Friday, December 25, 2009

Pricing Strategies in a Recession Period - Your Best Recession Strategy? Think Twice Before Price Cuts

Sales and profits are plummeting and customers are demanding better deals. What can you do to silence customer complaints, cover fixed costs, and buy time until the economy rebounds? Often, companies will cut prices. But is this knee-jerk reaction the best strategy for pricing your products in a downturn? Definitely no it may affect profitability when the economy rebounds, signal to your customers that you're easy prey for additional discounts, and cloud your brand's hard-earned image. Learn how to craft your pricing strategies to strengthen your business now and to help prime your business for later growth.

Before you think about adjusting prices, think again, a knee-jerk reaction to the recession is never good for business in the long run, and could even erode your brand image. Instead, make your pricing decisions based on clear strategic goals.
When times are good, pricing mistakes can be easily forgiven. But when the economy sours, a misguided pricing strategy can shrink profitability, warp customer relationships, and destroy a brand.

When sales and profits are plummeting and customers are demanding better deals, the instinctive response is to cut prices. This silences customer complaints, helps cover fixed costs, and buys time until the economy rebounds. A price cut can also boost sales quickly, especially when there is no money for advertising or other promotions.
But such a knee-jerk reaction may not be the best strategy; Price cuts now may affect your company's profitability when the upturn occurs. It may signal to customers that you're an easy prey for additional discounting. And it may cloud your brand's hard-won image.

Pricing decisions should not be viewed as Band-Aid solutions for bleeding income statements, they should be part of a long-term strategy for fiscal fitness. When economic storm clouds gather, trim your production levels, postpone expansion plans that aren't absolutely vital to your future growth, and slash nonessential costs wherever you can. This prepares you to pursue low-value business opportunities that help you maintain your cash flow without drastically reducing your production capacity.

Crafting the right pricing strategies will not only strengthen your business now, it will also prime it for growth later. To bolster sales while avoiding a price cut's dampening effect on long-term profitability, keep the following advice in mind:

Consider the impact
Profitability is not the only prism through which you should view pricing. Other important perspectives include:
•Volume. Too many firms fail to account for the effects of price on volume and of volume on costs. In a recession, trying to recover these costs through a price increase can be fatal.
•Impact on customer relationships. "Sucker pricing" This creates ill will and tarnishes your brand.
•Impact on the industry. Price cuts not backed by cost reductions often lead to competitive counterattacks, which erode profitability.

Adjust your sales goals
"Don't fight today's sales wars with yesterday's pricing strategies," says Mitchell. Sales goals set when checkbooks were open may no longer be suitable for a recession. Executives experience what Holden calls the "coffin corner of costing" when, for the purposes of making the numbers, they overemphasize capacity utilization and become willing to cut the price of high-value products. The wireless industry, for example, generated strong demand with its low pricing but then was unable to recover its costs of capital.

Instead of sales goals, set dollar contribution goals for products, market segments, and individual customers. To do this you may have to invest in financial systems that can track process costs as well as direct costs. Moreover, setting profitability goals may mean abandoning market-share goals. After all, a large market share doesn't necessarily mean increased profitability. But switching to profitability benchmarks can help you pursue other low-price business.

It may also make sense to change the basis for your pricing. Most expert believe that pricing based on value the economic or psychological benefits delivered by your product or service is much more effective than competitor, cost, or customer-driven pricing strategies. Remember, too, that the basis for customer value can shift when the economic climate changes. When times are good, customers often place a premium on your maintaining production capacity to ensure timely delivery of their orders; otherwise, their sales suffer. But in a recession, logistical services may be more valuable.

Understand your competitive advantage
In a recession, pricing should be shaped by industry position and long-term strategy. If your competitive advantage derives from a low-cost structure, cost cutting can pump up your market share, positioning your firm for a payoff when the economy improves. But a common mistake, says Holden, "is to use price as a competitive advantage for high-value products by giving away services or discounting to your best customers. You erode the base of profitable customers and reduce the potential for profitability when the recession ends."

Leverage your segmentation strategy
Especially if you have high fixed costs, use pricing to generate incremental revenue from your segmented customer base. Strive for "first-class," "business-class," and "economy" pricing, the way the airlines do. First-class customers receive extra value with minimal discounting; economy customers get minimum value. Such segmentation based on price sensitivity creates sales opportunities that can offset losses in other areas, especially since there is often little difference in production costs among the offerings.

Offerings can be segmented not only by value added but also by time (for example, peak-load purchasing), location, or purchase quantity. "The more you can slice and dice your prices and offerings without affecting your brand, the more you can sustain profitability," Dynamic pricing represents an extension of such a segmented pricing strategy; here, prices shift instantaneously in response to changes in supply and demand. Although the practice doesn't suit every company, early testers of dynamic pricing software have been pleasantly surprised to discover how much more they can charge without affecting sales volume. The consulting firm Accenture reports that a price increase of just 5% can improve operating profits by 55% if sales volume remains constant.

Pamper loyal customers
Losing a customer now represents a double whammy: It drains customer equity and raises the cost of acquiring a replacement. Keep your best customers happy by bolstering loyalty programs or providing additional services. Consider offering product training or other classes for your B2B customers—not only will it augment the value you offer customers, it will also make it more difficult for those customers to switch to another provider.

Plug revenue leaks
Companies can run aground on pricing gaffes once covered by the high tide of a good economy. A common oversight is not recovering all the costs involved in services, delivery, or other processes, says Mitchell. Set minimum order quantities so that processing costs won't eat all the profits. Strengthen your collection efforts to shrink the time between orders and receipt of payment. Without undermining customer value, establish a price menu for "free" services such as delivery or favorable payment terms. When sold separately, such offerings increase revenue opportunities. They also provide a benchmark value for customers who formerly discounted them because they were free.

In a recession, revenue leaks also occur because sales forces become less resistant to customer pressures. They knock down the price until the sale is won, despite the impact on profitability. Ideally, prices should be negotiated based on business rules volume, delivery, financing and not according to the negotiating skills of purchasing agents. They should also be based on the value to the customer. But sales forces often oppose value pricing because it usually means higher prices and a greater willingness to walk away from price-sensitive deals. To encourage the desired behavior, compensate your sales force based on its contribution to profitability and/or customer equity, not just on sales volume.

Shift the battleground
When you negotiate with customers, include other factors besides the payment amount—for example, payment terms or ongoing training in the conversation. Some additional suggestions:
•Change the volume requirement to raise revenue and lower unit costs.
•Bundle products that increase customer value.
•In exchange for a discount, ask for a multiyear contract to smooth out your revenue and production variability.

Protect your brands
Brands become more valuable during a recession period because they offer defensible margins. Sales of cosmetics often rise during a recession, The reason: They represent affordable luxuries or offer a psychological boost. So don't cut prices on your premium brands during a recession; they can be sold without discounts through word-of-mouth or channel promotions that increase visibility and appeal.

Wednesday, December 9, 2009

Getting The Most Out Of Your Price

When you are setting up a business for the first time, it can be quite difficult to know what price to set. You need to think about what your customers are willing to pay what the competition is charging and your costs.

As a rule of thumb, it is best to aim high as you can, as you should always lower your price rather than increase it. If your price is low, you may attract a lot of customers but you may lose them if you need to increase the price. You may also be losing money because your price does not cover your costs. Customers may think that if your product is cheap, it can't be good. Customers would be happy to pay for quality - value for money is often the best option.

When comparing your product to competitive products, you do not necessarily have to follow their pricing. Ask yourself if your product or service compares favourably and whether you can justify a higher price.
When considering your costs, it would be helpful if you did a forecast. This will allow you to be more informed and realistic about the price you charge. Bear in mind that you will need to charge a fair and competitive price with a reasonable profit. Your gross profit will need to cover all overheads and expenses. You take your money (your drawings) from what is left, that is your net profit.

Costing Formulae
There are three main costing formulae you can use to work out a cost for your service or cost for your product.

1 Daily/Hourly Rate
If you are providing a service, for example consultancy, you may find it useful to cost your service based on time calculation. You do this by first adding the number of days you will not be providing a service in the year. This will include weekends off, holidays, bank holidays, administration (about a day a week) and contingency days for any emergencies. Subtract this figure from the number of days in the year and this will give you your potential earning days. Then work out how many hours each day you will work and this will give you your total potential hours for the year.
To calculate your daily/hourly rate the formula is:
Business Overheads (fixed costs pa) + PSB (Personal Survival Budget - money taken out business to live on) divided by Number of days/hours available to sell = Cost per day/hour.

2 Cost of Product
The formula below applies if you are making something that you are going to sell.
Business Overheads + PSB divided by Production (the total number of items you produce) plus the Variable Cost per item (the variable costs per item will be know when you start making them) = Total Cost per item.

3 Mark up and margin
You business can only exist if you make a profit. The profit can either be as a percentage of the cost price or the selling price. If the profit is based on the cost price, it is known as Mark Up and can be expressed as follows:
Selling Price - Cost Price
--------------------------------------- x 100
Cost Price
If based on the selling price it is known as Margin and can be expressed as follow:
Selling Price - Cost Price
--------------------------------------- x 100
Selling Price
When pricing your product, make sure that the selling price provides an adequate margin to produce a profit.
There is no definitive method of setting a price. Your aim should be to set your prices initially at the level, which gives you your highest profits possible. Easier said than done!

Tips To Know When Setting Your Prices

Determining prices must be based on a broad, thoughtful basis. It requires a basic understanding of both your financial and business goals. Below are few principles to consider when you decide what prices to put on your product or service.

Keep your prices realistic. A realistic price is the price you set after taking into consideration various factors: the direction of your business, your cost structure and expenses, your resources and financial goals. Avoid setting your prices based on “what everybody is charging.” What is right for your competitors may not be profitable for your business. After all, their goals, strategies and financials may be different from yours. Research your competition and see what they are charging, but do not copy their pricing structure just to charge what everybody else is charging. Set your prices based on your own situation.

Cover all your costs. The price of your item should cover the costs associated with it, its contribution to the overhead, and profit. A successful pricing strategy is one that results in the most dollars after all your costs are met. Be careful in setting your prices too low: while it may attract a large sales volume, you may not be making enough revenue to cover the costs of selling the merchandise. If you set your prices too high, your sales volume may be so low you can't cover operating expenses.

Check your prices against inflation. Your prices must keep up with inflation. Inflation increases your cost of doing business, with the prices of your materials, overhead and other costs increasing. If you maintain your prices despite rising inflation, you will erode your profit margin. Allow your business to increase your prices at least once a year, but give your customers sufficient warning about the price increase. Once you’ve established your policies, constantly monitor your prices and operating costs to insure profit.

Include in your pricing the value of your time. Avoid committing the mistake of not including a salary for yourself, particularly if you are operating a service business. Your time is valuable, and you need to compute it in your pricing structure.

Customers are not always looking for the lowest price. Price is not always the topmost concern of customers. There are many customers who do not mind paying higher prices, particularly if they know that they are purchasing exclusive merchandise, or your business is located in a convenient or high-end location. Many customers are willing to pay premium prices for quality service: speedy delivery; helpful and friendly customer relations; excellent product knowledge, or satisfaction in handling complaints.

Price low, but smart. A common pricing strategy for small business. particularly new entrants into the market is to price low just to get the work. By pricing low, the aim is to penetrate the market and get as much repeat business.

However, be aware that pricing low can have adverse repercussions on your business. First, a low price may signal a low quality product and service. Be careful in setting prices too low. Second, it may be difficult to raise prices later on once customers are accustomed to your low prices. Third, your start-up business is yet to develop economies of scale that makes it hard to compete on price.

Use discounts with care. Offering discounts is a good strategy for encouraging repeat/bulk orders, bundling sales, and early payment of customers. Discounts also allow you to more quickly sell products with vanishing opportunity -- e.g. products with sell-by dates, seasonal and quick obsolescence like fashion and technology. You can also stimulate demand for your products during the times when your product/service is less popular. Discounts are also used to clear out merchandise that has become outdated.

Tuesday, December 1, 2009

Specifications of Service

Any service can be clearly, completely, consistently and concisely specified by means of the following 12 standard attributes which conform to the MECE principle (Mutually Exclusive, Collectively Exhaustive)
1.Service Consumer Benefits
2.Service-specific Functional Parameter(s)
3.Service Delivery Point
4.Service Consumer Count
5.Service Readiness Times
6.Service Support Times
7.Service Support Language(s)
8.Service Fulfillment Target
9.Maximum Impairment Duration per Incident
10.Service Delivering Duration
11.Service Delivery Unit
12.Service Delivering Price

The meaning and content of these attributes are:
•Service Consumer Benefits describe the (set of) benefits which are callable, receivable and effectively utilizable for any authorized service consumer and which are provided to him as soon as he requests the offered service. The description of these benefits must be phrased in the terms and wording of the intended service consumers.
•Service-specific Functional Parameters specify the functional parameters which are essential and unique to the respective service and which describe the most important dimension of the services cape, the service output or outcome, e.g. maximum e-mailbox capacity per registered and authorized e-mail service consumer.
•Service Delivery Point describes the physical location and/or logical interface where the benefits of the service are made accessible, callable, receivable and utilzable to the authorized service consumers. At this point and/or interface, the preparedness for service delivery can be assessed as well as the effective delivery of the service itself can be monitored and controlled.
•Service Consumer Count specifies the number of intended, identified, named, registered and authorized service consumers which shall be and/or are allowed and enabled to call and utilize the defined service for executing and/or supporting their business tasks or private activities.
•Service Readiness Times specify the distinct agreed times of day when

1)The described service consumer benefits are
I)Accessible and callable for the authorized service consumers at the defined service delivery point
ii)Receivable and utilizable for the authorized service consumers at the respective agreed service level
2)All service-relevant processes and resources are operative and effective
3)All service-relevant technical systems are up and running and attended by the operating team
4)The specified service benefits are comprehensively delivered to any authorized requesting service consumer without any delay or friction.
The time data are specified in 24 h format per local working day and local time, referring to the location of the intended service consumers.
•Service Support Times specify the determined and agreed times of day when the usage and consumption of commissioned services is supported by the service desk team for all identified, registered and authorized service consumers within the service customer's organizational unit or area. The service desk is/shall be the so called the Single Point of Contact (SPoC) for any service consumer inquiry regarding the commissioned, requested and/or delivered services, particularly in the event of service denial, i.e. an incident. During the defined service support times, the service desk can be reached by phone, e-mail, web-based entries and/or fax, respectively. The time data are specified in 24 h format per local working day and local time, referring to the location of the intended service consumers.
•Service Support Languages specifies the national languages which are spoken by the service desk team(s) to the service consumers calling them.
•Service Fulfillment Target specifies the service provider's promise of effective and seamless delivery of the defined benefits to any authorized service consumer requesting the service within the defined service times. It is expressed as the promised minimum ratio of the counts of successful individual service deliveries related to the counts of requested service deliveries. The effective service fulfillment ratio can be measured and calculated per single service consumer or per consumer group and may be referred to different time periods (workday, calenderweek, work month, etc.)
•Maximum Impairment Duration per Incident specifies the allowable maximum elapsing time [hh:mm] between
i)The first occurrence of a service impairment, i.e. service quality degradation or service delivery disruption, whilst the service consumer consumes and utilizes the requested service,
ii)The full resumption and complete execution of the service delivery to the content of the affected service consumer.
•Service Delivering Duration specifies the promised and agreed maximum period of time for effectively delivering all specified service consumer benefits to the requesting service consumer at the currently chosen service delivery point.
•Service Delivery Unit specifies the basic portion for delivering the defined service consumer benefits. The service delivery unit is the reference and mapping object for all cost for service generation and delivery as well as for charging and billing the consumed service volume to the service customer who has commissioned the service delivery.
•Service Delivering Price specifies the amount of money the service customer has to pay for the distinct service volumes his authorized service consumers have consumed. Normally, the service delivering price comprises two portions
a)A fixed basic price portion for basic efforts and resources which provide accessibility and usability of the service delivery functions, i.e. service access price
b)A price portion covering the service consumption based on
i)Fixed flat rate price per authorized service consumer and delivery period without regard on the consumed service volumes,
ii)Staged prices depending on consumed service volumes,
iii)Fixed price per particularly consumed service delivering unit.