The myth of pricing

Amongst the various elements of the marketing mix, pricing positions products faster than any other and is also the strongest determinant of company profitability.

A 1% price reduction leads to an 8% decline in profit for a typical FCMG company, double the impact of a 1% increase in costs. However, few companies undertake any serious pricing research to support the development of an effective pricing strategy.

Worse still, the sales force tends to concern itself more with pricing than anything else, and the typical company salesman allows himself to get too easily dragged into a discussion with his customers focused on price alone.

Given the competitive nature of the market place and the skills of retail buyers, this inevitably often leads not to lower pricing, but to a spiralling downturn in profitability.

It does not have to be like this. The main driver of this state of affairs is the mistaken belief of salesmen that price on its own is the major focus and motivator for both customers and consumers alike.

This is then ‘confirmed'. Customers perpetuate this myth as it delivers an extra profit opportunity to them, or perhaps more likely in today's cutthroat retail environment, allows them to reduce prices for their consumers in concerted efforts to gain a competitive advantage in the market.

The net result of all of this situation is that companies and their retail customers leave on the table value - which one or both could have claimed for consumers - who may have willingly paid a higher purchase price, to appreciatively pocket.

The error that sales people who fall into this trap make is to confuse price with value. They believe that having the keenest price is critical to maximising sales and will happily point out that classical economic theory supports this hypothesis. If this was the case, however, Porsche would sell no cars and Dubai's Burj Al Arab would be empty. Price is an important element in any buying decision, but it is neither the only one nor the most important.

Let us examine more closely the retailer/supplier relationship as a way of proving the point. In the same way that FMCG companies set objectives for their sales force, progressive retailers measure their buying teams using a series of key performance indicators (KPIs). These vary by retailer but usually include metrics such as profit per metre of shelf space, category growth and revenue from listing fees.

Buyers are never measured on whether they secure the cheapest price from a key supplier because their boss has no access to the buying price of their competitors. Furthermore, asked which suppliers are their preferred ones most buyers would say those who support them the most, whether in creating innovative activities in their stores, working with them to grow an overall category rather than individual brands or sharing industry insights which help to create efficiencies or competitive advantage.

Buyers value companies that are reliable and trustworthy, and deliver against their commitments. Being the cheapest is rarely cited as a characteristic of a preferred supplier. With regard to consumers, it is true that there are a few basic products called KVIs (Known Value Items) which are very price sensitive, but demand for most other products is driven by a combination of factors of which price is just one element.

Companies using price discounts as the major thrust of their promotional activities run the risk that consumers will wait for the next offer and only buy when the product is price-promoted, effectively repositioning the product at a lower price. By contrast, companies who use added value activities such as prize draws, link purchases, and extra free and maintain regular pricing tend to enjoy more stable demand and a more profitable, faster-growing business.

Most interesting of all, when one FMCG company compared the results of two promotions, both featuring displays but one with regular pricing and one with a discount, they found the incremental sales effect was almost identical suggesting that a good display works more successfully than price.

So let's debunk the pricing myth once and for all, and focus our efforts on creating value for our businesses rather than destroying it.

Nick Pearson is managing director of Pearson Consulting.

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic. Arabian Business would like to point out that only comments relevant to the story will be published. Any containing personal insults or inappropriate language will not be approved.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM