The Price is Right--Until It's Not
The Price is Right--Until It's Not
Economists are actually right on this part of commerce
Author’s Notes:
Hopefully all American readers had a good Thanksgiving in this last week. My publishing schedule will continue to be every Friday from here through the end of the year, but posts will be shorter blurbs based on when I am taking more time off.
Best,
Ward
One of our recent posts on Composability was quoted by a CDP industry player Hightouch in their opinion piece on weighing Build vs Buy!
Check out their full article here and the MarTech for Humans one linked below.
Onto your regularly scheduled programming.
Pricing is Everywhere
“There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says "Morning, boys. How's the water?" And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes:
"What the hell is water?”
—David Foster Wallace “This is Water”
We’re so surrounded by conscious pricing that we forget it’s even there.
A few weeks ago, I was looking for custom formal stationery.
Although you could buy some standardized options from larger companies like PaperSource, it was significantly harder to find online ordering for custom prints.
Instead of seeing a simple, easy price on a webpage, the most transparent companies had pricing guidelines and an option to reach out for a custom quote.
The less transparent companies wanted to set up a call without any guidance on what to expect.
It’s a strange feeling in the modern world—not knowing how much something costs.
I’d gotten so used to having instant comparisons1 that being without a pre-specified price left me adrift in a financial sea.
Everywhere you look, you see a price tag.
Almost no one wonders why that is the price.
Why not a dollar higher? You could make more profit
Why not a dollar lower? You could win more market share
As conversations about stationery with calligraphers revealed, setting a price is a difficult activity.
The single price number has to summarize all the inputs and outputs in a single number—how much items directly cost, customer willingness to pay, labor, shrinkage, vendor relations, asset depreciation, opportunity cost, etc
So how do you put all of those into a single, reliable number for price?
For many small companies with lower volume, it’s done by hand for each order.
For larger companies, the process is so complex that it’s grown into its own specialty.
In this post, we’ll discuss how a pricing specialist at a major manufacturer thinks about the complex world of pricing.
We’ll walk though the importance of pricing and the balancing act pricing specialists deal with
In a future post, we’ll walk through a few methods of calculating pricing
Meet Ed
Recently, I interviewed Ed Wollard, a Product Marketing Manager at Honeywell, a Fortune 100 company.2
Ed is a product marketing professional who manages a portfolio of B2B OEM products, so he sees both the processes for publicly pricing items as well as the more behind-the-scenes special pricing deals.
“Pricing? That doesn’t sound like marketing. Marketing is ads, right?”
—Most people
Promotion3—advertising—clearly gets the bulk of the attention for marketing in the modern world.
Ed argues that Promotion’s popularity is ill-deserved and Pricing is actually the core sink-or-swim factor in a purchase.
Q: Ed, what you can you tell me about price?
Ed: Pricing is, in my opinion, the number one most important part of a product.
It really doesn’t matter what features you have or what advantages you claim; if the price doesn’t fit the budget of the customer, they’re not going to buy it.
They can’t buy it.
When [someone] thinks about marketing, they’re usually thinking about advertising.
If someone works in marketing or is a marketing student, they may also think about place—something like “where I should locate a new store”.
What should really dominate the conversation instead is price.
Pricing’s Balancing Act
Q: So what does pricing mean in the context of your business?
Ed: For me, my role is a custom marketing role.
I interface with the customers and I do a lot of sales assistance, including setting pricing for our B2B business.
In general my role is to grow my [department] revenue.
The core part that I'm in charge of is Pricing requests from our salesman where we don't follow the standard pricing.
My goal is to get the sales team the price that wins them the business basically while also meeting the goals of the rest of [Honeywell’s] business.
All different parts of the business have different goals. The role of pricing is to balance them.
Sales obviously wants to meet their commission
Finance wants to meet revenue and margin targets for the business
Product management may have a different goal or need as well
How to Calculate Price: Example 1
When asked how he calculated price for a product, Ed listed a few different approaches and important considerations.
In this post, we’re going to discuss only the simplest case: Pricing something that already exists.
Pricing Based on Existing Market
Ed: Imagine I need a certain amount of product volume.
The factory is going to have a volume goal because they want to get their volumes to capacity as much as they can to reduce their overhead costs.
I need to balance that [production goal] against our customer’s needs.
We're supposed to be an expert of our customers.
We're also supposed to be an expert of our region and our product so that we know where our competitors stand.
And then I need to know my competitors are at $X price and I'm at $Y price. [I’ll ask myself] is there any way I can get down to $X to make myself more attractive to the customer [while still meeting business goals]?
Many people want to think that if my part is better, I could get a better price.
More often, in reality it's if my part is better at the same price I'll win.
This is because you need to get to that price right before anything else.
Price dictates everything.
A lot of companies will say quality matters or these feature matters.
And it's true, quality does matter.
But you quickly learn in business, price dominates everything.
Profits dominate everything—Especially for public companies.
Conclusion
You don’t pay me for the minutes, you pay me for the years
—Old Tradesman’s Saying
The Handyman’s Invoice fable exactly aligns with how pricing work appears.
Yes, the end result of a pricing effort is often a single number that sits unassuming on the webpage for a product.
But the knowledge to correctly weigh all relevant factors and the wisdom to understand externalities is the true value of a good pricing system.
Don’t overlook pricing because it’s less sexy than promotion.
Pricing is the girl-next-door who lets her hair down only at the senior prom—important, but overlooked until it’s too late.
Even if the comparison price is a lie, its still a reference point
The Q&A section is edited for clarity and reordered for flow. Words and phrasings were retained wherever possible.
Generally, the 4 P’s of marketing are: Product, Placement, Promotion, Pricing