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We Lose Money on Every Sale, But We Make It Up on Volume: Growing Association Profits With Effective Pricing

We Lose Money on Every Sale, But We Make It Up on Volume: Growing Association Profits With Effective Pricing. Kevin Whorton Director of Retail Programs National Association of Chain Drug Stores, Inc. General Manager, NACDS Services Corporation . Program Outline.

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We Lose Money on Every Sale, But We Make It Up on Volume: Growing Association Profits With Effective Pricing

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  1. We Lose Money on Every Sale, But We Make It Up on Volume:Growing Association Profits With Effective Pricing Kevin Whorton Director of Retail Programs National Association of Chain Drug Stores, Inc. General Manager, NACDS Services Corporation

  2. Program Outline I. Overview of Pricing Techniques/Tactics II. Framework for Setting Optimal Price III. Vignettes and Cautionary Tales

  3. I: Overview of Pricing Techniques and Tactics

  4. Pricing Objectives • Will drive strategies and techniques: • Maximize profit/financial surplus • Cost recovery • Maximize market size • Social equity

  5. Pricing Strategies • Cost-oriented: based on markup/target return on investment • Market penetration: low introductory price • Build acceptance, forestall competition • Market skimming: where market will bear • No foreseeable competition • Competitive price: defensive, matching, or maintaining guaranteed low price • Prestige price: intentional high/establish value

  6. Common Pricing Techniques • Cost-plus pricing: adding markup to achieve defined margin • Demand-oriented pricing: consumer need sets price; price level varies with demand • Line pricing: price set for individual items, relative to other items within the line/brand • Price discrimination: offer multiple prices within distinct markets/distribution channels • Other: price points, loss leader, promo pricing

  7. Price Setting • Existing services • Qualitative research • Quantitative methods--contingent valuation • Tradeoff (conjoint) modeling • Overall review of practices • New services • Price testing • Bundled/unbundled products

  8. Pricing By Service Category • Services Under Development • Marketing involvement during product development process: • Define ideal product • Determine its attributes • Forecast success of product with a variety of price points/strategies (measure opportunity cost)

  9. Which Problems Apply to You • Too much/too little price variety in product line • Over-consistent pricing across categories with different costs: associates, students, international • Internal resistance to hikes: “not business decision” • Not bundled well with discounts for other services • Price level inconsistent with perceived value • Constant dues level over time, despite changes in services/components of membership

  10. Potential Solutions • Varying solutions and potential returns • Direct changes in base dues • Bundling with products/premium membership • New categories (e.g. inst./multiple memberships) • Multiple-year and discounted memberships • Changing price for categories with higher/lower fulfillment costs (international, students) • Each change needs systematic review/evaluation similar to new product development model

  11. Communication • Make case for direct price changes… • Marshal evidence of over/underpricing • Address underlying issues (e.g., cost allocations) • Build internal/external understanding/acceptance • ... or indirect price changes • Increase benefits, member discounts, premium giveaways, member-only services (if overpriced) • Unbundle benefits, lower member discounts, create premium level (if underpriced) • Continue to pursue a long-term strategy to change direct prices

  12. Implementation • To succeed, maximize return on price changes • Communicate findings internally • Forecast results, re-evaluate effectiveness • Communicate to external audiences • The sales force — chapters, recruiters • Current customers — catalog, renewals • Prospects — promotional materials • Position change as increased market responsiveness • Establish precedent: ensure pricing is a marketing decision

  13. Applications: Membership • Typical scheme: • Annual charge, no installments • Primary membership: often political/by-laws • Line pricing for other categories • No volume discounts • Strategy for changes: budget-balancing • Technique is cost-based • Full, not incremental cost

  14. Application: Member Dues • Identify pricing strategy/technique used • Determine if strategy is sub-optimal • Retention (by category) vs. benchmarks • Exit surveys: frequency of value/cost as a reason • Satisfaction ratings based on “value for price paid” • Qualitative research, current members • Competitive scan/market penetration • Use file analysis: total members by company, site • Positioning: “primary” or “secondary” affiliation

  15. Application: Exhibit Fees • Far greater latitude: multiple attendees • Split registrant fees from space rental • History rules: working within budgets • Competitor intelligence • Potential for value-added: pre-show lists, travel costs, all factored into budgets • Annual packages: ads + exhibitor fees • Willingness to trade certainty for higher price tag

  16. Application: Sponsorships • Typical scheme: • Full, not incremental cost • Based on perceived WTP or need for specific program • Often linked to giving/donor relations • Altruistic motives vs. market access • Pricing the sponsor “ask” • Identify market’s value to potential sponsor • Extensive use of add-ons • Specific deadlines for offers/auction to drive prices build-in exclusivity for high profile • Avoid frequent use of tiers

  17. Application: Certifications • Cost-plus pricing: FC vs. VC: packaging and recordkeeping • Externalities: ‘lift’ for all education • Product line: spinoffs, distance learning • Perceived value--new clients/higher income • Adjustments if problem signs (attrition rates) • Importance of lifetime value • Pricing for first and subsequent years • Pricing and penetration: elite/prestige (low) or democratic/requisite credential (high)

  18. II: A Framework for Setting the Optimal Price

  19. "No margin, no mission." Henri Manasse, Ph.D, Sc.D. ASHP Executive Vice President and Chief Executive Officer

  20. Assumptions • You price to generate a profit. • There is a direct relationship between price and demand. • Cost is only one element used to establish the final price. • Price is used as a basis for determining a product’s value.

  21. Pricing Floor and Ceiling • Your costs set the floor. • The marketplace sets the ceiling. • There is a range of acceptable prices (in theory on one is optimal).

  22. Components of Pricing Process • Pricing constraints and objectives • Demand, revenue, and elasticity • Cost, volume, and profit relationships • Pricing strategies • Factors in setting the specific price • Special adjustments

  23. Pricing Objectives • Specify pricing goals that reflect your organization’s strategic goals • Profit • Manage for long-run profits • Maximize current profits (current quarter, current year) • Target return on investment

  24. Pricing Objectives (cont.) • Sales • Given adequate profit, increase in sales revenue will lead to increases in market share and profit. • Market share (ratio of your sales to industry sales) • Declining market • Long-term strategy for entry into new markets

  25. Pricing Objectives (cont.) • Unit sales • Good for products that increase in price each year • Can be deceptive with price cutting (revenue can be down while unit sales are up

  26. Constraints • Determine the demand • Associations are niche oriented w/ a defined marketplace. • Look at both competitive association products and competitive commercial products. • Is your product/service truly unique? • Is there an expected price?

  27. Constraints (cont.) • Anticipate the competitive reaction • Who are your competitors? • How crowded is the marketplace? • What are your competitor's charging? • How will you price position your product?

  28. Constraints (cont.) • Establish universe size market share • Is the market large enough to generate adequate sales? • Is the universe stable? • Is the universe growing or shrinking? At what rate?

  29. Constraints (cont.) • Determine the cost of producing and marketing the product or service • Production costs • Marketing costs • Fulfillment costs • Assigned overhead or other fixed costs

  30. Other Pricing Constraints • Newness of product: stage in the product life cycle • Single product vs. product line • Cost of changing prices and the time period they apply • The competitive marketplace (monopoly vs. competitive) • Competitor’s prices

  31. Pricing Objectives (cont.) • Survival • Social responsibility • True for many associations • Look at total product line for profitability (gains offset losses)

  32. Demand, Revenue, Elasticity • Demand Curve Factors • Price Elasticity and Demand

  33. Demand Curve Factors • Consumer tastes • Price and availability of other products (preference set) • Consumer income

  34. Typical Demand Curve

  35. Revenue Curve

  36. Price Elasticity and Demand • There is a relationship between the quantity demanded and price. • Elasticity is the % change in quantity demanded relative to the % change in price. • Price elasticity of demand (E) is: (Initial quantity demanded / New quantity demanded) / Initial quantity demanded (E) = _________________________________________ (Initial price - New price) / Initial price

  37. What does this mean? • Demand is elastic when a small price increase produces a larger percentage decrease in quantity demanded. Price elasticity is > 1. • Demand is inelastic when a small price increase produces a smaller percentage decrease in quantity demanded. Price elasticity is < 1. • (The above also works in reverse.) • Unit demand elasticity- when the percentage of change in price produces an identical change in quantity demanded.

  38. Factors Affecting Elasticity • The greater the number of substitutes, the greater the elasticity. • Products and services considered to be necessities are price inelastic. • Items that require large cash outlays compared to disposable income are price elastic. • One way to measure elasticity is through year-to-year purchasing.

  39. Cost, Volume, and Profit Relationships • Pricing Terms • Marginal Analysis • Break-even Analysis • Estimating Demand

  40. Terms • Profit = Total revenue -Total cost • Total cost (TC) = total production, marketing, and sales expense. • Fixed costs (FC) do not change with the quantity sold (rent, salaries) • Variable costs (VC) vary directly with the quantity sold • Variable cost expressed on a per unit basis it called unit variable cost. • Marginal cost (MC) is change in unit cost for producing and marketing one additional unit.

  41. Marginal Analysis for Profit Maximization • To maximize profit • sell and promote your products/services as long as the revenue received from the sale of an additional product is greater than the cost to produce and market that product. • In theory, you want to operate up to the point where MR = MC

  42. Break-even Analysis • Analyze the relationship between total revenue and total cost to determine profitability at various levels of output. • The break-even point (BEP) is the point where total revenue = total cost.

  43. Calculating the Break-even Point Fixed Cost_______ BEPq = Unit price - Unit variable cost • Answers the question: How many units do I need to sell to break even?

  44. Practical Example of Break-even $55,000___ BEPq = $35 - ($10 + $ 8) = 3235.3 • Question: How may units can we realistically sell?

  45. Developing the Break-even Chart • Where P = $35 • UVC = $18 (printing, distribution, storage) • FC = $55,000 (development, marketing, salaries, OH)

  46. Break-even Chart • Q TR TVC TC Profit ROI • (P X Q) (UVC X Q) (FC X TVC) • 1,000 $35,000 $18,000 $73,000 ($38,000) • 2,000 $70,000 $36,000 $91,000 ($21,000) • 3,000 $105,000 $54,000 $109,000 ($4,000) • 4,000 $140,000 $72,000 $127,000 $13,000 10.2% • 5,000 $175,000 $90,000 $145,000 $30,000 20.7% • 6,000 $210,000 $108,000 $163,000 $47,000 28.8%

  47. Break-even Graph

  48. Estimating Demand • Universe/market share • Example: Membership category (N=250) • 31,000 certified technicians • 15,000 take exam in 1999 (12,000 pass) • Approximately 1/3 are in the health-system market niche • Min. universe = .33 x 43,000 = 14,190 • Mkt share estimate = 10% or 1,419

  49. Estimating Demand (cont.) • Average Sales Method 1,000 units x .3 = 333 2,000 units x .4 = 800 3,000 units x .2 = 600 4,000 units x .1 = 400 Total estimate = 2,133

  50. Estimating Demand (cont.) • Previous sales/similar products • Review sales of earlier editions • What external factors are affecting demand? • Examine sales of similar products • External research: sales of competitive products • Internal research: ask customers if they’d buy

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