The Profit Game – draft manuscript Hans Casteels
- 1 -
Winning the Profit Game
Smarter Pricing, Smarter Branding
The Profit Game – draft manuscript i
Profit Game 072903 finalFINAL DRAFT Created by Hans Casteels 10/3/2015
Acknowledgment...
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Profit Game 072903 finalFINAL DRAFT Created by Hans Casteels 10/3/2015
Jeanne-Mey an...
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Profit Game 072903 final draft Created by HC // Confidential
Table of Conte...
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Discounting and...
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Introduction
How to Read This Book
This book is ...
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This book takes a simple position: to keep impro...
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these factors must and can be understood togethe...
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resources are being wasted. Contrary to what bra...
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Turn to Chapter 22. About how to handle a “lowes...
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Section 3: How to Manage Ongoing Price and Reven...
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now may be the time to break out of the vicious ...
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Section 1: Take a New Look at Price and Brand
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Chapter 1
Winning the Profit Game
Rock ‘n roll f...
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going pretty much their own way—but to succeed ...
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Here’s another illustration, with a setting fam...
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Price and product are integral. Smart companies...
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Winning the Profit Game with Pricing
The price ...
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commands a 61 percent higher price. The same is...
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can tell at a glance if you’re dealing with bac...
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understand is what we mean by price capabilitie...
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Pricing Mistakes
With bad pricing, huge amounts...
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at the kiosk. This gives a direct read on the g...
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A Reward for Effort
Going forward in this book,...
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1. The Friends and Family Program created what ...
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Chapter 2
The Secret Life of Price
...
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In the real world, there are many v...
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The Clarity of Value
Both televisio...
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and worth about $480,000 a year to ...
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The Discipline of Competition
It’s ...
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long-term cash flows and operating ...
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Brand loyalty comes about when buye...
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lie many potential changes, some fo...
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transparency is often not to the se...
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understand how to optimize its pric...
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meant a higher selling price. Knowi...
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Benefits
This criterion suggests th...
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Relationships change over time, inc...
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 If there is still no response, sh...
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Seeing Through Chaos: The Power of ...
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the process. For more, see Benson P...
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the weekend and start the week with...
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Chapter 3
Branding for Profit
Many manage...
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Brand is a form of information. Brand is ...
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their time, so they don’t open it. Since ...
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Brand and Product
Brand equity varies by ...
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Example 3: In big-ticket industrial purch...
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cosmetics, fashion accessories, toys, and...
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found that despite beating Amazon’s price...
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that only a handful of visitors to Isuzu ...
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Brand also plays a role in industrial pur...
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histories. There are, however, major diff...
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campaign initially underscored the observ...
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Japanese car lines Lexus and Infiniti wer...
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increased contact with the public, his ap...
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The question to ask is: Where does your c...
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Rule 2: Target the Decisions, If You Can
...
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becomes known, the audit firm suffers bra...
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Rule 3: Be Selective in Spending on Brand...
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Many managers view brand as the overall i...
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9. James C. Schroer, “Ad Spending: Growin...
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Pricing game for non pricing professionals - final draft

a guide to optimize margins for non-pricing professionals
Published on: Mar 4, 2016
Published in: Business      
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Transcripts - Pricing game for non pricing professionals - final draft

  • 1. The Profit Game – draft manuscript Hans Casteels - 1 - Winning the Profit Game Smarter Pricing, Smarter Branding
  • 2. The Profit Game – draft manuscript i Profit Game 072903 finalFINAL DRAFT Created by Hans Casteels 10/3/2015 Acknowledgments When authors from three different organizations write a book, a team of colleagues provides support of many kinds – editorial, factual, intellectual, and emotional. The author of the Profit Game wants to express his joint and individual gratitude to all those who helped make this book possible. Hans would like to acknowledge the valuable contributions of Daniel E. Aks, Marty Hyman, Andrei Jezierski, Pam Docters, Patrick Thiede, Stephen C. Lipton, Graham King, Neil Posner, Gayle Maurin, Linda S. Sullivan, Sen. John Struthers, Phebe Prescott Greenwood, Mery Parra, John Grim, Dr. K. Raymond Wolfe, Julio Zamora, his co-authors, his consulting clients, and Eric Mitchell of the Professional Pricing Society. In particular, he would like to thank G.J.G. (Bob) Docters, Nancy S. Lothrop, Bert Schefers and Dan Aks, for their tireless chapter reviews, and thoughtful suggestions and additions.
  • 3. The Profit Game – draft manuscript ii Profit Game 072903 finalFINAL DRAFT Created by Hans Casteels 10/3/2015 Jeanne-Mey and Hans would like to thank their A.T. Kearney colleagues for their support. Marc Hochman and Donna Hagerman of A.T. Kearney’s eBreviate division and Ricardo Ruiz-Huidobro of A.T. Kearney’s Alexandria office provided insights on the “Turning Online Auctions to Your Advantage” chapter. Karen Kaluzsa of A.T. Kearney’s Chicago office provided her usual knowledgeable research assistance. Steve would like to thank Khadija Siddiqi for research assistance, and Professor Frank Mathewson, Dr. Avery Shenfeld and Brian Wanless for helpful discussions, suggestions, and encouragement during the writing of this book. Finally and wholeheartedly, we want to thank Mary Glenn, our senior editor at McGraw- Hill, for her support. She not only believed in our topic, she believed in our ability to make it fascinating.
  • 4. Winning the Profit Game – draft manuscript iii Profit Game 072903 final draft Created by HC // Confidential Table of Contents Acknowledgments............................................................................................................................ i Introduction How to Read This Book............................................................................................. 1 Section 1: Take a New Look at Price and Brand....................................................................... 8 Winning the Profit Game ...................................................................................................... 9 The Secret Life of Price ...................................................................................................... 21 Branding for Profit .............................................................................................................. 38 Segmentation: Beauty is in the Eye of the Beholder........................................................... 57 The Truth About Costs........................................................................................................ 70 Doing it All in Boom and Bust............................................................................................ 88 Section 2: How to Set Price and Create Revenue................................................................... 106 Price As a Language to Customers ................................................................................... 107 Ways to Set Price Level .................................................................................................... 117 How to Price New Services............................................................................................... 137 Tiering, Bundles, and Solutions ........................................................................................ 156 Turning Value into Money................................................................................................ 170 Special Considerations: Lawyers and Other People’s Money .......................................... 184 Section 3: How to Manage Ongoing Revenues....................................................................... 202 Getting Started: Fundamental Questions for Senior Management.................................... 203 How to Raise Prices .......................................................................................................... 213
  • 5. Winning the Profit Game – draft manuscript iv Profit Game 072903 final draft Created by HC // Confidential Discounting and the Price Stack........................................................................................ 228 How to Use Price to Penetrate Markets ............................................................................ 243 Turning Online Auctions to Your Advantage................................................................... 257 The Aftermarket: Don’t Let it be an Afterthought............................................................ 271 Quick Hits ......................................................................................................................... 281 Section 4: Building Revenue Capabilities............................................................................... 289 A Supporting Organization and Process ........................................................................... 290 Sales Channels................................................................................................................... 305 Pricing Technology—Vapor or Value?............................................................................. 319 Building a Price and Brand Powerhouse........................................................................... 335
  • 6. Profit Game – draft manuscript 1 Profit Game 072903 final draft 10/3/2015 Introduction How to Read This Book This book is about smarter ways of improving the bottom line. It’s aimed at business leaders and managers such as you who help shape that bottom line, and who often have specific revenue responsibilities. The past decade has seen the re-engineering of business processes, wholesale staff reductions, new purchasing strategies, a focus on quality, customer relationship management (CRM), automation, and the development of a slew of new channels and technologies for reaching customers. All of these have played an important role in improving results, but today they’re part of nearly every top company’s repertoire—long past the impact, excitement, and competitive advantage they initially offered. Smart managers and smart companies are already asking, what’s next? How do we stay ahead?
  • 7. Profit Game – draft manuscript 2 Profit Game 072903 final draft 10/3/2015 This book takes a simple position: to keep improving the bottom line, business must now shift its sights and focus on growing the top line. There are two fundamental tools for doing so: price and brand. What can possibly be new about price and brand? The answer is, a lot. To begin with, the level of competence in using these tools varies drastically among competitors. This is especially true of price skills: pricing today by major companies ranges from the brilliant to the stupid. This means that anyone who does learn to price well can achieve a huge competitive edge. (See Chapter 1 for proof.) This is in contrast to tools such as promotions or channel management— most companies do promotions pretty well, and no company today has a monopoly on sales-channel smarts. Sophisticated yet common-sense approaches are now available that make pricing a logical, high-return activity for managers, integral to the development of new products and services. Brand is part of this activity—it isn’t the fuzzy, mysterious thing that branding gurus persist in making it out to be. Rather, it is absolutely linked to price, so much so that a superior price strategy cannot exist without a detailed brand strategy. This linkage is really the spur behind this book. Our goal is to show you how to optimize price, brand, costs, and product development for any business, whether manufacturing or services. More than that, we’ll show you both why and how to integrate your pricing and brand strategies. The end result is that you’ll be able to grow the top line in any environment, no matter how tough. As our title has it, you’ll win the profit game. Why did we mention costs in the preceding paragraph? Isn’t this a book about growing the top line? The truth is that there are neglected links between price and costs as well, and all of
  • 8. Profit Game – draft manuscript 3 Profit Game 072903 final draft 10/3/2015 these factors must and can be understood together. So what has hindered such understanding to date? One reason many managers don’t focus enough on price and brand is that their efforts in these areas don’t seem to bear a linear relationship to revenue growth. In other words, you can double your efforts on price and brand, but this never seems to yield double the revenues. Something as simple as a price increase will work fine one time, fail the next time—with no logic to explain the difference in outcome. Even if an increase succeeds, you’re forced to wonder whether it was as big as it could have been, or whether you’ve left money on the table. How can you know? In every way, results from pricing and branding seem uncertain and arbitrary. What’s really going on here is not that pricing is uncertain, but that most managers aren’t equipped with the tools required to be confident of their pricing. That’s where this book will help, as we trace through previously neglected steps in manipulating product and profit, price and cost, brand and price, value and revenue. For example, do you assume—as many managers do—that an immediate and natural connection exists between creating value and obtaining revenues? If so, Chapter 11 will show you that this is anything but the case. Without a deliberate strategy for turning value into money—a process known as monetization—you have only limited control of your revenues; perhaps no more than accidental control. Do you have a clear monetization strategy for your company? Or take branding, another area where results often seem disconnected from effort. Let’s say your business devotes significant resources to brand—can you quantify exactly how this effort improves your top line, your cost position, your bottom line? If not, most likely these
  • 9. Profit Game – draft manuscript 4 Profit Game 072903 final draft 10/3/2015 resources are being wasted. Contrary to what brand gurus may tell you, brand awareness by itself can be worth very little—and in fact, without a clear value proposition, can be downright harmful. For example, Isuzu, the maker of economical mid-priced cars, outspent its competitors on advertising on a per-car basis, thereby creating big brand awareness. The only problem was, this leap in awareness didn’t help sales: A study shows that few visitors to an Isuzu showroom left having bought an Isuzu, as compared to the preponderance of visitors to Mercedes showrooms who left with a Mercedes. Imagine the needless expense to Isuzu, both in branding and in the sales channel. The Isuzu branding effort resulted in higher selling costs, while Mercedes branding has resulted in lower selling costs—and higher revenues. (See Chapter 3 for how to connect branding dollars to desired customer behavior.) This isn’t an academic book. Our goal is to lay out the principles simply, then provide you with an abundance of real-world frameworks for how to price. We believe that these frameworks, combined with success stories from a wide range of industries, will help you where it counts: improving your company’s results. Plan of the Book Time is key to our readers. If you have the time to read this book cover to cover, great— but if you have only 20 minutes to prepare for a key decision, this book can still serve as a quick injection of understanding and experience. Thus we have written many of our chapters as how-to guides, readable in a few minutes on their own. Need advice on raising price? Turn to Chapter 14. On managing sales channels? Take a look at Chapter 21. Pricing new products or services? Chapter 9 presents some powerful new approaches. On automating your pricing capabilities?
  • 10. Profit Game – draft manuscript 5 Profit Game 072903 final draft 10/3/2015 Turn to Chapter 22. About how to handle a “lowest cost” auction? Take a look at Chapter 17. Whatever your immediate need, flip through the table of contents, then turn directly to the relevant section or chapter. If you do have more time, we intend to provide you with a complete yet concise background in the tools and methodologies you need. We suggest you begin with Section 1, but feel free to skip to the section that best suits your immediate objectives. Section 1: Take a New Look at Price and Brand This first section provides the conceptual underpinnings of revenue. We explain the dynamics of price, including the forces that push prices higher or lower; look at the link between brand and price and how to use it to advantage; explore segmentation as a way to create additional value; and examine the somewhat surprising relationship of cost to price. Lastly, by way of gathering these various threads together, we show how businesses can build revenue in both boom times and recession. Section 2: How to Set a Price and Create Revenues This section discusses the various ways to frame a revenue strategy and set initial price levels, especially when you have a clean slate, and makes clear that pricing is actually an important language for speaking to customers. Other topics include how to create new value through bundling, tiering, or solutions, as well as how to fully monetize existing value—that is, extract cash from customers.
  • 11. Profit Game – draft manuscript 6 Profit Game 072903 final draft 10/3/2015 Section 3: How to Manage Ongoing Price and Revenues It’s just as crucial to know how to improve price performance in an ongoing business, one with established goods and services. Key questions include how to penetrate markets, raise or lower prices, react to auctions, improve profit in the aftermarket, and manage discounting. We end with a chapter detailing some “quick hits” to meet budgets: These can help an organization achieve rapid gains in revenue and ultimately move toward better revenue skills. Section 4: Building Price and Revenue Capabilities It’s not enough for you as an individual manager to understand the topics in this book, ultimately, your entire organization must evolve to support the integration of pricing, branding, and related activities. In addition, powerful systems are becoming available that can take pricing experiments beyond what you may have thought possible. Accordingly, this section focuses on best practices in processes, organization, systems, and skills. The Way Forward Once you’ve read this book through, we believe you’ll be convinced of the rewards of spending time on revenue and pricing. You will have the tools to be as confident of price optimization as you are today of cost reduction efforts—but what then? Can you afford to divert your efforts from other activities and increase your company’s efforts and resources in these areas? Put another way, can you afford not to? If these activities have been neglected in the past,
  • 12. Profit Game – draft manuscript 7 Profit Game 072903 final draft 10/3/2015 now may be the time to break out of the vicious cycle of low priority leading to minimal results, leading to still lower priority and still worse results. But isn’t pricing someone else’s responsibility—say, the marketing department’s? Perhaps today it is, but this can’t continue. The ability to rapidly adjust price levels and structures flows across many departments and requires high-level understanding. 1 A broad range of management must become involved—in marketing, finance, operations, IT, and sales. Linking the top and the bottom lines offers remarkable returns to your company. We invite you to read on and see for yourself. 1. This is particularly true if the marketing department is obsessed with promotion and sales support. Einstein once said: “Problems cannot be solved at the same level of understanding as that which created them.”
  • 13. Profit Game – draft manuscript 8 Profit Game 072903 final draft 10/3/2015 Section 1: Take a New Look at Price and Brand
  • 14. Profit Game – draft manuscript 9 Profit Game 072903 final draft 10/3/2015 Chapter 1 Winning the Profit Game Rock ‘n roll finds power in the driving beat of drums and riff of multiple guitars. The Swing era’s big bands relied on thundering brass sections whose synchronized refrains would rattle the dance hall roof. Classical music produced masterpieces built around virtuoso string sections capable of producing sounds ranging from glissando to pizzicato. Every era has its own music and its own signature instruments. If we make the analogy with business, what skill is emerging even now as the lead instrument of the 2000s? What will be the key to success in an environment that’s tougher, more competitive than ever before, and evolving as you read this? This book argues that it’s pricing— not pricing alone, but pricing integrated with brand, cost management, and product development. And here is the crux of our musical metaphor: Previously these disciplines all played solo lines,
  • 15. Profit Game – draft manuscript 10 Profit Game 072903 final draft 10/3/2015 going pretty much their own way—but to succeed today they must play in unison, with price carrying the melody. But can pricing really be that important? Apparently so. Let’s demonstrate by breaking our assertion down into smaller components: price and brand, price and cost, price and product development. In each case, the principle is the same. In each case, we’ll illustrate it with examples of success. Price and brand must be inseparable if you wish to maximize profitability. A business issue faced by the U. S. Postal Service illustrates the point: Today the USPS offers multiple types of postage, including first class and bulk rates. While the two have distinct levels of service, the major difference between them is far more subtle: Postal recipients, like you and me, tend to open letters with first class stamps but throw away those with bulk mail stamps—so much so that bulk mail letters are three times as likely to get trashed unopened. It appears that first class postage has a “brand,” and that you and I are very sensitive to that brand. Now consider that junk mailers, an important USPS customer group, live and die by how many people open their letters. Thus, many bulk mailers actually use the costly first class stamp, even though the 16.9 cent bulk mail stamp would get the letter there. Wanting the best of both worlds, they have been lobbying the USPS to get the two stamps to look alike—thereby letting them cut costs while effectively stealing the benefits of the brand. Only by analyzing its customers’ economics (and the behavior of its customers’ customers), and by likewise calculating how much the price difference is worth to its own revenues, has the USPS known to resist these requests. This has preserved the first class brand, and with it, that high-profit revenue stream.
  • 16. Profit Game – draft manuscript 11 Profit Game 072903 final draft 10/3/2015 Here’s another illustration, with a setting familiar to all business travelers who were around before cell phones: AT&T knew that payphone users feared being gouged by pirate payphones with huge hidden charges, and that the AT&T brand represented a guarantee against this sort of extreme pricing. The result? At many airports, there was often a line for an AT&T payphone, even as independent payphones sat idle. The phones were functionally identical, and often the independent’s rates were lower, not higher. But because customers did not actually know the tariffs, they preferred to wait for the AT&T phones. Because AT&T was aware of this behavior, it was able to charge a premium for its brand— maximizing profit. Price and cost are inseparable. Many managers believe that costs drive price, and some of the time this is true. However, equally often price drives cost. How price can actually be used to reduce costs is a key tool every manager ought to know. For example, a leading commercial printer, tired of the operational nightmare of rush orders, re-structured his pricing so that overtime and other added costs for such orders were reflected in his price. Soon the number of rush orders went down without any apparent loss of customers—the new pricing simply forced customers to plan better, to the printer’s benefit. Even more impressive, smart manufacturing companies such as Dell Computer do “forward pricing” of products. They ask what price the market requires for best volumes, then use these target prices and volumes to force subcontractors to adjust their prices (and therefore Dell’s costs) to meet the market price. Subcontractors do this because they too want higher volumes. This strategy is made viable only through tight linkages among marketing, manufacturing, and procurement—but it can be done.
  • 17. Profit Game – draft manuscript 12 Profit Game 072903 final draft 10/3/2015 Price and product are integral. Smart companies have already begun to integrate price and product development, knowing that how you price determines both your customer and your competition. Here, a choice often overlooked is whether to offer a product or a service to the market. For example, GE makes aircraft engines, but came up with the novel idea of offering aircraft engines as a service, rather than only as a product. The result is “power by the hour” contracts with airplane operators, whereby the unit of sale is an hour of engine use by commercial airlines. Similarly, IBM now offers “computing on demand” as an alternative to the purchase of processors. In both cases, customers enjoy reduced risk and fewer operational burdens, even as the vendors enjoy better profits. Another example comes from the cellular telephone industry: Cellular service companies have for years given away phones, choosing instead to make their money from networks. This practice has successfully insulated them from cutthroat international competition for equipment. Similar examples of price defining an offering can be found in the field of the arts. Whereas many movie theaters offer only one price at all times, the large independent theaters offer off-price matinees and special-price showings—a pricing technique known as tiering. The result has been a material uplift in revenues. The Houston Society for the Performing Arts, meanwhile, has made use of simple simulation tools to experiment with different combinations of shows, seating, and discounts for its season ticket holders—a sophisticated version of bundling. Such bundles have boosted revenues by 17 percent, with minimal risk to attendance.
  • 18. Profit Game – draft manuscript 13 Profit Game 072903 final draft 10/3/2015 Winning the Profit Game with Pricing The price initiatives described above have been able to lift prices anywhere from 5 to 25 percent and more on a sustained basis for the companies involved. This range of improvement is material in any business, and should occupy a high priority for any management. Price improvement is actually a better use of management time than cost-reduction projects, because even though cost can sometimes be reduced by higher percentages, price improvements have greater leverage on the bottom line. Take a look at Fig. 1.1. It shows that for the S&P 500, a 1 percent improvement in price results in a 7.1 percent improvement in operating profit. This dwarfs the return on a 1 percent increase in volume. And it’s more than double the return on a 1 percent cost reduction, which nets only a 2.5 percent improvement. These figures show that price is the most powerful management tool—and that it can be applied to every industry. Here are more examples of smart managers using pricing to improve revenues: Demand management in airlines supported by Sabre, the pricing and ticketing system developed by American Airlines, re-prices seats every six minutes and manages dozens of distinct price categories. This sophisticated capability adds 15 percent to revenues. HP’s North American enterprise systems division says that smarter pricing adds 4 percent to its top line and has helped increase market share. Even a commodity business such as Alcoa Aluminum attributes a 5 percent revenue uplift to its extensive pricing program. Brand, too, can be linked to higher prices and thus to improved revenues. As we’ve shown, a strong brand lets you charge a premium for otherwise identical products, depending on your industry, this effect can boost your price by 20-plus percent and more than double your profits. For example, Heinz and Del Monte offer identical tomato pastes, yet the premium brand Heinz
  • 19. Profit Game – draft manuscript 14 Profit Game 072903 final draft 10/3/2015 commands a 61 percent higher price. The same is true for the identical table salts made by Morton and Arrow—the premium brand here commands an 18 percent higher price. Intelligent pricing can also grow margins through analyzing connections between unit price and customers. For example, most steel producers base their prices on the types of steel they have identified as most profitable—in other words, by product. But one strategic manufacturer decided to take a different tack. He realized that since his blast furnace represented his principal capital asset, which could run only 24 hours a day during good times, its use should be prioritized not by type of steel, but by profitability per ton and profitability per minute. Based on this insight, the manufacturer developed a segmentation and price scheme that allowed it to focus on its most attractive customers. The result has been high profits in an industry with few profitable players. Ironically, every day companies have dozens of smart people looking to improve sales volumes, reduce costs, or reduce the cost of capital. But usually it’s only the CEO or the head of P&L who tries to connect the dots between the top and bottom lines—and even this tends to occur only in scarce moments of reflection amid various crises. Institutional Obstacles Many companies unconsciously create formidable obstacles to the coordination of price, brand, cost, and product development. For a start, they spread these four functions in separate organizational pyramids—most often marketing, finance, line management, technology, and operations—which don’t meet face-to-face until they reach the CEO reporting level. If that is not bad enough, the cultures of each of these four functions are quite alien to each other. Often you
  • 20. Profit Game – draft manuscript 15 Profit Game 072903 final draft 10/3/2015 can tell at a glance if you’re dealing with back-office pricers, the flamboyant, creative branding staff, the hard-nosed cost-cutters with rolled up shirt sleeves, or the idiosyncratic product developers confined to incubators or laboratories. Finally, and perhaps most important, these four functions have very little in common regarding their missions and operational measures for success. Branding often measures success primarily by awareness, pricing by incidence of discounting, marketing by short term revenues, and product developers by patents or the reliability of products. Only CEO and P&L heads are on the hook for the bottom line. This was not always the case. Once upon a time, there was less of a divide in business functions: Henry Ford personally managed product design, brand, costs, and price. The same with Steve Jobs and Steve Wozniak at Apple, who jointly designed, built, and positioned the Apple computer line. The same with Bob Crandall, who was the decisive element at American Airlines in airplane choice, price, brand, and more. But this book does not call for more centralized or autocratic corporate control. To the contrary, we’ve seen the four elements come together in a wide range of reporting relationships. We explore the potential for change at an organizational, process, and capability level in Chapter 20. A Broader Definition of Price Price uplifts don’t just happen because the CEO orders a price increase. Companies obtain higher prices because they can integrate price, brand, cost, and product management, and because they understand the impact of all this on markets. This ability to both execute and
  • 21. Profit Game – draft manuscript 16 Profit Game 072903 final draft 10/3/2015 understand is what we mean by price capabilities. These capabilities go beyond organization, culture, and process—they are the ultimate test of a company’s business strategy. The first step in building your company’s price capabilities is to understand what motivates your customers’ spending habits. These are called price drivers, and they form the basis for a sound price strategy. Take the familiar example of selling a house. Anyone who has ever sold or bought can recite a long list of potential price drivers—house size, lot size, location, condition, neatness, presentation, architecture, among others—but as we discover in Chapter 2, only two of these drivers actually matter. Similarly, when your company sells goods and services, only a few characteristics are likely to influence pricing. Here’s an example from the data communications market: The primary driver of one device (called a multiplexer) was how much this device could save you in monthly charges from the telephone company. If the multiplexer saved three lines, it was worth $700, and if it saved six lines, it was worth $1,400. All other drivers were secondary. The same kind of analysis applies to greeting cards, toothbrushes, information services, automobiles, and many others. It’s an immensely powerful analytic tool—but only if you use it correctly. Finally, pricing must be a senior management agenda item. Strategic price capabilities are often not amenable to execution by middle management. In Chapter 14, we discuss how the president of Pfizer struck a deal with the state of Florida when the company found its pricing hindered by Medicaid and other state-administered health care programs. This was a CEO-level pricing initiative with potentially big pay-outs.
  • 22. Profit Game – draft manuscript 17 Profit Game 072903 final draft 10/3/2015 Pricing Mistakes With bad pricing, huge amounts of money are left on the table. However, unlike ill-fated mergers, or poor purchasing practices, the harm of bad pricing is often invisible. Leaving money on the table doesn’t result in tell-tale fingerprints on accounting records—other than lackluster performance. When a company’s desire to affect price and markets exceeds its pricing capabilities, profitability is often harmed rather than helped. For example, as advertising spending fell during the early 2000s, one media CEO blamed the sales and marketing function. He ordered the sales and marketing team to stand firm on price—and saw revenues slip even further until he was fired by the shareholders. Similarly, a few years ago a leading cigarette manufacturer offered a significant price break to its wholesalers, but failed to structure the new price so to force the wholesalers to pass along the savings to end-users, which was to have been the whole point. As a result, the wholesalers got a one-time windfall and the manufacturer failed to win new market share. Excuses for unresponsive pricing include the difficulty of physically re-labeling prices on shelves, too many products, too much data, or any number of reasons—but all these problems can be fixed. Notwithstanding this, one well-known retail chain has in fact used such excuses to go as long as 18 months without a re-price of convenience items, a luxury few companies can afford. A more encouraging example is Toys “R” Us. In the face of head-on competition with Wal-Mart, it decided to abandon price tags altogether. It now has kiosks where customers can go to scan any piece of merchandise to see its price. Re-pricing can now be instantaneous, and the system provides invaluable information about customer decisions after seeing the price displayed
  • 23. Profit Game – draft manuscript 18 Profit Game 072903 final draft 10/3/2015 at the kiosk. This gives a direct read on the gap between the customer’s perceived value and the set price, a very powerful capability. Information technology capabilities are equally crucial in some markets. When young upstart MCI challenged AT&T for market share through the innovative “Friends and Family” program, MCI succeeded in cheaply winning over a million customers through customer referrals and highly effective direct marketing. 1 AT&T, saddled with legacy systems at the time, was unable to respond and saw its share erode over many painful years. If a company’s pricing actions exceed its IT capabilities, the result can be explosively counterproductive—an exception to our earlier generalization about pricing blunders going unnoticed. For example, a leading long-distance telephone company unintentionally sent almost one million checks, designed to induce long-distance users to change vendors, to its own customers—needlessly costing the company more than $30 million. Even this gaffe pales in comparison to the debacle at Greyhound. Looking to increase revenues and reduce costs, the bus line attempted to install a reservation and pricing system modeled on a similar system successfully used by airlines. However, bus routes are more complex than those of airlines, placing the necessary IT well beyond the company’s capabilities. It pushed forward regardless, however, going so far as to sell off many of its buses in anticipation of expected efficiencies and touting revenue gains to investors. The result was a complete systems crash upon launch, riots at bus stops as passengers fought to board infrequent buses, and a crash in stock value.2 A worthwhile lesson to the rest of us, although an expensive one for the formerly high-flying bus line.
  • 24. Profit Game – draft manuscript 19 Profit Game 072903 final draft 10/3/2015 A Reward for Effort Going forward in this book, you’re about to read how price, brand, and cost have been made to work together, and how leading-edge pricing can be a powerful solo instrument when the situation calls for it. But what will this knowledge require of you? Of your organization? Consider that smart companies in every industry have begun treating the intangibles of price and brand as products in their own right. After a highly successful product re-launch, white-goods manufacturer Whirlpool said that it now thinks of launching a new price as requiring the same process as launching a new dishwasher or dryer.3 There is the same value in market research, innovative thinking, and careful execution. Brand too can be considered a product, with the right message and value proposition to the customer being keys to success in the market. The rewards of this new mindset are great—jumps in the top line of 5 to 25 percent, even bigger jumps in profit. Yet the effort required is not trivial. Not willing to make that effort are those companies that believe they can shrink their way to superior results, or that allow themselves the luxury of mediocre returns. Companies on this side of the divide will continue to plod along with separate and isolated functional management in brand, pricing, operations, sales, customer service, finance, and IT. But for how long? The 2000s represent a tougher economic climate than the 1990s, and sooner or later a broad range of their competitors will learn to integrate price with brand and the other disciplines. Those that lag will face severe pressures as their competitors hone pricing skills, use them to build margins, then invest these same margins in improving pricing capabilities still further. Which side of the pricing equation do you want to be on?
  • 25. Profit Game – draft manuscript 20 Profit Game 072903 final draft 10/3/2015 1. The Friends and Family Program created what MCI called “calling circles.” An MCI subscriber would be offered a discount to callers in her “circle” who also subscribed to MCI. MCI would then contact the circle members named by the subscriber and, in general, enjoyed great success in converting and keeping them. In pricing terms, we can say that MCI used conditional discounts for lead generation and improved retention. 2. “Real Dog: How Greyhound Lines Re-Engineered Itself Into A Deep Hole,” The Wall Street Journal, October 20, 1994. 3. “The Price is Wrong,” The Economist, May 23, 2002.
  • 26. Winning the Profit Game – draft manuscript 21 Profit Game 072903 final FINAL 10/3/2015 Chapter 2 The Secret Life of Price On television there is a game show where contestants are shown various consumer goods, ranging from snack foods to boats, and are then asked to guess the price.1 When we watch that show it’s fascinating to see the contestants struggling to come up with an estimate, and we feel a genuine sense of closure when the real price is revealed.2 Good entertainment—but upon reflection, a flawed view of the world. At best, it’s an idealized view of a very small part of the world, namely consumer goods. But it’s still missing too much of the intriguing variety of pricing. On the show there appears to be only one price for the product, no discount opportunities, no warranties or related charges, and the products are sold only through an attractive model’s hand gestures. Finally, no one questions the prices, or even wonders why the prices are what they are.
  • 27. Winning the Profit Game – draft manuscript 22 Profit Game 072903 final FINAL 10/3/2015 In the real world, there are many variations in price for a particular good or service. By way of example, some retail prices found around Canada are shown in Fig. 2.1. This chart illustrates that, in addition to there being no single price for each of these goods, in some cases the range of differences, or spread, is wide. In other cases, the spread is narrow. A simple chart—but it gives rise to questions that are anything but simple. Why are some goods priced high while others are priced low? Why do prices vary so much, sometimes even for the same item in the same city? Why do prices for some items vary more than for others? What are the forces at work? This chapter takes us on a journey beneath the surface of prices, into a varied and sometimes complex world—yet a world with answers that are highly rational and useful once we understand them. In some ways, this chapter is key to the rest of the book: it describes what price really is. The Three Elements of Price There are many influences on price, and therefore in different markets, different influences will dominate. However, we believe that the three strongest influences—those that have the greatest applicability across industries—are the value of a good or service, the degree of competitive intensity, and the importance of brand. In some cases, all three of these influences will matter. Yet in every pricing situation, it’s worth asking if there is one that matters more than the other two. Let’s discuss each in turn. 3
  • 28. Winning the Profit Game – draft manuscript 23 Profit Game 072903 final FINAL 10/3/2015 The Clarity of Value Both television and popular conceptions of price convey the idea that price is directly related to the value of the service being offered. As it happens, value is the cornerstone of price in the real world, too. To learn more, Let’s look at the technique of value-based pricing—one of the best pricing methods, when feasible. An example comes from a well-known chemical company. This company had developed a new hot-melt adhesive for use in sealing and packaging consumer goods—that is, gluing up boxes for everything from computers to breakfast cereal. The new adhesive had a number of advantages over competing products: stronger, lower-density, and more stable at high temperatures. But how to price it? What was the value of all these advantages? To find out the answer to this question, the company interviewed potential customers, spent time on the packaging lines of current customers, and jointly worked up financials with purchasing officers who would have to sign off on the purchase. After this effort the chemical company was able to identify three distinct benefits: First, the product stuck better, so less was needed and fewer boxes would burst or fail. This in turn meant less breakage and fewer claims for returned merchandise. Second, the adhesive reduced factory maintenance because it was less prone to plug up customer’s nozzles and hoses. And third, the higher thermal stability meant a better appearance for the final product—less discoloration. The company then quantified—wherever possible—the value the adhesive would create for customers by reducing the customer’s cost of ownership in the packaging process. The reduced costs in the packaging process, and reduced clogging of hoses, were highly quantifiable,
  • 29. Winning the Profit Game – draft manuscript 24 Profit Game 072903 final FINAL 10/3/2015 and worth about $480,000 a year to a company doing a million boxes per month. Other benefits could not be so easily quantified, such as the value of better appearance. The company worked with customers to communicate and validate the value created for them. This involved working with different stakeholders inside customer organizations, running trials, and building the credibility of the claims of savings and advantage. Another way of looking at this process is that although the company came with a fair degree of credibility, it nonetheless had to create a brand for the new adhesive—a reminder that although one of the big three factors may dominate a situation, as value does here, the others are usually present as well. The company decided it would price the product to capture the value of all the quantifiable cost savings, giving away to customers only the fuzzier, harder-to-quantify benefits, such as improved appearance. This proved a sound strategy because the typical customer required hard numbers on cost savings before paying a higher price—but was pleased to see additional benefits such as a neater appearance, for which he was not being charged. The value-based approach resulted in a market price 40 percent higher than a cost-based approach would have produced. Also worth noting is that this price carried a 30 percent premium over the next highest price in the market. And because the company had taken the time to communicate the value of the new adhesive, and had chosen a price closely tied to demonstrable benefits, the new adhesive rapidly gained a big share of the market.4 Note that value changes, depending on the buyer’s point of view. Farmers value tractors more than do accountants; baby boomers value the Beatles more than do their parents. This is the notion behind segmentation, the practice discussed in Chapter 4 of charging different prices to different groups of customers for the same product.
  • 30. Winning the Profit Game – draft manuscript 25 Profit Game 072903 final FINAL 10/3/2015 The Discipline of Competition It’s no surprise that the level of competition drives prices, but how you measure the effect isn’t nearly so obvious. It depends on the nature of the market. The simple number of competitors can be useful for determining price in some markets—yet in the case of airlines, it’s not the total number of airlines that determines average ticket price, but rather the number of airlines serving a particular route. An airline with no competition can command a premium price—but add a second carrier, and prices drop an average of 22 percent. Add a third competitor, and prices dip a further 20 percent. Additional competitors depress prices by another 10 percent. What happens if there are always dozens of ruthless competitors competing for every sale? In that case, differences in price can become so subtle as to be hidden, as they are in some commodity markets—for example, steel.5 One roll of cold-rolled steel costs the same as any other conforming roll from another source. Automobile manufacturers, an important customer base for cold-rolled steel, at first glance appear to ignore quality differences among vendors— meaning they refuse to pay more to any given source. And yet markets such as this do still draw distinctions. In this case, Dofasco, a leading integrated steel producer, makes its steel to stricter tolerances and in run-experiments with Toyota, has shown that its steel runs through stamping machines 20 percent faster than other steels. At first glance Dofasco’s quality would appear to go unrewarded with no price premium, but that is not true. Each automobile manufacturer maintains plans for which steel providers to drop in the event of a downturn. For its superior quality, Dofasco will be among the last providers to be dropped while others will be forced to shut down factories. This is critical to
  • 31. Winning the Profit Game – draft manuscript 26 Profit Game 072903 final FINAL 10/3/2015 long-term cash flows and operating costs. Thus, in this particular commodity market, the price rewards for value cannot be seen in the short run—only in the longer run.6 Brand Brand is the third major element of price. Whether it be a product such as laundry soap, or services such as legal representation, sellers who enjoy prestige, familiarity and cachet will command a higher price than those without brand references. A classic example of brand and price: matches from a drugstore will light the candles on your birthday cake, and cost nothing. A $1.49 plastic BIC lighter will do the same; so will a sleek $70 Colibri piezoelectric lighter. Each offers the same degree of utility—but each has a very different brand value. You’ll note we just used “value” again. Strictly speaking, brand is a form of value—there is distinct value to buyers in purchasing a product or service with a strong brand. Buyers benefit in several ways, including: Brand awareness makes it easier to identify candidates for purchase. For example, if you’re shopping for a car, you don’t need to spend a lot of time compiling lists of manufacturers—a brand that fits your requirements will spring to mind. Perceived brand quality allows buyers to abbreviate their product testing and decision- making, confident that the seller has thought through the product requirements and the product will perform as advertised. In corporate purchasing, brand allows buyers to feel comfortable that their senior managers won’t second-guess the decision.
  • 32. Winning the Profit Game – draft manuscript 27 Profit Game 072903 final FINAL 10/3/2015 Brand loyalty comes about when buyers feel reassured the product is the best it can be. Even better, users of luxury brands often feel better for driving their Mercedes, or wearing an Armani suit, or a Tiffany ring. For individuals, brand is a reflection of their personality. The appeal to sellers is that brand offers an effective way to acquire, satisfy, and retain customers, beyond the vagaries of product specifications or the lowest price. As we discuss in the next chapter, this works best when there is a complexity or an unknown aspect to the product. The more customers know every aspect of a product and its alternatives, the more they believe all such products are functionally identical, and the greater their skepticism about taking differences on faith, the less important brand will be to price. Prices in Real Life The more we look at specific prices in specific markets, the more we see how prices vary. In fact, we have only to glance back at our contradictory list of prices in Canada to realize we will rarely see uniform prices, even for the same branded item. We know that in most markets, products and services differ in quality, as well as in shipping costs, after-sales service, and in other ways—and of course, these varied factors naturally affect price. And we can guess that different companies choose to price for different objectives: for example, to gain an immediate maximization of profit or share gain. These factors too must have an impact.7 Another reason for different prices is the difference between the list price and the actual price the customer pays and the seller realizes—the realized price or “pocket price.” As a result, any product or service has more than one price. Between the list price and the final pocket price
  • 33. Winning the Profit Game – draft manuscript 28 Profit Game 072903 final FINAL 10/3/2015 lie many potential changes, some foreseen, others not. Fig. 2.2 shows the realized price of a household good, and illustrates how discounts and adjustments in the pocket price can alter list price. In this case, the realized price was half that of the list price. The multiple components of realized price have the effect of making actual market prices highly variable. For example, one buyer might receive a deep discount, the other does not, one buyer might purchase under a long-term contract, another does not. To add to the confusion, some costs and benefits not tangibly related to the specific transaction also have an impact on price. Customer loyalty programs such as promotional gifts are a factor in some industries. Additional adjustments such as vendor financing and volume rebates can sometimes make it hard for anyone to understand the price of a particular transaction. Finally, there is the chaos of the real world. The management of Mercedes-Benz USA has a clear notion of the prices at which its cars should sell. With good German clarity, the company has even designated its cars numerically to reflect chassis size and engine strength, so that bigger numbers mean more valuable cars. Every car has been considered, every car has its number and precise list price—and yet the actual prices realized by Mercedes-Benz dealers deviate considerably from this grand scheme. Recent sales at one dealer revealed some typical reasons for this: a bargain sale to an angry influential customer who had returned his car as a “lemon,” the sale of a previous year’s model at a price no one could account for, a fleet sale of several cars, and a car that arrived without the options ordered by the customer. Thus, even when an overall price structure is known, it can be difficult to see it clearly reflected in actual prices. And in some cases the pattern is deliberately obscured. Customers typically like simple, unambiguous pricing, often called transparent pricing. It allows easy comparison. Yet
  • 34. Winning the Profit Game – draft manuscript 29 Profit Game 072903 final FINAL 10/3/2015 transparency is often not to the seller’s advantage, and thus opaque pricing is common, particularly in industrial markets. Ironically, complex pricing is often opaque to the sellers as well. When developing a record of final or pocket prices for a particular good or service, we often find that almost no one associated with the seller actually knows these prices—and many people who thought they knew turn out to be mistaken. For example, we once surveyed a sales force, asking what prices had been obtained the prior month for specific sales. Later, we compared the survey results to cash results posted on the general ledger. The correlation between actual prices and the remembered prices showed a correlation of only 65 percent—not a close match. Interestingly, there is often little or no correlation between discounts and volumes: a low volume customer may receive more favorable discounts than higher volume, more strategic customers. Price Drivers We now arrive at the actionable part of this chapter. Despite all the confusion that price variations can present us with, nonetheless price patterns can be found. These patterns are a reflection of how a particular market defines value, the competition in that market, brand, and dozens of other factors. Understand the patterns in your market, and you can maximize the value your company realizes from the market. Know the patterns and the better you can take advantage of price patterns and changes. The good news is that price has distinct patterns. Even better news is that these patterns are often simple. You don’t need to know higher mathematics to leverage price patterns in most cases. Often a simple relationship, or a simple mathematical tool, will allow your company to
  • 35. Winning the Profit Game – draft manuscript 30 Profit Game 072903 final FINAL 10/3/2015 understand how to optimize its prices. We call such a pattern a “price driver.” Knowledge of price drivers is like having radar in a fog—if value can’t be given shape, and if prices obscure rather than reveal, you can easily run aground. But once you can quantify value by means of price drivers, you can see where you actually are and how to get the ship home safely. Let’s take a familiar example of pricing and discuss the price drivers: residential housing prices. When buying a home, most of us look at different houses for sale within a neighborhood, get advice from a realtor, then put in an offer to purchase a house. This works fairly well if there are similar houses on the market within a narrow geography, and the realtor has good judgment. But we can do better. As an example, we looked at houses sold during 2003 within one small New England town. We compared sales prices with a number of features that sellers and realtors commonly believe important to selling price: size of house, lot size, how well the house is maintained, how many bathrooms, whether or not there is a garage, landscaping, dry basement, or “charm.” Using a statistical technique that looks for connections between these features and the selling price, we were able to separate those features that mattered from those that didn’t—in other words, to identify the true drivers. As it turns out, there were only two: the size of the house measured by the number of square feet of floor space, and the size of the lot in acres. The statistical analysis said these two factors accounted for 97 percent of the house price.8 Specifically, if you multiplied the square feet by $325 per square foot, and the acreage by $125,000 per acre, you could predict the selling price almost exactly. Obviously, this was not news to real estate developers who had been building bigger and bigger (and less and less charming) houses in this area for years—bigger
  • 36. Winning the Profit Game – draft manuscript 31 Profit Game 072903 final FINAL 10/3/2015 meant a higher selling price. Knowing price drivers allows businesses such as developers to single-mindedly maximize their margins. The analysis also suggested that this market did allow for a modest premium for lots sized over half an acre—but not much, and certainly less than the cost of additional land. Hence large houses on small lots. Oddly, the numbers suggested that there was no systematic value associated with neatness or care and maintenance. In some cases, we suspect this was because older homes were being torn down and rebuilt. In such cases, whether a home was poorly maintained or well- maintained didn’t matter to the developer. If these price patterns differed from what buyers say they want, we can only observe that sales prices show what buyers are actually willing to pay. What factors drive prices in other markets? The answer depends on the market, of course. However, across a broad range of markets there are typical drivers that should be examined when asking why prices behave as they do. The usual suspects are number of competitors, geography, cost-to-serve, and customer benefits created by the product or service. Two examples: Geography Geography affects not only sellers’ costs, but also demand, competitive mix, and other price components. A look at prices posted on Marriott Corporation’s website for its hotel rooms shows that prices are highest in the center of Manhattan and at the two major New York airports, and fall as you move away from these centers (see Fig. 2.3). Other geographic drivers we have observed include the distance to a manufacturer’s factory and the distance from a major transportation hub, such as a rail link.
  • 37. Winning the Profit Game – draft manuscript 32 Profit Game 072903 final FINAL 10/3/2015 Benefits This criterion suggests that if a machine is three times as productive as another machine, it will be worth three times as much. Although not always true, it’s often a good guide.9 For example, printing presses are priced primarily on their speed per minute. Agricultural goods, such as hybrid seeds, are priced based on their productivity per acre. Such benefits are carefully measured, and companies devote tremendous resources to demonstrating to customers the exact increases in productivity. For example, Pioneer, one of the developers of hybrid seeds, funds test acres in agricultural communities to prove results to farmers. Other examples where value or productivity drives price include the size of buses and their drivers’ salaries, computer code output and dollars per hour for software developers, and financial portfolio managers’ performances and bonuses.10 You can find still more examples in later chapters. Prices Over Time Don’t forget that prices also vary over time, which gives us another important driver. Airplane ticket prices vary as you get closer to the time of scheduled take-off. Gasoline prices along highways vary in the course of a week.11 Magazine renewal prices drop as your subscription nears an end. Timing can be everything, as when Cisco routers moved from selling near list prices in 2000 to selling for pennies on the dollar on eBay—this after the tech bubble burst in 2001 and bankrupt dot.coms sold their equipment to pay off employees and creditors.
  • 38. Winning the Profit Game – draft manuscript 33 Profit Game 072903 final FINAL 10/3/2015 Relationships change over time, including those between buyer and seller. Even in industries where the customer is normally king, there are moments when the balance of power shifts. Many sellers of goods or services lacking meaningful differentiation have found ways of temporarily obtaining higher prices—for example, the surcharge for rush orders. It’s a hard life selling an undifferentiated product, but smart pricing and pricing that takes advantage of changes over time can lift returns dramatically. To see why price matters over time, consider the development and manufacture of an industrial good. The typical pattern is that in the beginning, prices are relatively low. Later, after the product has been well-established in the market, opportunities will come about to increase price significantly—but to seize these opportunities, you need to be alert and actively managing price. Otherwise, you may miss the most lucrative parts in the cycle, such as the aftermarket. We discuss the aftermarket specifically in Chapter 18, but suffice here to quote Henry Ford: “I would give my cars away for free if I could be guaranteed spare parts sales.” Smart magazine publishers also understand price life cycles. One example is the efforts they undertake to retain subscribers, all of which are reflected by price changes and channel choices—typical for superior pricers that tend to vary other elements of a marketing program along with price. The issue here is the dreaded non-renewal. To avoid it, publishers use increasingly high-cost methods, while offering increasingly attractive prices. To wit:  Some months before a subscription ends, inexpensive little cards (“blow-in cards”) are inserted into the magazine, offering very ordinary renewal rates  If no response is forthcoming, a letter is sent with a better price offer
  • 39. Winning the Profit Game – draft manuscript 34 Profit Game 072903 final FINAL 10/3/2015  If there is still no response, shortly before the subscription lapses, a telemarketer will call—sometimes with the same price, sometimes lower, but always at a higher cost to the publisher  After the subscription lapses comes the grace continuation (free issues) and a letter  Finally, when all hope is gone, the name and contact information may be sold to Publishers Clearinghouse or a similar organization, which offers the publisher its lowest margins In a host of industries, companies have used price patterns over time to squeeze the last dollar out of a product. In the film industry today, often it’s the revenues after the initial theater run that push a movie into the black. Similarly, retailer Best Buy for many years derived more of its margins from selling extended service warranties than from selling the actual merchandise. The tougher the core market, the more ingenuity is needed in the pricing of related services. Even if times are good in your industry, knowing typical industry price evolution can help you prepare for a future that may be different than today. Many industries go through similar stages in their pricing evolution. In each case, as prices evolve, their administration becomes more complex. One example is the telecom industry, which has moved from uniform transparent pricing to highly varied, promotional pricing, as shown in Fig. 2.4. Managers must look ahead to possible pricing changes, or else billing and back office systems won’t be able to accommodate more complex pricing, accounting systems won’t produce the required cost analysis, channels won’t be able to sell new price plans, and marketing won’t be adept at developing creative and effective new structures. Without foresight, increased pricing pressure will truly be bad news—your company will not be able to adapt in time.
  • 40. Winning the Profit Game – draft manuscript 35 Profit Game 072903 final FINAL 10/3/2015 Seeing Through Chaos: The Power of Drivers Even at their most complex, prices are secretly rational. The world is filled with buyers, sellers, and intermediaries, all pursuing radically different objectives with different timeframes, values, budgets, skills, knowledge, and executional capabilities. This can make it hard to discern the true price drivers in your market. Yet by keeping close track of realized prices and applying the appropriate analytic tools, you can understand the drivers and penetrate the price fog to develop a strong price strategy. Whatever form it takes, a good price strategy must recognize the limitations to setting a price. Don’t be surprised when you set a price and the product or service sells at anything but the target price. Develop a price strategy that’s compatible with the chaos of real prices. The ability of your company to thrive in an increasingly competitive environment may well depend on recognizing emerging price patterns—and price drivers are the starting point. 1. “The Price is Right,” with Bob Barker on CBS, is apparently the longest-running top-rated show. 2. This is probably why we write books on pricing. 3. Daniel E. Aks, COO of a leading magazine conglomerate, points out that value, competition, and brand are really another way of describing supply and demand—but they are more useful to line managers than trying to measure supply and demand. We do however discuss ways of using supply and demand to determine price levels in chapters 8 and 15. 4. To value price, you must be able to meaningfully differentiate your product or service from competing offers. If value propositions are identical, the price ends up being set by the least sophisticated or most aggressive competitor. Such competitors typically don’t focus on customer value, and therefore may under-price, destroying the market in
  • 41. Winning the Profit Game – draft manuscript 36 Profit Game 072903 final FINAL 10/3/2015 the process. For more, see Benson P. Shapiro, “Precision Pricing for Profit in the New World Order,” Harvard Business Review, December 1998. 5. Although many managers call their market a commodity market, a real commodity exists only when buyers refuse to pay any more to one up-to-spec vendor than to another. 6. Other ways that price results can be made invisible, or at least obscure, include barter—the exchange of goods and services for goods and services. This is common in many endeavors ranging from not-for-profit organizations to large defense contracts. See “A Well Kept Military Secret. Foreigners Exact Trade-Offs from U. S. Contractors,” The New York Times, February 10, 2003, Sec. 3:1; also “Buying Your Way Into College. So, Just How Much Do You Need to Donate To Get Your Kid In?” The Wall Street Journal, March 12, 2003: D1. This article suggests that a $1 million donation can get anyone into Harvard—along with the regular tuition payment. 7. For instance, during the late 1990s, many markets were affected by new Internet-based participants striving for market share and capital market approval, while incumbents sought profitability and defense of markets. 8. A statistical measure of how well observed prices can be explained by price drivers can be obtained through a process called regression analysis. If the fit is perfect, the “R-squared” is 1.00 (or 100 percent). The R2 tells you how much of the variation in prices is explained by the price driver or drivers being tested. Also, brand can play a role in real estate pricing but apparently within this town brand was consistent. Inside New York City, the name of a building can affect the price. See “The High Stakes Game of the Name,” The New York Times, July 27, 2003: 1, real estate section. 9. In some cases, companies decide to forego the higher price in favor of increasing market share by offering a superior value proposition, so sometimes value will relate to total revenues rather than simply to price. 10. See, for example, Moses Abramovitz, National Income Lectures, Stanford University, 1979. 11. Regarding gasoline prices, the pattern observed is low prices on Monday, rising to higher prices on Friday. This reflects the fact that much of highway traffic is commuters. These workers can visit local low-priced stations over
  • 42. Winning the Profit Game – draft manuscript 37 Profit Game 072903 final FINAL 10/3/2015 the weekend and start the week with full tanks of gasoline. By Friday, they often need a fill-up, and have little choice but to use the service stations located on the highways.
  • 43. Winning the Profit Game – draft manuscript 38 Profit Game 072903 final 10/3/2015 Chapter 3 Branding for Profit Many managers have come to regard brand as a fuzzy topic, requiring broad measures. This is wrong. Brand in fact has specific purposes, and businesses should invest in it only with specific aims in mind. A sure sign of fuzzy thinking (and poor strategy as a result) is the mistaken belief that customer awareness is the same as brand strength. Other signs of fuzzy thinking are internal memos with “brand” listed as a company strength without further elaboration. Specificity is required to move brand from “feel good” to hard financial results. Here’s a statement shocking to those still mired in fuzziness: Brand is at its most valuable as a tool for pricing. For a given market segment, if you understand brand, the value of your offers, and the competitive dynamics, you can optimize your price. The question thus becomes, how do we understand brand in price terms?
  • 44. Winning the Profit Game – draft manuscript 39 Profit Game 072903 final 10/3/2015 Brand is a form of information. Brand is most valuable where customers have the least specific information, the least ability to obtain information, the least clarity on evaluation criteria, and the least time or inclination to obtain product information. Brand equity produces the highest returns when products or services are complex, difficult to compare, difficult to evaluate in regard to success, and expensive to evaluate relative to price. The brand message is most powerful when it’s clear, crisp, and communicates a relevant vision or value to the customer. This is why companies such as Coca-Cola, McDonald’s and IBM are so focused on providing a consistent product or service. Product variation would damage the non-verbal proposition of what you expect in a McDonald’s hamburger, the contents of a Coca-Cola bottle, or an IBM computer. We believe that brand and the utility of brand vary sharply by product, market, and channel. Therefore, unless you offer only one kind of product to a homogenous market, your brand strategies must be highly varied, along with your level of effort and expenditure. Brand is best understood by examining how your customers make decisions regarding your product or service. For example, as described in Chapter 1, direct mail advertisers must decide to buy either first class or bulk mail stamps for their letters. Their decision-making process illustrates the need to understand customer decision criteria: many mailers pay for first-class mail although, functionally, bulk mail (standard A mail) gets the letter there within an acceptable length of time. Why pay more? The reason is that in some markets, mail recipients are three times more likely to open a first-class envelope than a bulk mail envelope. Over time, mail recipients have learned that envelopes with first-class stamps tend to contain more important messages—a bill, a legal notice, or business correspondence. Bulk mail tends to be a waste of
  • 45. Winning the Profit Game – draft manuscript 40 Profit Game 072903 final 10/3/2015 their time, so they don’t open it. Since bulk mailers’ business relies on how many people open their envelopes, many pay for first-class stamps. Another example is automotive spare parts. A Mercedes diesel camshaft purchased from a Mercedes-Benz dealer runs $500. The same camshaft, in the same box with the same manufacturer’s logo stamped on it, can be had for $150 from an independent parts supplier. Other parts also show three-fold price differences. Still another example is sunglasses. Surveys show that many sunglass purchasers pay for a better brand because they believe those glasses offer superior UV protection. In fact, an independent study recently showed that there are no discernable differences in UV protection in sunglasses that cost more than $5. In each case, consumers made the choices they did because of lack of information. If mail recipients could somehow know what was in an envelope, they wouldn’t rely on the type of stamp when deciding whether to trash a letter or open it. Likewise, if car owners knew they were buying exactly the same part, they would opt for the lower-priced component. Finally, if sunglass purchasers knew that all sunglasses offer UV protection, many would spend less. Channel influences the importance of brand. On the Internet, the ability of brands to provide information is even more critical. Faced with an inability to touch, smell, and inspect food and grocery items, for example, patrons of online groceries tend to be more brand-oriented and less price-sensitive than shoppers in conventional grocery stores. Brand is used as a proxy for quality.
  • 46. Winning the Profit Game – draft manuscript 41 Profit Game 072903 final 10/3/2015 Brand and Product Brand equity varies by type of product, as do its dynamics. Why? Because available information, as well as the inclination to obtain such information, also varies by product. Here are three examples of this: Example 1: 3M’s branding decisions for its lines of clear adhesive tapes are based on how much attention consumers give adhesive tape (very little, it appears). According to the 3M product manager, the “Scotch” and “Highland” brands are kept separate because they offer distinctly different levels of quality. For example, Scotch, the premium brand, can be removed from paper without tearing the surface of the paper. Lower-priced Highland will tear the paper, and appears less transparent. Since 3M knows that few if any consumers will take the time to read the specifications of their adhesive tape, the only way to maintain clarity as to quality is to separately brand the two tapes. Each has a different market focus: Scotch appeals to customers who are price-insensitive, while Highland competes with discount brands of adhesive tape. Example 2: Car manufacturers, unlike 3M, have the luxury of knowing that most purchasers view a car as a major purchase decision, and will therefore invest a fair chunk of time in investigating purchase options. Thus car manufacturers can support multiple levels of quality under the general umbrella of the total company brand. BMW wants potential purchasers to believe that it produces “The Ultimate Driving Experience” for different price levels. Although its low-end 3 Series may under-perform its other cars, BMW believes consumers will have the sophistication to understand that for its class, the 3 Series offers superior handling compared to competitors.
  • 47. Winning the Profit Game – draft manuscript 42 Profit Game 072903 final 10/3/2015 Example 3: In big-ticket industrial purchases, customers are willing to spend a lot of time evaluating product quality. In preparing for a major outsourcing decision ($600 million per year for five years), one leading utility spent $350,000 on consultants and an equal amount on internal employees’ time to thoroughly evaluate two of its options: IBM versus EDS. IBM’s reputation and credibility among top management was acknowledged to be superior, but the utility chose EDS after concluding it offered the better long-term performance. Brand failed to win the day. Brand and Price Often, brand and price serve a similar purpose—to inform purchasers about their potential purchase.1 For example, telling a consumer that a car is priced at $60,000 will deliver much the same message as telling him the car is built by Mercedes, Lexus, Jaguar, or BMW. While the nuances differ, in both cases the message is essentially the same: “It’s a luxury car.” In general, brand and price are often close reflections of each other. A much-asked question is whether or not brand can create a price premium. The answer is yes: Some of the smartest companies in the world cultivate brand because it does in fact result in higher prices and thus higher margins. In some cases, these premiums appear to exist without much basis. For example, the U.S. Supreme Court found in one famous anti-trust suit that chlorine laundry bleaches are identical in function and performance. Consumers apparently don’t agree, however—Clorox routinely commands a gross margin of 58 percent, versus less than half that for competitors.2 If we associate brand with market share, whether as driver or result, there emerges a clear link between brand and price. Fig. 3.1 shows this for various products. In the case of perfumes,
  • 48. Winning the Profit Game – draft manuscript 43 Profit Game 072903 final 10/3/2015 cosmetics, fashion accessories, toys, and similar products, the combination of design and brand often matters far more than the cost of materials, manufacture, and distribution. For example, manufacturing costs for perfume and fashion clothing are often less than 15 percent of the retail purchase price.3 High margins are possible because fashion designers such as Ralph Lauren have “built [their companies] into aspirational lifestyle brands reflecting the good life.”4 Brand in this context offers the consumer guidance on how to achieve such lifestyle aspirations: Fashion products claim to be the keys “for successful living” (Benetton) or the stuff of “new dreams and legends” (Hermes). Designers operate in a rapidly changing and impressionistic segment in which product evaluation is uncertain, hence, consumers will pay a premium for a brand that assures them of a product’s merits. While some areas of human endeavor will always remain a mystery (such as how to dress fashionably), others evolve over time. In the 1960s oil companies were heavy advertisers, and many consumers believed there were significant differences among major brands of petroleum. Since then, most of us have become aware that the differences are minimal.5 We’ve become correspondingly more price-sensitive, and as a result there is no longer an oil company on the Ad Age list of top 200 advertisers. The Internet remains an area of relative uncertainty for both consumers and businesses, and so, not surprisingly, brand remains key in this market. By signaling trust, an online brand can leverage a price premium, even for nearly identical products and services. For example, one study found that Amazon.com, which enjoys strong customer trust, has been able to sustain prices 7 to 12 percent higher than online competitors such as Books.com. 6 The study further
  • 49. Winning the Profit Game – draft manuscript 44 Profit Game 072903 final 10/3/2015 found that despite beating Amazon’s prices 99 percent of the time, Books.com’s share of online book traffic remained miniscule at 2.2 percent. 7 Offline, too, many industries grant a premium to brand strength. The automobile sector offers an example: Toyota and GM cooperated to build and sell a car known variously as the Geo Prizm or Toyota Corolla. The Corolla and Geo were identical coming off the same assembly line, and shared all but a handful of mainly cosmetic parts. Yet the Toyota sells for more than $2,800 than the Geo. There can be only one reason: brand. Where product quality is obvious, however, the power of brand is limited. For example, one Canadian brick manufacturer decided to brand its products, and invested in advertising and other tools to do so. While consumers eventually learned to recognize this brand, it had no impact on brick prices or market share, so the experiment was dropped. In a commodity business, brand usually isn’t worth the effort. Hence, in his book on brand equity, David Aaker values brand equity in the stone, glass, and clay industry as zero.8 Brand and Costs Brand influences costs. A strong brand will not only allow a price premium, but will in addition make potential customers more inclined to pay attention to advertisements. A strong brand provides a platform for further communication with customers. A meaningful, distinct, and consistent brand can have an enormous impact on the selling process. A powerful example comes from the automobile industry, which has a range of well- known brands. On the one hand, we have the striking statistic that almost 80 percent of the visitors to Mercedes automobile showrooms end up buying a Mercedes. On the other, we find
  • 50. Winning the Profit Game – draft manuscript 45 Profit Game 072903 final 10/3/2015 that only a handful of visitors to Isuzu showrooms end up buying an Isuzu. Clearly, despite a clever and memorable advertising campaign involving “Joe Isuzu,” brand awareness did not translate into purchases for this importer of reliable, moderately priced cars. The affect on selling costs is dramatic. Instead of spending their days on productive prospects, Isuzu dealerships must filter through many wasted prospects. Probably this is just the beginning of the financial burden: lower compensation for salespeople, a higher rate of dealer dissatisfaction, sinking morale, and less care taken with prospects. All conspire to create a vicious cycle. Better branding could fix this cycle. Brand and Market Share For some consumer packaged goods, there is solid statistical evidence that brand awareness, as measured by advertising, is related to market share. The definitive study of beer brewers’ market battles showed that when Anheuser-Busch and Miller outspent local rivals by a factor of two, their share of market expanded over the next several years to match their share of advertising “voice.” The correlation between advertising and market share (albeit lagged) is 50 percent—a pretty strong result in a dynamic marketplace.9 Some important caveats exist to this powerful prescription. The study warns that the advertising share advantage must be constant over time, and must be considered locality by locality. Further, this rule may not apply to niche markets. This is another way of saying that advertising must have an impact on the consumer decision-making process—general advertising to niche markets is not effective. For example, advertising aimed at New Yorkers doesn’t affect consumer decisions in Los Angeles.
  • 51. Winning the Profit Game – draft manuscript 46 Profit Game 072903 final 10/3/2015 Brand also plays a role in industrial purchases when drawing up the Request For Proposal “short list.” While purchasers will eventually know the merits of competing offers in detail, when drawing up the RFP list they’re forced by their initial ignorance to rely on brand to decide who may bid. Brand may also play a role when the buyer’s decision-maker is worried that the soundness of his decision can’t be effectively communicated to senior management. Hence the 1960s slogan, “No data processing manager was ever fired for choosing IBM.” Bundling of consumer products and services tends to intensify the importance of brand. Customers view bundles as natural combinations, and generally believe there is a bargain in the bundle.10 Given the many permutations of bundled offers, consumers can’t generally make direct comparisons to competing offers—and even if they could, they probably wouldn’t take the time required to do it right. Given this disinclination on the part of consumers to investigate the actual economics, brand plays a key role. A good brand may convince the consumer that a bundle is likely to represent a bargain and a well-integrated set of service components, while a poor brand will lead consumers to avoid a decision. This is why bundling is a tool that generally favors market incumbents.11 Limits to Brand Impact A lot of money is being spent on corporate brand advertising by telecommunications competitors. Yet the overall efficacy of such broad-based advertising is unclear. Increasingly, consumers have come to believe that there are no significant differences among telephone companies. Indeed, competitors AT&T, MCI, Sprint, Verizon, SBC, BellSouth and others offer fairly similar levels of service, have similar prices, similar sales channels, and fairly similar
  • 52. Winning the Profit Game – draft manuscript 47 Profit Game 072903 final 10/3/2015 histories. There are, however, major differences in advertising levels. AT&T spends more than $1 billion annually, while SBC Ameritech spends less than $100 million annually. Has this made a difference in brand? Probably not. Each company is ranked according to reputation by Fortune magazine each year (see Fig. 3.2). If reputation is a proxy for brand, it appears that advertising levels have had no impact on brand. Regression analysis of reputation and advertising dollars (either as a share of revenue or in absolute terms, lagged or instantaneous) shows no relationship—that is, no explanatory power. (In technical jargon, R-squared is low or nil.) Unlike the beer market, it appears that the telecommunications market cannot be won by brute force. Just as IBM has found that the power of its formidable brand has eroded over time (the disappearance of the famous “IBM Premium”) because of an increasingly open computing world, telecommunications giants may be discovering that ad spending is also no longer the key to brand. Damage to Brand The personal computer industry has recently seen a major shift in market power based on brand. Evidence of this comes from a recent poll of potential buyers of personal computers, which shows that more than 67 percent of new PC purchasers would have bought a different brand to save $100, and 82 percent would have done so for a savings of $200.12 This wasn’t always the case. At one point, Compaq, IBM, and others were powerful brands in the personal computing world. What ended this comfortable state of affairs was the “Intel Inside” campaign, which most PC manufacturers eagerly but perhaps mistakenly joined. This
  • 53. Winning the Profit Game – draft manuscript 48 Profit Game 072903 final 10/3/2015 campaign initially underscored the observation (then true) that some software ran better with an Intel processor. Unfortunately for the PC manufacturers, the campaign had the side-effect of telling PC purchasers that the most important thing about a PC isn’t the manufacturer—it’s the chip (for example, the Pentium III). Thus, as a result of the “Intel Inside” campaign, many consumers now place far less value on the brand of PC they buy. Meanwhile, the one brand that never had anything to do with Intel—namely, Apple—is today the most secure against price-based switching by existing users. This is shown in the survey depicted in Fig. 3.3, where we see a mere 2 percent of users citing price as the main reason for buying an Apple. Apple is secure primarily because its product is distinct, but this is reinforced by a branding campaign to reinforce the distinctiveness of Apple’s “Think Different” brand. Dell also scores well in price insensitivity, perhaps because of its emphasis on tailoring PC features to users’ needs. These differences in brand equity exist despite some observers’ beliefs that for most PCs performance is quite similar.13 The lesson from the PC industry is that brand power resides in those markets with the greatest uncertainty. PC consumers have concluded that the differences among PCs mean little or nothing. Asked to explain the differences among chips made by Intel, Cyrix and AMD, most consumers have no idea. They do know that credible entities, in the form of PC manufacturers, have been telling them there are important differences in these chips. From that knowledge gap springs the power of Intel’s brand. Another source of brand erosion is when brand, price, message, and performance diverge. In the late 1980s, various studies commissioned by Mercedes-Benz USA indicated that the
  • 54. Winning the Profit Game – draft manuscript 49 Profit Game 072903 final 10/3/2015 Japanese car lines Lexus and Infiniti were both producing cars comparable in quality to the Mercedes line. Worse yet, they were being priced at 20 to 30 percent less than Mercedes. When Mercedes management refused to reduce price, the inevitable result was share loss to the Japanese. All of this was exacerbated by a lack of clarity on brand. While Mercedes claims to dominate the field in all aspects of quality, in fact they are viewed as leading in only two aspects, safety and prestige (see Fig. 3.4). Mercedes’ advertising claims (“Sacrifice Nothing,” “The Complete Automotive Experience,” “Passion”) are at odds with its actual advantages. Mercedes ads, unlike Volvo, do not mention safety. Mercedes ads also do not use the word “prestige,” or a synonym. (The ads do emphasize quality, but that is common to many brands—including some distinctly down-market brands.) While its advertising may not correspond closely to Mercedes’ comparative advantages, fortunately its price goes a long way to reinforcing the prestige advantage. In contrast, BMW’s perceived advantage regarding “driveability” is highly consistent with its claims to be The Ultimate Driving Experience. Perhaps as a result, BMW has come from behind to pass Mercedes in U.S. car volume. BMW now dominates the performance luxury car segment, and has taken pains (to the tune of $150 million per year spent on U.S. advertising) to drive that point home. Although brand is closely related to advertising, success in branding may have nothing to do with advertising. Brand is a function of experience also. For example, a New York Times Magazine article talked about how Prince Charles of England had engaged a public relations firm to improve his “brand” (also known as image).14 As a result of that firm’s efforts and the Prince’s
  • 55. Winning the Profit Game – draft manuscript 50 Profit Game 072903 final 10/3/2015 increased contact with the public, his approval ratings rose from a low of 41 percent to more than 60 percent. Other groups and institutions have developed positive or negative brands without the benefit of advertising. For example, a recent poll found high regard for pharmacists and low regard for politicians. It’s unlikely that most of us know much about either profession in detail, but we may have been disappointed by bad results from the smoke-filled rooms of legislatures and pleased at our good experiences with pharmacists—all of this with little advertising. Rules Regarding Brand Based on a number of markets, there are at least three widely applicable rules regarding branding and profit. Each rule requires a detailed understanding of how purchase decisions are made by customers. Rule 1: Brand is a Function of Audience, Product, Price and Message, Not Your Company Brand parameters are set by the nature of the product, not the company. Both 3M and BMW are large, prestigious companies. However, the brand dynamics for the two companies are very different. 3M’s Scotch Tape brand cannot support two levels of product quality, while BMW has several levels of automobile size and quality. It’s not that BMW is a better company than 3M, it’s just that the branding dynamics differ due to product and customer interest levels. As advertising veteran Roger Kenrick observes: “Companies don’t own brands—customers do.”
  • 56. Winning the Profit Game – draft manuscript 51 Profit Game 072903 final 10/3/2015 The question to ask is: Where does your company’s product fall—toward the Scotch Tape or the BMW side of the spectrum? An interesting example of such a quandary exists in the telecommunications industry, which is seeing the rollout of a new product: Internet telephony. Today, telephone companies are launching voice-over-Internet products. Unlike traditional (“PSTN”) telephony, which is highly reliable, easy to use, and high quality, Internet telephony has (so far) been unreliable, difficult for the average user to master, and highly variable in quality. For example, telephone central offices are engineered to fail less than 30 minutes every 40 years. On the other hand, some personal computers crash on a daily basis, and Internet-based voice calls are often cut off during conversation. Voice quality on most Internet calls is mediocre, at best. However, Internet calls are either inexpensive or free, depending on how you measure it. Can telephone companies such as Verizon, Bell Canada, British Telecom, and others, afford to offer Internet telephony under their corporate names? If telephony were like adhesive tape, the answer would clearly be no: keep inexpensive, low-quality Internet calls as a separate brand, far away from high-quality, high-cost PSTN telephony. Consumers may not care about the differences in specifications and guarantees between PSTN and Internet telephony—but they will nonetheless think poorly of a service provider when the latter fails to perform to PSTN standards. However, if telephone companies think consumers view telephony like automobiles (that is, interesting and worth investigating) then they may well offer both services under one umbrella brand.
  • 57. Winning the Profit Game – draft manuscript 52 Profit Game 072903 final 10/3/2015 Rule 2: Target the Decisions, If You Can Brand is a form of information to help decision-makers. For well-established companies, generalized, content-free brand advertising has only limited utility. Potential purchasers already know of the existence and size of most major suppliers. (This may be different for smaller competitors, or new entrants.) If the existence of the company is already well known, a brand message needs to address the specific questions facing decision-makers. Targeting specific decisions allows companies to build brand. Examples of a solid understanding of customer values include the decision by credit card companies to offer competitive foreign exchange rates to customers—they recognize this as a high-visibility issue for international travelers, one where any appearance of profiteering on exchange rates will undercut the basic message of support while traveling. Thus credit card companies keep exchange commissions low because this reduces customer defections. Similarly, focus groups in the early 1990s made it clear that the key feature they appreciated in Cisco routers was the number of protocols supported. This guided both product design and branding. Cisco’s lead in protocols made it “The Easiest Decision I’ve Ever Made” among IT managers. Customers may “own” a brand, but they aren’t always its best caretaker—in fact, sometimes you may have to ignore their expressed desires. The question is when to do so. To answer correctly, you must understand the customer decision-making process. For example, professional services firms face constant attempts by their clients to appropriate the value of the firm’s name. Audit firms have their reputation at stake when they sign company SEC filings. Where there is financial mismanagement, such as at Enron, the company being audited will use its auditor’s approval as a shield. Yet, when the mismanagement
  • 58. Winning the Profit Game – draft manuscript 53 Profit Game 072903 final 10/3/2015 becomes known, the audit firm suffers brand and financial loss. Similarly, many management consulting firms find themselves approached by clients who want to use the consultant’s prestige to obtain their board of directors’ approval of risky new business ventures and controversial decisions. If the new venture goes sour or the decision proves flawed, then the consultant’s reputation suffers. Customers want the benefit of premium brands, but don’t want to pay for them. Chevrolet owners would probably enjoy having a Cadillac marquee on their cars, and Nissan owners might prefer an Infiniti marquee. The temptation to give customers what they want is tempered by the potential erosion of the premium brand. Both General Motors and Nissan have in fact used such branding tactics to temporarily boost sales and realized prices—yet possibly at the longer-term expense of brand. Who should make brand decisions? We discuss the organizational aspects of brand and price more fully in Chapter 20. However, the critical requirement is for direct involvement by the same managers who make price and product decisions. Often, brand is given solely to staff managers who have functional expertise in advertising. This is a mistake. Unless managers are intimately knowledgeable about the customer decision-making process, they can’t leverage that process in deciding how to brand. Brand managers not familiar with the market can only act as police to ensure that logos are not misused—useful, but not likely to turn brand into a significant competitive advantage.
  • 59. Winning the Profit Game – draft manuscript 54 Profit Game 072903 final 10/3/2015 Rule 3: Be Selective in Spending on Brand The lesson from the beer wars is that more spending on brand is better. But in many industries and markets, this isn’t true. For industrial marketers, brand must be targeted. Most industrial organizations are far more complex and heterogeneous than beverage or packaged goods companies. GE has more than 300 profit centers, each with hundreds or thousands of products. Sony has dozens of distinct businesses, each offering hundreds (sometimes thousands) of different products ranging from motion pictures to personal computers. A typical Telco has a dozen profit centers and more than 30,000 discrete products and services, covering scores of distinct markets (local service, voice, data, residential and business, yellow pages, network management, and public telephones) These permutations mean one message will never fit all requirements. Broad spending may create awareness, but this doesn’t necessarily mean increased opportunities, revenues, or profits. This has been the lesson from Joe Isuzu, the telecom industry, and the commodity industries. Before spending on broad-gauge media, decide if your market truly looks like beer and cars. Summary Brand is an important element of both corporate success and superior pricing. Although there are a few industries where there’s no point in seeking a price premium through brand, in most others, brand improves price, costs, the sales process, and market share.
  • 60. Winning the Profit Game – draft manuscript 55 Profit Game 072903 final 10/3/2015 Many managers view brand as the overall impression that a company wants to create, or else equate brand only with customer awareness—but in fact, brand is most powerful when tailored to decisions made by customers. If targeted at decisions and products for which the customer has the least familiarity and the least ability or inclination to research, brand can affect price dramatically—a 100 percent price premium is not uncommon. Brand is a superior tool for swaying customers and potential customers who will not fully investigate all aspects of their purchase decision. Remember that execution matters. The wrong brand message can destroy loyalty and the ability to command a premium. Superior brand is meaningful, distinct, and true—and an important part of a company’s profitability tool chest. 1. “Price Strategy: Time To Choose Your Weapons,” The Journal of Business Strategy, September-October 1997:11-15. 2. Clorox annual report, 1998. 3. French Fragrances, Inc., 1998 10K. 4. Richard Baum, Goldman Sachs Retailing Conference, Tokyo, Japan, October 12, 1998. 5. In fact, petroleum brands may have shared distribution agreements—meaning it may be a Mobil product coming out of a Chevron pump. 6. Michael D. Smith, Joseph Bailey, and Erik Brynjolfsson, “Understanding Digital Markets: Review and Assessment,” July 1999. 7. “The Power of Smart Pricing,” Business Week, April 10, 2000. Books.com is now part of barnesandnoble.com. 8. David Aaker, “Managing Brand Equity,” 1991 (Free Press).
  • 61. Winning the Profit Game – draft manuscript 56 Profit Game 072903 final 10/3/2015 9. James C. Schroer, “Ad Spending: Growing Market Share,” Harvard Business Review, Jan./Feb. 1990. 10. Focus groups in five major U.S. cities queried on various potential service bundles, May 1997. 11. Market leaders often can wait up to a year before following minor players in bundling initiatives, without significant share loss. However, minor players (those with less than 40 percent share) must follow share leaders in less than six months, or else get shut out of a new bundle niche. “The New Wholesalers,” Telephony, January 21, 1998. 12. Sanford Bernstein Research, survey of PC buyers. 13. “Comparison of PC Performance,” PC Week, March 22, 1999. 14. The New York Times Magazine, November 22, 1998.

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