Yesterday, Google announced a rare miss to earnings:  Year-over-year, revenue grew ONLY 25% and profit a mere 7%.  Analysts cited pricing as one of the key reasons for the miss, as the average pay-per-click price decreased by 8% despite growing volume 34% from a year earlier. Does Google have a pricing problem?

If you look beyond analyst reports, the answer is not so simple. The trend in web advertising has shifted in the last year, with individuals clicking on ads from their mobile devices rather than their desktop computers.  Of note, mobile devices inherently drive lower price points than desktop clicks. Despite the lower average price, the growth in volume could not offset the decrease in revenue. This is a MIX challenge, not a pricing issue. 

Google may still command a premium price for both its desktop and mobile pay-per-clicks relative to alternatives. However, due to structural changes in how people use the web, the mix of price points is causing a revenue challenge. The larger question for Google is twofold:

1)      Are they able to maintain or grow their pricing power in each segment?

2)      Are they able to maintain or grow their market share in each segment?

If the answer to these two questions is yes, then it certainly is a mix issue and not a pricing issue. 

If you were in charge of pricing at Google, what actions would you take?

My barber recently left the salon he had worked at for the past 25 years and relocated.  I visited him earlier this week at his new location and he shared his journey and why he chose this particular spot.

I thought there were some interesting lessons to take from his experience and that I’d share them with you.

He checked out three different salons.

The first place he investigated was a good location but according to Antonio “was not well maintained …. there were chairs with rips in them …. my customers would not be happy in that place.”  I happened to walk by that place today and would agree with Antonio. Even if the price was cheaper, I would not like going to that place at all; it was rundown.

Then he described the next stop on his search, “….. a great location, but they charge $40 bucks for a haircut …. I told them that my customers wouldn’t go for that……they’ll pay $4-5 more, but not $40 for a haircut.  The owners said to me that was their price and they were sticking to it ….. they wear bow ties ….. I bet that’s to justify $40 bucks!” We had a good laugh and as a customer I agreed that $40 was a lot more than I was willing to pay.

That lead Antonio to his final destination located closeby in a Fairmont hotel. “Good location and the price is $4 more than what I was charging before …. $4-5 to my customers …. they don’t mind.”  And in my case he is right. I’ve been seeing Antonio for 12 years, I enjoy seeing him; it’s like a little break from the hubbub. We talk about restaurants and travel and our families, at Christmas he sneaks me a glass of wine. You get the idea, it’s personal.

Antonio’s story included wisdom as well as an example of a typical behavior that leads to missed opportunities when it comes to pricing.  I have summarized it into 3 lessons:

1. Antonio instinctively knew what wouldn’t work for his customers.  The first salon was in poor repair and “was not right for his customers” even if the price was cheaper.  He also knew that the high end location that charged 60% more was too much for his customers even though it was a fantastic location.

• Lesson:  A good value proposition consists of many components and price is only one of them.

2. The salon that charged $40 for a haircut stuck to its pricing strategy; they knew their value proposition and did not deviate.

• Lesson:  Segmentation is the name of the game. You need to know who your core customers are and stick with them. If they are Wall Street bankers then go ahead and charge $40, put on a bow tie and feel good about it.

3. He knew he could charge his customers $4-5 more and they “would not mind.”  Based on this insight Antonio missed a golden opportunity. He should have adjusted prices at the old salon 12 months earlier.

• Lesson: We are usually too risk averse when it comes to pricing, thus forgoing significant opportunities.

(Editor’s Note: Paul Hunt’s story originally appeared in the Financial Post, and we have received his permission to use the story on our blog: http://natpo.st/xgRJT9)

All the best planning and hard work that go into a major corporate pricing project or initiative can be wasted if you don’t manage the change process for your users—especially your sales force.  At PROS, we’ve talked to a number of frustrated companies that have been stymied in their pricing efforts because their sales force didn’t have the confidence in their numbers or their systems.

That’s why PROS sponsored a recent online Professional Pricing Society (PPS) webinar from one of the top pricing professionals in the country, Kristin Daniels, of Cardinal Health.  Kristin shares her experience and lessons learned for successful pricing project adoption in this presentation.   If you’re a PPS member you can check it out here.

Kristin and I have also coauthored a new white paper called, “Change Management in Pricing Projects” that gives you an overview of four key steps every pricing project needs to secure user adoption.  It’s designed to help you get your users to not only adopt but to embrace your pricing project goals and processes. 

One of the most important things to keep in mind is that different audiences in your company need to have pricing messages and examples tailored to issues or problems that are meaningful to them.  That includes your finance department as well as marketing types and sales people. 

Your sales people, in particular, want specific examples of how new pricing methods and technologies are going to make their life easier and more productive.  When introducing new pricing software, for example, Kristin has some great suggestions.

Go for a quick win with fast answers from using the pricing software and then have the ability to dig into more complex analysis.  Break up the sales team into small teams, ideally of 3-4 people.  Give each team a unique problem to solve in the software and 15 minutes to solve it.  Then have a representative from each team come to the front of the room and demonstrate in 5 minutes or less how they found their answer in the software.  Then repeat with at least one more 30 minute round.  This is particularly effective with sales representatives because it forces teamwork, drives competition, ensures participation, and enables three different problems to be shown to the entire group within each 30 minute round.

This paper is filled with these kinds of practical tips you can use in implementing your own pricing project.  I suggest you take a few minutes and download it free.

The task of achieving optimal pricing in the automotive and equipment parts industry can be quite challenging. Market-based pricing techniques—even with perfect information about competitor prices — are an attempt to get it right. But, recent research conducted by PROS for a major auto parts manufacturer shows that new automated tools and techniques are required to overcome what can be described as a “market-based pricing credibility gap.”

This gap occurs because current methods of using only competitive data to determine a “market-based” parts price aren’t really up to the task. While the logic of market-based pricing to the average has the advantage of simplicity, according to our research, it’s not the whole story and it doesn’t reflect what happens in the real world.

That means a lot of parts manufacturers and distributors are experiencing far more uncertainty in market-based pricing analysis than they might think.  And, if their pricing analysis is off, it’s likely that they are not optimizing prices for profitability, and may also be wasting money on competitive pricing research.

To close the “market-based pricing credibility gap,” professionals today have to explore new methods of prescriptive pricing for parts that incorporate more comprehensive scientific methods and automation through advances in software technology.

There’s a new white paper that I’ve written aimed specially at this issue in the auto parts/equipment industry.  Download it free

The concept of variant, or component, pricing is familiar to a lot of manufacturers these days, thanks to Dell.  That’s because Dell introduced the concept of variant pricing through its model for customizing the purchase of a personal computer — a big innovation at the time.  When ordering a PC from Dell, for example, the customer selects a base option and then chooses  variations on the base configuration by adding hardware and software components.  By setting a new standard for how consumers purchase a PC—using variant pricing for adding components — Dell rapidly became a market leader in its industry. 

Despite the success of variant pricing among manufacturers, distribution companies have rarely followed suit… and therefore have often missed opportunities to increase customer perceptions of value and capture added profits that variant pricing offers. 

Gaining the ability to set distributor prices by component and associated services, and breaking out different costs for internal reporting and customer communication, are essential to reaping the benefits of variant pricing.  Only when distributor pricing teams and sales forces have the right information at the right time will they be able to make informed decisions, communicate properly with customers, and maximize revenue and profitability. 

It’s not rocket science.  But it does involve scientific analytics and computer software technology to make it possible. You can download a free whitepaper that describes how variant pricing can be applied to the distributor business model.  Plus, it shows you how innovators in distribution are already using variant pricing to increase their competitive position and enhance their profitability.

If you aren’t using Variant Pricing right now, you’re probably leaving money on the table in every deal.

Download the white paper

The term ”Willingness-to-Pay” (WTP) is often used by pricing professionals to discuss the spending limit of customers for products they buy.  The definition of WTP by author Christoph Breidert, a PhD in business and economics, says: 

Willingness-to-Pay is the highest price an individual is willing to accept to pay for some good or service.

Think about it. If you knew each of your customer’s precise “Willingness to Pay” (WTP) for each product, you could simply charge that price. The result would likely be a huge increase in your profit and market share…and maybe a bonus for you.

But, up to now, there’s been a problem with finding the ever-elusive willingness to pay.  Common consumer business pricing techniques typically used to determine WIP don’t apply very well in the business-to-business environment where prices are constantly negotiated.

That’s where your own B2B transaction data and pricing software technology comes in.  Because you can now use automated tools to mine your historical data and literally determine a WTP for every customer and every deal.  A lot of companies are already doing it. You can find out how in a new white paper I’ve written that explains what I’m talking about.  Download it free

Understanding the value you provide to your customers is always important when you set prices, but it is even more crucial in commodity product industries.  Take this example of a European chemical manufacturer:

A large customer continued to pressure a sales rep of a chemical commodity products manufacturer for lower prices on a specific product line using “cheaper competition from Asia” as his leverage.  The manufacturer complied with many of these requests because it was a “commodity product” and the manufacturer felt they would lose the business if they did not lower prices. 

A year later, during performance reviews, it became apparent the product line was losing money, so the manufacturer decided to discontinue production.  To everyone’s surprise, once the customer was notified about this decision, the customer went into panic mode saying that their production would be impacted, as the Asian competitors could not provide the same level of product quality or JIT delivery service.  They were now willing to renegotiate the contract.  The end result was a renegotiated contract that included a 20% price increase that kept the product line alive.

In the commodity products industry, a distinction must be made between commodity product and a commodity offer.  While the product may be perceived as the commodity, the offer provides opportunity for differentiation and capitalizing on differentiation via product customization, service levels, product quality, delivery, marketing support, etc.  As evidenced by the story above, it’s essential that commodity products companies understand the value they provide to different customers and differentiate offers for each segment.

The key to optimal pricing decisions is understanding the value that you provide to your customers and then testing those findings in a real market place.  There are many analysis approaches, such as Economic Value Mapping, that intend to determine the value you provide your customers based on surveys, customer interviews, etc. The challenge with these types of approaches especially in commodity industries is that they can be difficult to implement in practice and, because they are static in nature, their results may become quickly outdated.  In most cases, the best answer to the value question lies in your data.  The right approach is to implement tools that (1) mine your data to understand the willingness to pay of different customers for your product and service offerings and (2) provide you a framework to make and evaluate your decisions in an automated fashion to support sustainable optimal pricing processes and decisions.  With pricing optimization tools, you can change the role of your pricing organization from price entry based on gut feel and sparse information to a continuous process of analyzing the business, testing new strategies, evaluating results and implementing across the board.

I just ran across an old TED talk from Malcolm Gladwell, author of many books.

In the talk, he explains (in an entertaining fashion) what segmentation is and why it is important. I enjoyed it, I hope you do too…

Malcolm Gladwell on spaghetti sauce

Manufacturing.net and PROS’ Doug Fuehne, VP, Professional Services of PROS Pricing Software Solutions talk about how manufacturers can improve their pricing strategies and come out ahead as the economy turns around.

To get right to it, the five pricing strategies Fuehne suggests will help you come out ahead in the economic recovery:

1. Identify underperformers.
2. Proactively forecast future performance.
3. Increase organizational agility.
4. Focus on customer satisfaction to keep the customers you DO have.
5. Provide sales force with optimized prices and other highly relevant information in a timely manner.

Click here to read the full article

We have been discussing the impact of SaaS on IT decision making as well as sales force adoption.  It is clear vendors are working hard on the following questions:

• How do I make it easier for my customers to get my software in use and start getting value?
• How do I continue to provide value, while simultaneously (a) offering high business value innovation and (b) as little IT cost as possible?

Recently, HP and Microsoft announced they will be working together to simplify the software delivery model.  This announcement, coupled with other options Microsoft offers, such as Windows Azure and Dynamics xRM, point to larger strategy Microsoft intends to use to offer a spectrum of options to customers. This spectrum ranges from on-premises and custom apps, to cloud-based apps built by 3rd parties on Pinpoint.

Other vendor examples include Salesforce.com’s AppExchange and Force.com platform.  Oracle and SAP also have offerings. 

What does this mean for someone interested in Pricing Applications?

It will no longer be “good enough” for an application to be conceived independently of these larger ecosystems.  To offer a J2EE or .NET app is no longer enough.  It is now critical to consider the various vendor ecosystems in the decision to buy.

Is my pricing system going to be an island that I have to integrate into my ecosystem?  How much will that cost?

Does the vendor offer seamless integration into the ecosystem(s) I have chosen?  Will my pricing system be a “good citizen” in my chosen ecosystem(s)?

Most importantly, which systems do my users prefer to work in?  This question points to the larger struggle between users and IT, usability versus manageability, and conflict between ecosystems. This is most pronounced in situations where users work in Excel but the system of record for data is SAP.