Saturday, March 16, 2013

Insight into the fun world of product and service pricing


Hello friends!

So this semester I am taking my electives at Rotman, one of which being Pricing. I took this class because I figured if I am going to be a brand manager or work with brand managers, understanding how to price the brands which I am involved with is probably pretty important.

Also, from when I worked at Dell, when we made any new marketing initiative, the price of the products we were advertising was almost always the biggest issue.  Pricing was in fact such an important consideration that several members of the marketing team’s job was almost entirely pricing products! I had a basic understanding of what they did but now wanted to really get it, so I could be a more complete marketer upon finishing my MBA so here I was.

I know MBA school often gets knocked for making students study cases of really random industries unrelated to that which you will ultimately work in but the cases are actually pretty useful for practice, in this case, practice pricing products and services. Especially because there are so many ways to do it. 

It’s a lot of math to even figure out how much your products COST never mind what you will price them at! Things that one normally takes for granted, like the electricity in your building (overhead), is actually built into the costs of stuff you buy. This actually helps explain why Walmart can offer such low prices- they cut corners on almost EVERYTHING in their company (note that I said “almost”; they spend a lot on technology and such which helps give them their competitive advantage but I digress). So for example, by having offices that look like they belong in 1960 means their costs are lower and therefore can ultimately price lower.

This also explains in part why when I was working at Dell, we were always undercut by Acer. Acer had SUPER lean Canadian operations compared to Dell- like 5 people working in its Canadian marketing department while Dell Canada had like 25. So of course now, each Dell computer had to recover the costs of more salaries than Acer thus the price difference (all else being equal). This would be cost-based pricing and is I think, why my pricer colleagues were using most of the time.

Besides cost-based pricing there are some other pricing varieties as well. One thing that I thought was pretty cool was a study my prof (Dilip Soman) did on how different pricing plans influence product use. i.e. for a gym membership, to encourage usage, it is better to offer monthly pricing plans than annual ones. This is because when you pay each month, it is a reminder that you are still paying for the gym and therefore should probably use it. But if you pay annually, a month after paying your membership fee, life gets in the way of going to the gym and you forget about it. (I am probably the exception to this rule- annual or monthly membership…I am going to work out!) Consumer psychology with pricing! Fascinating.

Besides psychological or cost-based pricing like what I talked about above, another way is “value based” where you basically just pay for what you actually want (i.e. what you value). This is why cellphone plans exist, for example- by having different pricing options for different types of people, Rogers, for example, maximizes profit because they can meet the needs of every type of customer. People will be more likely to buy if they know they are paying only for stuff they actually want.

Thanks to our delightful pricing class, once I get back to work in a few months, I will be ready to make some awesome prices for whatever I am marketing to help my team make some big $$! 


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