Product Pricing

1. Product Pricing Chapter Six Overview

2. Pricing Is Tricky • Maximize profitability or maximize sales volume? • Corporate (the brand group) can’t control retail pricing. • Lots of hands in the food chain.

3. Variables • Manufacturing costs may vary, especially raw goods • Transportation costs may vary • Distributors, retailers all have their hands out for a piece of the action.

4. Hawaiian Punch • Manufacturers Sales Data: Product shipped to: • New Orleans 250,000 cases • Houston 24,000 cases

5. This Is Strange Because…. Brand Development Index (BDI): A measure of strength of consumer sales across the USA (100 = average) Houston 125 New Orleans 75

6. Hawaiian Punch • Retailer Sales Data (Nielsen): Houston: 160,000 cases New Orleans: 114,000 cases

7. Sitting at the Office in Cincinnati • How could Houston have possibly sold 160,000 cases this month when we only shipped in 24,000 cases?

8. Consolidators • Sophisticated computer systems and transportation systems have created an animal called Consolidators. These predators are tied into every major grocery chain in the country, and the computers constantly monitor for pricing differences.

9. Consolidators • When the computer spots a pricing discrepancy, it quickly calculates transportation costs from point A to point B, and if it’s lower than what the folks at point B are currently being offered for a price, they will buy it and ship it across the country.

10. Which Leads You To The Next Question….. • How could the retailers in New Orleans be getting the product for a price different than in Houston? • When it leaves the plant, it’s all priced the same.

11. FOB • Pricing is always stated as: FOB (City of Manufacturing Facility)

12. We Ship It or You Pick It Up…. • Large retail chains lower their overall costs by using the Consolidators for shipping. This is how discrepancies arise between markets. • If a Consolidator can pickup an entire truck of product and take it to New Orleans, then load some of it into another truck already heading to Houston and it helps fill up that truck, then you can see how it works…..FULL TRUCKS maximize efficiency.

13. Sales Force Slush Funds • Market Development Funds (MDF) Funny money used by the sales force as incentives with the trade…. Usually stated as a “cents per case” discount (I.e. $1.00 per case).

14. Retailers and MDF • Are supposed to use the money as a means of funding discounts to the consumer…. • Take the discount and roll it into unit pricing…. • Coke 2-Liters just . 99 cents this week at Smith’s.

15. But What Often Happens Is…..

16. Retailers Take Their MDF and Flag Their New Low Price In the Consolidators Computer System • They’ll offer out through the Consolidators a .75 cents per case discount, skim the .25 cents per case, and let the Consolidators sell, sell, sell across the country while they take a .25 cent cut for every case.

17. Manufacturer’s Can’t Stop It From Happening…

18. So, the Net Effect • The manufacturer cannot control retail pricing very well. • Too many variables not under your control.

19. Disney Videos & DVD’s • In early 1990’s, some retailers like Walmart, Kmart and Target would take the video releases of the big Disney movies like “The Lion King” or “Beauty and the Beast” and use them as “Loss-Leaders” to get people into their stores.

20. They’d Sell Below Cost • We’d sell the videos to them for $14.00 each, and they’d put them on sale for $12.99 or lower. • Why? • High-profile items with lots of ad support provided by Disney.

21. Minimum Pricing • To combat the chains using our product as fodder for their price wars, we instigated a new policy of “minimum pricing”, meaning the retailer couldn’t sell it for less than the stated price or we’d cut their supply of product off…..

22. Why Did That Work? • Because we shipped DIRECT to each major chain and cut out the distributors. • There was no hand in the delivery chain that could offer a lower price on product, and if the retailer violated our minimum pricing policy, they’d be cut off from all Disney videos forever.

23. Price Elasticity • Economics term for price / volume relationship. If you sell 3 units at $1.00, and you’d sell 10 units at .50 cents…..

24. Price Elasticity

25. Simple Philosophy • The lower the price, the greater the “benefit” for the consumer, which makes it more attractive for purchase. • So the lower your price, the more you’ll sell.

26. But Life Ain’t That Easy • If price were the sole reason why we bought something, then we’d all be buying the cheapest generic products out there and brand names would not exist.

27. Baseball Example • Average price would have led you to price the balls at $4.00 each. • But when you factored in profit, it led you to a price of $5.00 each. • You sold fewer balls, but you made more profit.

28. Further Complicating Matters • Money isn’t the only currency being “used” to purchase products…. • Five “Life Currencies” • Money Time Space Information Personal Energy

29. Have You Ever Heard This…. • It’ll take too much time….. • I don’t have enough energy to do that right now…. • There’s not enough room to do that…. • I don’t know where I’d put it, I’m out of space….. • That’s more information than I need…..

30. The Other Life Currencies Are Just As Important as Money

31. Pricing Strategies • Scalpers Strategy • Machiavelli’s Strategy • Long-term value of a customer strategy.

32. Long Term Value of A Customer • Highest marketing costs are those associated with attracting new customers. • Repeat customers are the ones you love…. You don’ t have to spend any money to get them to keep buying.

33. Long-Term Customers Are Cash Cows • They are where you make your numbers – year in and year out.

35. Brighter Child • First year marketing costs: $34,000 • Number of customers acquired: 150 • Cost per customer acquired: $226.00

36. Value of Each Customer Retained • Preschool 2.5 years at average price of $125.00 month: $3,750 • Play ‘N Learn 2 years at average price of $47.00 per month: $ 1,112 • Lifetime value of a customer: $4,862

37. Lifetime Value • $4,862 Lifetime value x 150 customers: $729,300 over 4.5 years Annual sales revenue: $162,066

38. Price Sensitivity • Price Sensitive (Commodities) • Price Insensitive (Monopolies)

39. Price Perception • Price communicates to the consumer the value you place upon your product. • High price = high value • Low price = low value • Park City Miner’s Shop

40. Any Idiot Can Compete On Price • If your value to consumer is merely a low price, you’d better keep an eye out for a new job, cause yours won’t be lasting long.

41. Trailer Parks & Big-Screen TV’s • Everybody wants to feel good about themselves and feel like their successful in their own way. • Low-income are some of the most loyal purchasers of many “name brands”.

42. Pricing Is Just One Variable in the Marketing Mix • If you work at a big corporation, don’t spend a lot of time worrying about it, because in many cases you can’t control it anyway. • Always provide the best package of benefits to the consumer at a fair price.