Business over the last 18 months or so has been tough for
many companies and everyone has tried to
innovate on Pricing to be able to grow their revenues.
Whenever we think of pricing , what immediately comes to
mind are Customer acquisition issues. Will a customer buy the product or
service at that price? Managers rarely think about “consumption or Usage” when
they set prices!
Dilip Soman has this very interesting take on the effects
of Pricing. He says that the way you set
prices doesn’t just influence demand. It also guides the way buyers use your
product or service – and that can have a lasting impact on customer
In Dilip's words: Consider this example. Two friends, Mary
and Bill, join the local health club and commit to one-year memberships. Bill
decides on an annual payment plan – $600 at the
time he signs up. Mary decides on a monthly payment plan–$50 a month. Who is
more likely to work out on a regular basis? And who is more likely to renew the
membership the following year? Almost any theory of rational choice would say
they are equally likely. After all, they’re paying the same amount for the same
benefits. But our research shows that Mary is much more likely to exercise at
the club than her friend. Bill will feel the need to get his money’s worth
early in his membership, but that drive will lessen as the pain of his $600
payment fades into the past. Mary, on the other hand, will be steadily reminded
of the cost of her membership because she makes payments every month. She will
feel the need to get her money’s worth throughout the year and will work out
more regularly. Those regular workouts will lead to an extremely important
result from the health club’s point of view: Mary will be far more likely to
renew her membership when the year is over.
So Dilip Soman’s study seems to suggest that people are
more likely to consume a product when they are aware of its cost-when they feel
"out of pocket." But common pricing practices such as advance sales,
season tickets, and price bundling all serve to mask how much a buyer has spent
on a given product, decreasing the likelihood that the buyer will actually use
it. And a customer who doesn't use a product is unlikely to buy that product
again. Executives who employ those pricing tactics without considering their
impact on consumption may be trading off long-term customer retention for
short-term increases in sales.
Have a look at Dilip Soman's study on Pricing & Psychology !!
It is obvious that the effect of this thinking can be
dramatic and can in fact completely change the way a company markets its
products. Atul Bagga from ThinkEquity, offered this very interesting analysis.:
A gaming company offered
recurring pricing to its subscribers and had attained fairly respectable
revenues. But the revenue growth appeared to be slowing down. The company,
after much soul searching, decided to move away from recurring pricing to a
free-to-play model with a pay-to-play option .They were afraid of the revenue
drop with the switch and how long it would take for them to get their revenues
back to what it was with the recurring pricing. It turns out that the dip
lasted only a few months, and in fact usage revenues started accelerating soon
after, quickly exceeding the projections with the recurring model.
Why was this? It turns out, in
the virtual world, folks are reluctant to commit to a recurring payment each
period . A lot of people are happy to pay usage fees, even if it means they pay
more over time. This probably goes to their feeling of control, including the
thinking that their expenses will actually be lower - i.e. why pay $10/month if
you can pay only $1 per use and you think you will use the service less than 10
times, maybe only once or twice.
Analytics can play a very interesting role in simulating
a whole range of options for Marketers as they develop a finer Pricing strategy.
Here are the issues that come to my mind:
if your cable TV/DTH company were to
charge you basis a “pay for what you see” policy. So you do not subscribe to a bouquet
of channels but instead get charged for your actual usage-how much TV did you
watch and exactly what you watched. Possible this may have regulatory
implications, but would it not be a very interesting option to have.
2. What if a Mobile company were to offer usage pricing, but bill in advance based
on a committed volume, or based on a previous month's (or quarter's) volume,
and then "make up" for the actual usage in the next billing cycle.
3. Offer some products on an “over the slab
price basis” - i.e. charge more if you go over your committed volume
I am sure there are many more ways to "skin this pricing cat" -would love to have your comments.
troubled economy is forcing corporate leaders to re-evaluate their spending
plans across the board and marketing is not exempt. In reducing marketing
budgets, corporate leaders face a difficult set of choices: How much is too
much? Are we negatively impacting impacting Revenue producing potential with
these choices is particularly difficult if the marketing team lacks a
systematic method of measuring the effectiveness and efficiency of marketing
spending and a proven method to link marketing spending to business outcomes.
According to Fred,all
marketing investments do at least one of three things:
1. They change customer perceptions
in a way that encourages them to buy more.
2. They provide temporary monetary
incentives for customers to buy more.
3. They make the brand more
available so customers can buy more.
budget cutting and planning for an economic downturn are never enjoyable, they
can provide an opportunity for inserting greater rigor, and better capabilities
and metrics to make marketing investments more effective in the long run.
Fred Geyer and Chiaki Nishino have to say about ‘Making Marketing Smarter
Amidst the Cuts’.http://www.prophet.com/downloads/articles/geyer-nishino-smarter.pdf
this is doing is creating a much greater focus on Marketing accountability.
Suddenly the CMO’s are talking to the CFO’s.
2009 Association of National Advertisers (ANA)/Marketing Management Analytics'
(MMA) Marketing Accountability Survey, which surveyed 95 senior-level marketers
in June, revealed some surprising results. Despite a 75 percent decrease in
marketers' marketing budgets this year, as well as 65 percent who said they
were expected to drive more sales with the same or lower budget, marketing
accountability programs have taken on a greater significance.
those findings include:
1. An increase in cross-functional
marketing accountability teams. Thirty-two percent of respondents said their teams
included representation from marketing, finance, and research, up 22 percent
2. An increase in speaking the
language of finance. Thirty-eight
percent agreed that marketing and finance share common metrics (up
significantly from 27 percent).
3. Use of more sophisticated
analytics to determine marketing budgets. Seventeen percent of respondents said they use
"what if" scenarios at different budget levels to determine sales and
profits--more than double the response from the 2008 survey.
4. A greater use of predictive
Forty-three percent of respondents said they use customer lifetime value models
as an accountability technique, up from 27 percent in the prior year's study.
My take is the following:
1. Have you created a set of metrics
along with your CFO to measure the effectiveness of your marketing?
2. Is someone from your Finance team
actively measuring your investments in a way that creates joint ownerhip?
3. Are you measuring both short term
and longer term results- as an example a bank may measure short term impact of
a promotion on Credit card spending and also evaluate whether in the longer
term the credit card customers behaviour changed in terms of increased
profitability(larger ticket sizes, more revolve etc)?
The good news, for marketers, is that data mining really can make a difference to most bottom lines. The bad news is that, despite what data mining can do, it is so often used so poorly that it is virtually useless. Companies are today storing huge amounts of data. Companies in the 'Petabyte Power Players' club include eBay Inc., with 5 petabytes of data, Wal-Mart Stores Inc., which has 2.5 petabytes, Bank of America Corp., which is storing 1.5 petabytes, Dell Inc., which has a 1PB data warehouse In many cases, the data is a big part of the problem. Even in the most reputable companies, data is often "dirty,"--out of date or otherwise irrelevant. Most commercially available data mining packages lack the flexibility and functionality that real world marketers need. The problem with "data quality" is ownership. No one seems to own this critical asset! Without doubt , the line functions have to own "data quality". Data quality can only be impacted substantially "at source"-either a salesperson fills up inaccurate information for a customer while he wildly chases his target or an operational group incorrectly data enters a customer record!One of the most frequent and most difficult causes of data quality is culture. If people do not think that data quality is important, it isn't.James Standen makes this interesting point;Data quality starts on the ground. The further from the ground, and the deeper into various operational systems, ETL jobs, staging tables, data warehouses or data marts we try to fix the problem, the harder it will be.http://blog.cequitysolutions.com/ The Numerical Algorithms Group (NAG), an organization that develops software to solve complex mathematical problems, has three suggestions. One, try hiring a mathematician who is a data-mining expert to guide your efforts. Two, consider developing data mining applications in-house using fully documented components (algorithms) from a reliable library. And finally, don't give up. When data mining works, it is well worth the effort.See what Rob Meyer has to say about ‘A Better Way to Mine Data’.
Robert G. Howard has this interesting post on how Companies seeking to become more customer-centric should define the customer experience as a formal end-to-end process in their organization.
He makes a compelling point : "For those organizations that have formally adopted a process-centric approach to business, the process is often formally defined, measured, monitored, and continually optimized. This level of discipline is critical to deliver a process that is high performing, predictable, efficient, effective, and error-free. In order to become more customer-centric, businesses should add the customer experience end-to-end process to their portfolio of strategically important processes. The customer experience is a process. Like any process, the customer experience process can work perfectly (or go horribly wrong), may contain numerous scenarios, and it can be analyzed, re-engineered and optimized.
Great customer experiences don't happen by accident. They require a keen attention to detail, a focus on every touch point, and an orchestration of all customer encounters regardless of how each customer may navigate the company. Mastering the customer experience must begin with mastering the end-to-end customer experience process."
Read more about what Robert has to say at:
My take is as follows:
- In many organizations no particular function is mandated with driving a "customer centric" agenda.
- Often Marketing picks up the gauntlet !But the reality in many Services organizations(banks, hotels, telecom companies) is that Marketing often does not have the clout to push through organizational changes which impact customer facing processes.
- However in growth markets such as India the opportunity to embed "customer centric" processes into the fabric of the organization is very strong . This is because entire industries are being created right from "scratch"-Retail, telecom and many others. It needs a strong CEO who drives the customer centricity agenda himself and makes it practical for the market to absorb. The CEO then must drive a technology agenda ,with the CTO, which puts together the "plumbing" for crafting a great customer experience.