irritating for fliers (I've heard some say "why are you nickel and diming me?") the alternative would be to raise prices across the board. Airlines are hemorrhaging money (what else is new?) because of higher fuel prices and the slowing economy. They need to do something, and price increases are an inevitable part of the mix. Flying is going to be more expensive for a while, until jet makers can create much more efficient planes. The next generation will help, but not enough to offset the rise in fuel prices.

Of course, airlines are good at slapping on surcharges. They are not good providing a good customer experience. They haven't done anything to address the ridiculous "security" procedures. (I'll save the story of how I accidentally took a swiss army knife in a carry on bag that was hand searched by TSI for another time.) They have taken pillows off planes and charged for "snacks". Why not work with the government to reduce the unnecessary elements of the security burden? Why not team up with airport restaurants, or even bring in Starbucks or someone similar to allow customers to order onboard food when they checkin? The system might take some work to implement, but it would allow the airlines to bill customers immediately instead of worrying about making change on the plane, allow customers to get some halfway decent food (depends on the airport), and the revenue sharing would probably bring in more incremental profit than the current program. The partners would drop food off before the flight, the airline could keep the hot food hot and the cold food cold and deliver it after take off. The passengers waiting inline for 15 minutes at Starbucks would save 15 minutes. Food revenue per customer would probably go way up, even if the airlines turned the bulk of the revenue over to the partner.

June 26

So much of pricing is about choosing the right metric. In other words, the dollars per what? Gasoline is priced in dollars per gallon (or per half gallon in some cases where the pumps can't display prices above $3.999-- how much do you think you can charge for the upgrade kit?).

A lot of software pricing debates come down to whether to charge per user, per CPU, per transaction, or per some other metric.

Now here's a great example of choosing the appropriate metric, courtesy of one of my favorite business gurus, Scott Adams.

Part 1.
Part 2.

June 24

With the economy in the state it's in and the price of energy going up, a lot of companies are making some tough pricing decisions. Their costs are going up, squeezing their margins. Also, they are worried that if they don't take a price increase now, they are going to be leaving a lot of money on the table. At the same time, their customers are feeling the pinch.

This topic has got some attention on the blogs.

• Geoffrey James over at BNet offers 3 methods to Raise Your Prices and Keep Your Customers. I disagree with method #1, opening up your ledger, but the concept of using price increases in your supply chain to justify price increases to your customers is legitimate. Note that customers don't actually care about your costs, but the increases in your costs mean that the costs of competitive products are also going up. This doesn't help as much with indirect competitors. For example, airline price hikes based on fuel costs are reasonable because all the airlines are facing the same issue, but they don't work as well against online collaboration software that could substitute for a trip.
• John Quelch at the Harvard Business Review provides Seven Tips for Managing Price Increases. A couple of these tips stand out. Unless you understand the value you provide, it's hard to price well. And unbundling is a great way to pass on a price increase to those who value your full offering while reducing price (and your costs) for those who only want part of your offering. For example, you might increase prices by 10%, but offer a 15% discount for customers who can schedule delivery 2 weeks in advance.
  

June 12

Most new businesses fail. They typically fail not because they can't deliver value, but because they can't capture enough of that value to turn a profit and grow. Capturing value requires a clear value message and an appropriate pricing policy.

Unfortunately, most entrepreneurs do not create a detailed value message and pricing plan. They start with a product (or service, I'll use the word "product" to refer to either), or even a technology and then they seek customers for the product. Then they try to sell those potential customers on the benefits of the product. Often, this involves a comparison with a better known competitor: "It's like ACME's offering, but better, and it's cheaper."(Read the rest of this post is over on the Bootstrap Austin Blog.)

May 30

As a pricing person, priceline.com is a fascinating site. Priceline is like a "normal" travel site where travelers can purchase airline tickets, hotel rooms, and rental cars, but it also offers a "Name Your Own Price" feature. This lets people offer to pay $200 for a 4-star hotel room in Midtown Manhattan, for example, and then sees if any hotels meeting the criteria will accept the price. (That query recently saved a client of ours a few hundred dollars.)

Once you reserve a hotel room, Priceline naturally wants to sell you a rental car. Here's where it gets interesting. If your price is accepted, Priceline takes you to a new page, that looks something like this:




Priceline also send you an email a few minutes later, which also offers rental car upsells. Notice anything different?

The prices in the email are $1-$2 more expensive. This type of testing is a great idea, especially for travel purchases where customers expect that prices will fluctuate. (Amazon got into trouble with customers for randomly varying the prices of items like DVD players to different customers.) Does anyone with more knowledge and/or experience with Priceline know whether the price differences are due to:

• Just testing, or
  
• Thinking that people who want immediate results online might be more willing to commit at a lower price (seems counterintuitive to me).
• Something else?

By the way, when I got around to clicking on one of the links the next day, the prices bore no resemblence to the stating figures-- they were much higher. And they were consistent whether I used to online page or the email page.

May 20

BNet, which is heavily focused on sales, has a couple helpful posts on pricing.

Three Successful Pricing Strategies for a Downturn urges you to react quickly when necessary, but don't hurt the long term to save the short term, and avoid price wars.

Another useful tip is to think about how to unbundle some of your offerings so that cash-strapped customers can still get some of the value your company provides without paying full price, but, and this is the important part, they have to give up something as well. If done effectively, this keeps them as a happy and profitable customer.

And what do you say when customers push back on price? Here are 12 possible responses, courtesy of sales guru Barry Rhein. (Here's an earlier post on the subject of handling price objections-- the concept that not everyone is actually a qualified prospect is a critical one. The sooner you can know that while the prospect might like your product, they cannot afford it, the sooner you can move on to somone who can, and the less effort you will spend destroying your brand value with excess discounting.

May 12

You analyze reams of data. You carefully evaluate potential pricing policies. You select what you think is the best one. And then your users tell you that they hate it. And not just because no one likes to spend money unnecessarily. They actually have good reasons. Had you known them at the beginning, you would have priced differently. So what do you do now?

Zoho, makers of popular online applications for CRM and office productivity applications, apologized on their blog and revamped their pricing. Essentially, they had not understood how some of their customers actually used their Creator application. The pricing policy had forced customers to trade off between buying a lot of things they didn't need to get a few features that they did need, or going without. Pricing is about capturing value, but the initial policy failed to give free and low-cost editions the capabilities that Zoho wanted them to feature. So they tried again. Perhaps it's a bit embarrassing to write a blog post like that, but it's much better than pretending everything is fine, or queitly making a change and sweeping your mistakes under the rug.

Zoho is lucky in some ways. They can change prices easily because they sell Software as a Service (SaaS). They don't have to deal with catalogues, price tags, contracts, and other overhead that goes with a price change at many other companies.

Dell is infamous for having different prices for essentially the same computer depending on which part of the website you visit. This is because during its breakneck growth, Dell organized around segments (Small Business, Home, Student, Government, etc). Segment leaders maintained control of their pricing, leading to inconsistencies. It got worse, as different promotional policies could result in the same machine in the same segment showing different prices. Customers complained on Dell's IdeaStorm online feedback forum. Now Dell is touting consistent pricing for their Vostro laptops for small business. It's a good start.

While these approaches draw attention to past missteps, they build a better relationship with customers than the typical press release-style price changes, where everything is spun to sound wonderful.

April 30

When you buy in bulk, you typically get a better deal. On a per-unit basis, it's cheaper to buy a 32-pack of Coca Cola at Costco than a single can in a convenience store. The same concept applies in industrial manufacturing, software licensing, and other industries. Sometimes, however, the buying more will cost you more, even on a per-unit basis.

This makes economic sense if what you are buying is in short supply, and rather than letting the price float with the market, the seller wants to allocate the supply to a number of buyers, perhaps due to contractual obligations. If you want more than your allotment, you pay the market price, not the contract price.

In some situations, it just seems like a tax on the mathematically disinclined. Take this example from an airport massage lounge.



Sorry about the blurry image. Here's what the sign says, plus an additional column that indicates the $/minute of massage.

Minutes	$	$/minute
10	$12	$1.20
15	$17	$1.13
20	$22	$1.10
30	$35	$1.17

I can get a 10 minute massage and a 20 minute massage for $34, $1 less than just getting a 30 minute massage. It probably says something about the way my brain is wired that this jumped out at me as I walked by. I asked the therapist on duty why this was the case. She said it had to do with the way they got reimbursed.

When pricing is compromised by internal alignment issues, it's usually easier to fix the alignment issues (as hard as that may be) than change the market.

Let's suppose they can't fix the alignment issues and they have to price this way. What should they do? I'm not an expert when it comes to massage, but I'm guessing that you could offer a "30 Minute Deep Tissue Massage" or some other value-added offering that you simply can't provide in less time. Maybe you add a foot massage. Then you raise the price to $40. And break it out separately from the per-minute massages on the board.

April 23

Pricing power comes from differential value. If you offer more value, you can charge more. Value is perceived by the customer, however, so while you can suggest the value of your offering, the customer ultimately decides.

Often, attributes that some customers value highly are irrelevant to other customers. For example, automakers sell more four-wheel-drive sedans in places where snow is a regular occurrence compared to Florida and Arizona.

Small businesses can often differentiate themselves from much larger competitors by serving a market or geographic niche much better than the larger firm. Product companies can differentiate themselves based on their service. Some companies might offer faster delivery time, while another offers more comprehensive engineering services, while another bundles in maintenance. Notice that the differentiators are not necessarily mutually exclusive, but companies that value certain differentiators will choose the vendor that offers the best fit.

In a crowded, competitive market place where every vendor says they are "better" and every customer says they care about low price, providing "difference cues" helps to remind people of how you are different. Apple, known both for great design and hefty price premiums, provided a great difference cue when they launched their iPod. MP3 players were relatively new to the market. They were like the Walkmen of yore and the portable CD players that had recently become popular-- useful to listen to your music on the go, but clunky. On subways, in gyms and buses and offices, people wore black or grey headphones to listen to their music. So Apple made their headphones white with white wires. It was different from everything else on the market. (Someone will probably name a counterexample, but I can't think of one off the top of my head.) It also advertised the product. The player itself might be hidden in a bag or a pocket, but the headphones were visible. It's a subtle point, but back when rational people (I like to include myself) thought that a $400 music player was a really dumb idea, the difference cue enhanced the iPod's value as a status symbol. Not only did you have a really cool music player, but everyone knew it.

Coincidentally, Sony had done something similar a decade earlier when they introduced their "Sports" line of Walkmen, which were built to withstand sweat, rain, and even water. Sony made the players and the headsets bright yellow to accenturate the difference from the regular "non-ruggedized" portable cassette players on the market, which helped justify the $50-100 prices.

So what did Bose do when they wanted to introduce earbud headphones? Bose had traditionally sold large, over-the-ear headphones, which gave them the ability to print "Bose" prominently. With the smaller earbuds, they needed a different approach. They didn't want to just have a black buds-- that would be so pre-iPod. They didn't want to just use white, because that wouldn't differentiate them from the (lousy-sounding) headphones that come with the iPod. So they created a twisted white and black pattern on the wires. I don't know if I like the asthetics, but you can immediately tell that they are different.

There are ways to differentiate just about everything. Here's a 1 slide animated PowerPoint with a great example of differentiating a "commodity." (Click on the image to open or save the file.)

April 11

We're at the Professional Pricing Society Spring Conference, with over 500 other pricing folks.

The best comment I've heard so far came from someone who stopped by our booth this morning. He had spent 9 years in sales and recently moved into pricing, so he understands how to make pricing work in the field. He said that sales is really important, but "this [pricing] is the s#$%!"