But managers are struggling to understand these tactics.
How often should companies really change their prices?
For any enterprise, the biggest constraint in changing prices is the “menu cost.” Historically, price changes were expensive and time-consuming. Price lists had to be recalculated, typed up, and mailed to customers; new catalogs, labels, and signs had to be printed. This forced companies to maintain prices. Throughout the 2000s, even as the Internet continued to grow, prices remained the same for months at a time.
Over the past few years, however, technology has drastically shifted the economics of price changes. Pricing optimization software helps companies link cost, customer, and sales-performance data and dynamic pricing methods allow firms to take account of market factors, competitor actions, and customer responses.
Menu costs have fallen dramatically. In industry after industry, this puts pressure on managers to change prices frequently. The popularity of short-lived price promotions, flash sales, and daily deals has further destabilized prices. But the trend is most pronounced among digital businesses, where price-change costs are virtually zero.
Many marketers see frequent price changes as a way of keeping customers on the hook and luring them back to their store or sites. Constant price shifts seem to be a good way to offer discounts selectively and protect margins.
Price changes make the buying decision infinitely more complex. Customers no longer have clear reference prices, so they don’t know when to pull the trigger. Research shows that when decisions become complex, many people delay making decisions or back out of them altogether. For example, when a price moves around on an hourly basis, the best option for many consumers is to simply tune out and postpone the purchase.
Another insidious consequence is that constant price changes shift the customer’s attention away from the product’s features to its price. Humans are hardwired to pay attention to stimuli that change and ignore those that remain stable. So when prices fluctuate constantly (and other features don’t), customers naturally turn their attention away from benefits and features of the product — the very factors that make a strong brand and allow the company to enjoy a price premium — and focus on price. Even products that used to be differentiated are seen as commodities. Nowhere is this phenomenon more evident than in furniture, where incessant sales have commoditized an entire category.
Frequent price changes are also perhaps the single biggest instigator of price wars. Most price changes, especially those that are publicized by companies, tend to be decreases. And when competitors see that a price is cut, they feel compelled to respond. Many airlines and supermarkets have fallen into this trap, ending up in bruising price wars as they match each others’ cuts and get caught in fast-moving downward price spirals.
There are legitimate reasons to change prices, of course. A company may want to get rid of its remaining inventory and introduce new versions of its products. Companies like Apple, Sony, Dell, and LG have to do this. And in non digital businesses, many products are seasonal: It makes sense to mark down sweaters in April and linen suits in October, for example. Other valid reasons for changing prices include rising raw material or labor costs, encouraging customers to try something new, and rewarding loyal customers.
But customer reactions to frequent pricing actions may make quick fluctuations unproductive at best, and inflict lasting damage to a company’s bottom-line at worst.
Having said all that, the question remains how to handle it best and what to do.
For me it's about three concepts:
Educate your customers , for example Diesel fuel fell this year, did your freight pricing fall? it most likely did not as UPS actually raised rates in 2015 , even though fuel prices are way down.
Customer's often assume that since fuel rates are down freight is down. Not always the case.
Having said all that, the question remains how to handle it best and what to do.
For me it's about three concepts:
- Education
- Collaboration
- Sharing
Educate your customers , for example Diesel fuel fell this year, did your freight pricing fall? it most likely did not as UPS actually raised rates in 2015 , even though fuel prices are way down.Customer's often assume that since fuel rates are down freight is down. Not always the case.
UPS® Ground, Air and International rates will increase an average net 4.9% for 2015
Diesel Prices over last 12 months | Month | Price | Change |
|---|---|---|
| Aug 2014 | 2.85 | --- |
| Aug 2015 | 1.52 | -9.60 % |
Collaborate with your customers, Often they will be your best source for finding new models to save money and in many instance may lead to a lower sales price but better margins.
In the health care industry this usually means some kind of rebate program or GPO membership but if you can collaborate with a customer or group of customer to consolidate your purchasing with a single vendor or product line , you can often negotiate that better pricing tier.
Sharing: And this is a key point if you want the collaboration and education to work.
Share the profits and information with your customers, if you are doing better then give them a piece of the pie. Or at least encourage then by offering volume discounts and making them aware of how to get the best pricing from you company. very often if you educate them properly they will understand the pricing models and how to take advantage.
So the message for today is , with a bit of collaboration , sharing and education you can change your prices to take advantage of market conditions, optimize your profits and at the same time provide your clients the best deal possible.
How can you possibly manage all of this? - With the MDS-Nx Distribution management suite all the tools to make your pricing engine dynamic responsive and collaborative are at your fingertips...
For more information on TSH or MDS call The Systems House, Inc. at 1-800- MDS-5556. Or send a message to sales@tshinc.com
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