As marketers we’ve been raised on the 4 Ps, and in fact some authors have suggested new Ps. Of the traditional 4 Ps most marketers are consumed with “Promotion” and “Product,” and fewer yet focus on “Place.”
However, it seems “Price” gets the short end of the stick time and again. Those days are over. In an increasingly global economy where new products are launched at break-neck speed, commoditization reigns, and consumer choice is abundant, “pricing” is more important than ever.
Airlines, hotels and the like have long used yield management applications to assist them with maximizing revenues for limited inventories. However, with the advent of the internet and specialized applications for pricing, many industries that once used “cost plus” pricing models, are now able to use analytics to drill down on a detailed level to fine tune pricing.
Yesterday, I ran across two articles in the main stream press showcasing how “pricing” is making a comeback. The first article from the Wall Street Journal, “Changing the Formula: Seeking Perfect Prices, CEO Tears Up the Rules“, detailed how in a staid industry like manufacturing, some companies are using analytics to increase revenues by examining pricing of all products.
In the article, Donald Washkewicz, CEO of Parker Hannifin Corporation, mentions that for many years, the pricing model of all products was cost plus 35%. The article notes, “No matter how much a product improved, the company often ended up charging the same premium it would for a more standard item.”
Realizing the insanity of such a system, Washkewicz instituted a pricing review of all products and examined what a customer was willing to pay rather than what it costs to make. No small undertaking, the pricing review in one of his businesses took six months to review 2,000 items and gathered 20,000 data points in total.
The pay-off, however, more than made up for the hassle. According to the article, “Today, the company says its new pricing approach boosted operating income by $200 million since 2002. That helped Parker’s net income soar to $673 million last year from $130 million in 2002.”
Overall it wasn’t easy and Washkewicz faced pressures from customers and suppliers since some prices were adjusted higher, and some lower. Ultimately though, Washkewicz persevered and the power of “Pricing” speaks for itself.
In a related article in the LA Times, “Baseball Charts a New Course on Seating“, the Los Angeles Dodgers are now getting granular in pricing, down to the row and seat.
The article notes, “You might pay more for your seat than the fan seated next to you. The Dodgers sell tickets in the field box section for $20, $30, $35, $37, $40 and $45, depending on whether you buy on game day, before game day or as part of a full-season, partial-season or group ticket package.”
The article also highlights that teams across the league are dividing the parks into smaller and smaller sections and charging more per seat based on whether a “hot” team is in town or whether it’s opening day. The re-emergence of “pricing,” at least in these instances, has created some detractors. Dodger fans complain the pricing is too complex and long for simpler days of three or four pricing tiers.
Even CEO Washkewicz was a target for push back as he instituted his strategic pricing review. And I know hundreds upon thousands of airline customers just wish they could have simpler pricing for an airline seat. So “pricing” is making a comeback and yield management isn’t just for hotels and airlines anymore. However, I have to ask the smart marketers in this forum, is this trend in pricing a good thing? Especially from a service perspective?
From the LA Times article, “It’s not all about making it easier for the consumer,” said Dennis Howard of the Warsaw Sports Marketing Center at the University of Oregon. “It’s largely revenue-driven.” Increasing revenues is obviously a good thing but how do you balance revenue management with the presentation of a coherent and dare I say, “fair” pricing strategy?
Also, at what point will consumers and business customers become confused and start looking for those companies presenting a simpler pricing model?
Tags: 4Ps, Pricing, variable pricing, yield management
My son is implementing a more granular pricing structure in his lawn mowing business. Instead of a general pricing structure for an average yard measured by “eyeballing it”, he;s getting down to the square foot by walking off yards and applying a price per square foot. Therefore, even though Mr. Jone’s yard may look as big as the neighbor’s next door, Mr. Jones’ price cold be more or less, depending on the quare footage. We’ll see how it goes.
Scott, good point. Effective pricing can be done through better analytics (technology) for sure. However “better analytics” can simply result from discarding the way things have been done in the past, thinking more deeply about the situation, and visualizing and/or enacting different solutions.
Thought-provoking post, Paul. As the trends have shifted to a more customer-focused marketing approach with individualized communications, it seems fitting that product pricing adjusts to what the market will bear rather than a pat mark-up rate.
However, in the case of stadium pricing and other products or services that fluctuate by season, timing, etc., there could be a perception of unfair practice. Only through market research can this be determined. It could also create confusion both inside sales offices as well as in marketing collateral when too many details and explanations are required.
Hi all,
Thanks for posting this in the blog. Pricing should have always been an important part of marketing strategy..I’m really surprised it has to make a come back.
On a separate note, it was interesting to read the post at 1to1, where people reflect their confusion over the 4 Ps. There, people want to substitute things like Preference, collaboration, etc as the new Ps of marketing. The problem is that the 4 Ps were just meant as an easy way to categorize the tactics of marketing and things like collaboration is simply a combination of promotion and place, while preferences are part of the analysis in marketing (analyzing customer preferences) and wasn’t intended to be a marketing tactic.
Thanks again for raising this broader issue.
I believe Pricing is the most underrated part of doing business.
Its potential is huge.
Scott, talk to your son and suggest him pricing on the value received by the customer (for example, the nicest garden is the one willing to pay more).
Paul,
In addition to the 4Ps, 4 other Ps that I often use (and there others that I use from time-to-time as well) are Package/Packaging, Procedure/Process, Profile, and Potential/Pace. Briefly, Packaging describes more than just the product (features, attributes, life span, benefits, etc.) by looking at how it is packaged (for branding, name recognition, color, specific packaging materials, consistency and continuity with other products in the line, sizes, etc.) both in terms of the retail delivery but also what’s included in the overall product unit when it is sold. Procedure is the Sales Process or how the product is actually made available to the consumer (B2B, B2C, internet, direct, wholesale, retail, etc.) and what a typical sales presentation includes. Financing, terms, and the means of acquistion and delivery also are included. Profile is the typical buyer profile or target audience and is subject to change, enhancement, refinement, and expansion. Potential refers to the growth potential of the product, the depth of the market, the demand, the absorption, and other factors related to future sales.
Steve
Even at GE, as finely managed an organization as there is in the world, according to CEO Jeffrey Immelt in an HBR interview published in June 2006, pricing had to make a “comeback.” Soon afer taking over as CEO from the lengendary Jack Welch, Immelt was shocked to learn from an internal exective presentation, that there was no systematic appoach to pricing.
Where there is systematic pricing beyond the cost plus approach, such as in Motorola’s cell phone division, pricing is a separate function that reports to Sales, not to Marketing.
In either case, where there is no systematic pricing decision structure or where pricing is not the responsibility of marketing, the challenge is how can the marketing function contribute value to the pricing decision?
For those interested in learning more about pricing, I turn your attention to a MarketingProfs virtual seminar led by Joseph Zale of the Strategic Pricing Group titled, “Using Pricing Strategy to Create Competitive Advantage in B2B Markets — It’s Time to Change the Game” http://www.marketingprofs.com/premium/seminar_detail.asp?adref=semsrch&semid=74.
Hi Paul -
Enjoyed your blog! I have an entire blog devoted to the appropriately titled “forgotten P.” My blog can be found at http://www.pricingforprofit.com
Thanks, Rafi Mohammed
Rafi, after reviewing your website (which was well done by the way) I’m going to go out and buy your book. Thanks for the tip!