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Pricing in a Downturn


The following excerpt is from a whitepaper written with two of my colleagues at Abbey Road Associates. Abbey Road is a business consulting firm that specializes in pricing strategy. I work with Abbey Road on a project basis. If you would like to read more of this paper, please contact me at karenlevine@abbeyroadassociates.com.

“Quick Checklist for Pricing in a Downturn”

Which pricing strategies address falling demand in an economic downturn? The pundits generally say ‘wake up, pay closer attention to customers, and be more targeted in your pricing.’1 Good ideas certainly, but what should you do specifically? Which price initiatives do, or do not, work?

From working with clients in industries which entered the recession early (e.g., print media, construction and commodity capital goods) we believe there are five key strategies, generally requiring intelligent use of tools, to combat falling revenues. The key to success, in all cases, is not to assume that market-facing management becomes magically smarter. You may need tools to change behaviors.

So, the answers occur in strategy + tool combinations. Most of them focus on understanding the customer buying decision, which is the driver of price sensitivity.
Know the decision, and you can optimize your pricing.

Strategy 1: Adjust your understanding of value and its capture.

With the downturn, the value of your offer has changed both in aggregate, and by component. For many industries the value of your after-sale service has increased, while the value of new widgets has fallen. This is a direct consequence of your customers feeling poorer, or having their budgets cut. While such cuts will preclude purchase of new units or services, the old units are now integral to customers’ businesses, and so must be maintained, recession or not.

Evidence of this sort of shift comes from recent IBM earning results. Unlike its more manufacturing-oriented peers who experienced sharp revenue declines, IBM exceeded earnings because it had shifted its business to over 60% service and lease revenues—which were less subject to capital expenditure cuts.

The tool required to best propel a change in focus is a quantitative assessment of your offer components’ value. That tool may take three forms:

— A detailed model of your customer’s business, showing how they make financial and purchase decisions
— Conjoint or other analysis of customer views, or
— Best of all, a rigorous analysis of customer behavior and testing of purchase/price behavior through regression or similar techniques.

The sooner you understand which categories of spend must continue, and which categories will be cut, the sooner you can adjust your price structure. We have found this analysis produces the best programs for preserving revenues. Often, a price increase on less price sensitive offer elements will offset reduced demand for former flagship products.

In simple terms: assuming your “normal” revenue mix is 70% new sales, 30% follow on, and the recession causes new sales to fall by 20%, we find that often you can make up much of that fall by raising follow-on prices (by as much as 50% in some cases!) Naturally, to avoid customer rebellion, finesse, messaging and superior bundling techniques are required to pull that off.

Strategy 2: Improve the value message.

This strategy is linked to the first strategy; in a nutshell it says that customers do not always realize the value of what you offer. While many sales forces say they sell value, in fact most do not. This is because in good times, in many industries, a sales rep does not do best by selling value. Rather the rep does better by raising awareness and inserting themselves into a buying process. In a downturn, the value communication role becomes more important.

The tool required for this role is to equip and train the sales force with specific messages and evidence of your product’s or service’s value. For instance, surprisingly few companies engage third party evaluators to compare their product with competitors. Credible third party evaluators are plentiful: often university professors will evaluate your product for little more than the cost of samples. Evaluation organizations such as J. D. Powers are very important elements of a value message when customers are parting with their money with increasing care.

Strategy 3: Make a third party pay, e.g., the IRS.

Many companies believe that once the product or service has been delivered, the pricing process is over. Wrong. We find that many buyers are able to obtain reimbursement of their costs, and that a majority of buyers can be educated on the tax consequences of their purchase. You as the seller impact both taxes and reimbursements, and you neglect an important element of net realized price if you ignore these impacts.

The means to effecting this is to understand your customer’s tax or reimbursement opportunities. For instance: if you sell to lawyers who can obtain client reimbursement of electronic research but not books, sell your electronic and print research in bundles and on the invoice allocate most of the price to the electronic. For instance: if you sell bundles of telephone and video services, do not allocate them equally on the invoice. Allocate more of the bundle price to the potentially tax deductable telephone line, and educate customers on why you have done so. A final example: if you are a not-for-profit performing venue selling 10 performance season tickets for $300, and individual performances for $50, then grant season ticket holders who donate back tickets for a performance they cannot attend a tax credit of $50, not $30.

Strategy 4: Better identify customer price sensitivities.

In some cases, a high priority should be to better understand a particular customer’s price sensitivity and the possibility of cancellations and defections. This will identify when you may need to offer a greater discount to retain the business, or when a discount is unnecessary. It takes segmentation and moves it to a more granular level.

The tool is a “risk scorecard” which rates the likelihood of customer cancellation due to price. It takes the collective wisdom of your best sales managers, and some quantitative testing, and distills the 4-6 key measures which precede a cancellation. Such measures might be usage, your price relative to competitors, or the process by which your customer makes buy/cancel decisions. Use of such a card is simple: sales management answers the 4-6 questions, and you get a score which says “Discount X%, Y% or None at all.”

We recommend a simple execution of this tool. The reason for this is that humans know more about key customer price drivers than do your systems. Frequently, the most important inputs to such a tool are known first by sales representatives or brand managers. For instance, a key factor could be a change in how purchases are approved, such as the switch between single decision-maker and committee, or a credit crunch in a particular geography or end user industry.

The benefits of this tool can be enormous. We repeatedly find that less than two-thirds of cancellations are price driven, so should not be addressed through price. Indeed, lowering price can sometimes destroy trust and set in motion further purchase reviews.

Footnotes:

1 For instance, the current McKinsey & Company January 2009 Quarterly We suppose the pundits include us, as we wrote Chapter 6. “Boom and Bust” in Winning the Profit Game. Smarter Pricing, Smarter Branding (McGraw-Hill, 2004).

2 The idea is that context sets price. While the customer may buy the same thing as always, the value and ability to price are different. For instance, while the orchestra may be the same, the price of a single performance is not the same as a series. So, if the season pass holder turns back in a single performance, it’s worth $50, not $30 ($300 divided by 10 performances.) This is hard-nosed value assessment.

If you would like to read more of this paper, please contact me at karenlevine@abbeyroadassociates.com.

Copyright Abbey Road Associates 2009

These Are a Few of My Favorite Things


My high school Latin teacher, Mr. Fiorella, used to say that a day in which you don’t learn something new is a day wasted. Thanks to the my continued addiction to audio podcasts, I am continuously learning. These are a few of my favorite pods:

INDISPENSABLE

Advertising Age’s Daily “Three Minute Ad Age” and other audio reports
– I fall in love with these a little more each day.
– Recommend “Inside the Mommy Blogger Business,” which includes a discussion of the Walmart Eleven Moms blogging hub.

Cynopsis Digital:
Alas, this was discontinued making it “Can’t Have.”

20 min. Yoga Sessions from YogaDownload.com
LOVE it. Can actually find 20 minutes for a yoga session – as opposed to the 2 hours required to take a 90 minute class at the gym.

New York Times Front Page:
GREAT way to stay on top of top news stories in the five minutes it takes to go from the doors of my elevator to the doors of the 1-2-3 subway line.

IMPORTANT

MediaBytes with Shelly Palmer – New Media News – Audio:
Be sure to adjust your volume level for this enthusiastic daily report

CABLE TV

Cynopsis In Your Ear:
Crucial daily update if you’re in the cable TV space. If I had not listened today, I might have canceled my HBO subscription, not realizing the Bill Maher is coming back on air this week.

Satellite Guys.US – Satellite Guys Podcast:
Long and rambling. Essential when I was working on a pricing strategy for a cable TV network. Not highly relevant at the moment.

HELPFUL

Apple Quick Tips:
Very helpful – video – short & sweet

A LITTLE LONG… BUT IF YOU HAVE THE TIME

BusinessWeek — Cover Stories:
LOVED “What’s a Friend Worth?” story that puts a dollar value on an individual’s social network (Twitter, Facebook, etc.)
“The Risk-Takers” is worth a listen
“Could Google Fix Detroit” is a very interesting interview with “What Would Google Do?” author Jeff Jarvis

Today’s Business:
Useful.

On the Media:
Many of these are about journalism rather than the business side of media; however, there was a very interesting piece about Twitter last summer. Bob Garfield is always entertaining and interesting – and super nice in person.

Weekend Business:
Long, in depth.

IF YOU HAVE THE TIME – LIFE

The Economist:
Always good to get a non-American perspective

Green 960 – Rachel Maddow:
Long but interesting

The Kelly Morris Yoga Podcast

President Obama’s Weekly Radio Address:
Often captures key addresses

Real Time with Bill Maher:
Loses something without the video

The Tudors:
Good to have when you’re waiting to be served at the Time Warner Cable office – video version. iTouch has incredible video quality. Not as visually explicit at the TV version, however. (Tudors is a little like soft porn.)

60 Minutes Podcast – The Full Broadcast:
A little difficult without the video.

The Future of Print and Other Ponderous Questions


I recently spoke with a senior editor at a top business magazine that is just now co-locating digital and print editorial staff. (Something the NYT found to be of great value several years ago.) He commented that he did not find this integration necessary, digital is for daily news reporting, and magazines are for deeper analysis and insight. He explained that writers should work their way up from digital to print in the same way they graduate from news reporting to feature stories.

Steeped in tradition as that sounds, I think that online writers should learn to be more insightful in their writing, bringing something more to the medium than reporting, which makes their site easily substitutable. The challenge becomes how to offer added value online without “stepping on” the deeper, more sophisticated content of the magazine. After all, we do want a reason for people to continue buying magazines. It’s good to have a stronghold in both media; at the very least, this allows for multiple touch points and mutual cross-promotion.

Tina Brown is the founder and editor-in-chief of “The Daily Beast” and an industry veteran who has made a stupendous transition from print to digital. Tina spoke with me recently about the importance of preventing magazine content from leaking before the publications hit newsstands – and the difficulty of accomplishing this. This is an important consideration for magazines that invest heavily in newsbreaking stories. I think, for example about Vanity Fair’s unveiling of “Deep Throat.” This is challenging because of the extraordinary lead time of magazines, one element of which includes the week or so it takes to print and distribute the “books.” I recall a controversy a few years ago in which a woman gained access to BusinessWeek stock picks before they became public and made quite a bit of money leveraging this information.

So, how do we protect the unique value of the printed journal – recall Conde Nast’s positioning of “Portfolio Magazine,” a daring introduction to the Business Magazine space a few years ago – while also providing differentiated online content – differentiated from the magazine and from other online news sources? This remains one of several “ultimate” questions that face us in the 21st century:

“How will we turn the tremendous value of the Internet into tangible value for its (initial) creators?”
“Do we need professional journalists – of the kind that win Pulitzer prizes – and, if so, how will we be able to afford them?”
“What is the meaning of life?”
and
“What is the right media mix for an advertiser?” – hmmm… I digress

Returning to one of my earlier posts, the question is currently facing us regarding the possibility of consumer-supported content. iTunes has succeeded with “micro-payments.” However, will people be willing to pay for “disposable” content? They might pay for a song or musical collection (formerly called “CDs”) that will bring them continued enjoyment, often for decades. And they will pay (at least up until now…) for books, which offer hours of enjoyment and may be written in, passed along and reread. Will they pay for an article they might prefer skimming and that has an ephemeral value?

Publishers like The Wall Street Journal, The Economist and Advertising Age have demonstrated that it is possible. As have information providers like Hoover’s, Consumer Reports, eMarketer, Forrester, Lexis Nexis, etc. What differentiates these publishers from The New York Times, which has struggled with this question for years? The answer is, indeed, differentiation – at least part of the answer. The Wall Street Journal and The Economist have differentiated themselves enough that if they put the content behind a walled garden, their readers will feel a loss that can not be substituted for by another publisher.

This is similar to the loss I have felt since Cynthia Turner discontinued her daily digital news podcasts. I have attempted to replace this news source with Shelly Palmer’s broadcasts, with NYT podcasts, with Ad Age Three Minute reports, but I continue to be less informed and less satisfied than I was. It seems that Cynthia tried to support this content/investment through an advertising model but was not successful. Personally, I would have paid for it. But are there enough Karen Levines to have supported it. Perhaps not. Perhaps the content is too targeted. Perhaps it was not promoted to enough people that share my need for it.

In any case, the WSJ, the Financial Times (I believe) and The Economist offer something to a loyal reader base that they cannot find elsewhere. Another factor that comes into play here is the relative investment required. I believe that all three of these come for free with a print subscription. Perhaps the subscription line of revenue for these publications is larger than newsstand. I would certainly find this easy to believe for The Economist as all the Economist subscribers I know watch their mailboxes longingly a day or few before the magazine is scheduled to arrive. (One actually bought an issue at newsstand on an occasion when it was available there first.)

So, in those cases, there is no incremental cost to those who subscribe. And those who pay the money to subscribe do so because the relative expenditure is low given the value. For example, many of these readers are affluent or are able to expense or write off this expenditure.

Now the New York Times does not have this luxury. If it puts its massive amount of content behind a wall, readers will find substitutes. And although some elements of the paper cannot be substituted for, e.g., Frank Rich’s column, which can often be accessed via unauthorized sources such as blogs – something pointed out to me by Frank Rich. (Of course, this can be addresses via the right technology, a lengthy and expensive investment that accounts for the success of some of the publishers mentioned above.)

And there you have my thoughts for the day on just one aspect of the ponderous question of the ages: “How will print publishers adapt and survive?”

On My Lap or by My Side


I have increasingly become a person who cannot watch television without my Macbook on my lap or closely by my side. Last night, I was watching “Better off Ted,” or perhaps it was “The Mentalist,” when I glimpsed in less than a second of footage what looked like a Diane Von Furstenberg dress that I own. After reviewing the spot on my DVR, I went immediately to the internet. Searching on “AT&T” and the name of the song used in the ad, I immediately found the AT&T “Brewery” ad on both YouTube and an advertising commentary website. I paused the video on the moment when you would see the dress, saved a screen grab to my desktop and uploaded the photo to a little fashion gallery I maintain on my Facebook profile.

A few weeks ago, I did the same thing with an Ikea ad in which the woman in the ad was wearing a DVF wrap dress I had just purchased in December. It was really quite fun to see the dress play a prominent role throughout the thirty-second spot as the leading lady slammed cabinets and drawers in her kitchen taking out her frustration with her “idiot” boss. I guess the dress I had purchased represented what a career woman would wear to work. I noted how she adjusted the sleeves to make them seem three-quarter length, assessed whether the actress (or wardrobe-ist) had pinned the front of the dress to keep it closed – I will never fully understand the logistics of a wrap dress, and considered whether the blousiness I had experienced with the top of the dress seemed to be part of the design. In this case, I uploaded a link to the video to my Facebook Wall.

A few months ago, I heard a wonderful song at the very end of an “Ugly Betty” episode. I quickly went to YouTube in an effort to find the song. Alas, it did not come up in my search based on the key phrases, so I went to Google. Already, I found several chats and Yahoo! Answers exchanges in which co-fans asked each other for help in identifying this song and shared what they remembered of the lyrics. Alas, no luck – a terrible missed opportunity on the part of the musical artists and their managers/promoters. (I did circle back and find the song several months later after letting these other zealots continue their investigations.)

More recently, I heard a song on ‘Grey’s Anatomy” that I quite liked. In this case, I shortly discovered websites – hosted by ABC, I believe, that provided all the pertinent information for individual episodes, including the song titles associated with particular parts of the show, e.g., “the montage when…” After realizing that I had confused two episodes – as I was catching up on several weeks of drama at once, I found the song – quite easily – went to iTunes and purchased it. I then looked for other songs by the same artist, but found little available.

I attended a panel the other night organized by Bill Sobel’s NY:MIEG that featured panelists involved in fashion and music. They discussed why it was that musical artists today are so quick to “sell out” by making their music available for commercial use — TV shows and commercials — when it was so taboo years ago. My answer, the artists today are up and coming and still being “discovered” by the general population. The television producers are using the songs to set the mood for their shows, but the musicians are gaining just as much, if not more, benefit by (a) being associated with “cool” programming or products – think about Feist and Apple (b) getting exposure to millions of viewers in one fell swoop – not only for free (I believe) or, more likely, with compensation.

Years ago (and still today), musicians paid and wrangled to get their music aired on the radio. The radio is no longer the medium. In this case it is television – and yes, mass, multi-million viewer, broadcast television. However, it is a terrible missed opportunity if the music is not immediately available online and easy to find. I personally am always on the prowl for something new to add to my iPod lineup.

When Viagra was first introduced, the demand was so unprecedented and unexpected that there was a shortage of product. In fact, it was unfortunate that media plans could not be changed in time to hold off on advertising until new product could be manufactured. In any case, the age old lesson is that product needs to be available at the time that it is promoted. In the case of Viagra and of the Ragu Pasta Sauce I used to market, this is much more complicated to do as there is physical demand to forecast and physical product to manufacture and distribute. In the case of the Internet and music, the product must be easy to find and easy to obtain.

When I worked for NBC at the “turn of the century,” I used to call or e-mail my friend in the traffic department – who was always at the office until very late at night – to comment on what was happening or what clothing was being worn on the currently aired episode of “Friends” or “Seinfeld.” In the age of TiVO and the DVR, I can no longer expect that others are watching TV shows at the same time I am – alas. There are, however, chat rooms and Twitter exchanges I can go to afterwards – as I have usually watched the program after that fact – to see whether others agreed that a twist of the plot seemed very strange.

And so it is that I have become not only addicted to my TV and my DVR but to my laptop – as an inseparable entertainment combination.

The Facebook Page Lives On


I just ran into a friend and former colleague at the gym. She broke the news that one of the most beloved executives at McCann Relationship Marketing had died suddenly this weekend, just two days ago. She told me there was a group on Facebook with the plans for a memorial service, and so I logged on to see what I could learn.

By rote, I searched for him in “people” and visited his page. Wow. His Wall was overflowing with testimonials and messages. The first from his niece this weekend. The most recent just a few minutes before I logged on.

It is something to see the kind of digital testament to a man’s life and legacy that can exist on a website that has been in existence only a few years. My colleague is gone, but his Facebook page continues to evolve. It’s a place where his friends, colleagues and family are writing to him and about him.

His profile photo is joyful and poignant and uniquely him. And his latest posts… In his second to last post, he wrote, “I had one last chance this past weekend, but the weather gods rained on his parade. Killington sucked.” His final entry reads, “I wonder what life will be like in three years.”

I wish I could write on his Wall, but I had not friended him yet on Facebook – only on LinkedIn, where his photo seems hardly the same person. Perhaps it is a new lesson in life to “friend” more people we care about while we have the chance – even those who are “professional” contacts.

User-generated… revenue???


“At midnight The New York Times stopped charging for its content online. It’s even handing out refunds to any online subscribers who paid for it in advance… strongly repudiating the idea that newspapers can earn big profits by hiding their online content behind a “pay wall” which can only be accessed by web surfers who pay a subscription fee.” (September 17, 2007 – Tech.Blorge)

“The New York Times is … looking at the possibility of charging for some of its online content, whether that would mean the news that most people read or special select content is unclear.” (March 15, 2009 – Tech.Blorge)

Over the past few years, the general consensus has been that a paid content business model is untenable, that advertising dollars are what make the world go round, more eyeballs mean more money, and walled gardens mean fewer eyeballs.

However in an era in which Netflix was the one shining star in the last round of investor reports, Apple’s iTunes maintains a highly profitable electronic-sell-through (EST) model, and overall advertising revenue is expected to fall 13% in 2009 (including a 1.2% decline in display ads and 7.5% drop in auctions and other non-search/lead generation digital advertising), there is renewed interest in the online subscription model.

In recent days, Newsday announced plans to end distribution of free online content, Disney’s Bob Iger discussed a possible subscription-based online video club, and MLB and ESPN entered into a partnership to offer premium web services for $130 per year via a co-branded package. The package includes live streaming of every regular season MLB game and exclusive ESPN text and video content.

In addition, both Time Warner Cable and Comcast, announced plans to create (or recreate) walled gardens (now called user authentication programs), through which television programs will be available via broadband to the cable operators’ respective subscribers.

More commentary to come…

Riding Crimson Coat-tails


One of the advantages of going to an elite Ivy institution is that you get to study with world-famous professors, and, in my case, that included Professor Jeffrey Sachs. As a fearless freshman, I went to the office hours of Professor Sachs, the youngest tenured professor at the university, and asked to be his research assistant.

Professor Sachs explained that his RAs were all graduate students but finally conceded to let me check in periodically to see if he had a need for my skills. After months of persistence, I wore him down and became his undergraduate research assistant.

This meant that I had an excuse for one-on-one meetings with Professor Sachs throughout my four years at Harvard. I remember coming into his office one day, with its wall-to-wall books and well-worn Turkish rug, to hear the end of a phone conversation in which he mentioned that he had fixed Bolivia’s hyperinflation. Surely he was exaggerating, I thought. But he was not.

My work turned to tracking Latin American bond prices as he helped the governments of several developing countries sort out their out of control inflation or solve other massive economic problems. And as a senior, I had the honor of having Professor Sachs grade my thesis – in language that sounded like he was critiquing a colleague’s book – and giving it an overall positive review!

When I graduated from college and moved to New York, I would often open the New York Times to see a picture of Professor Sachs, who was now being called upon by the leaders of Russia and Poland to help them transition from socialist to capitalist economies upon the break up of the Soviet block. Once again, I boldly called upon Professor Sachs to help me get involved in this historic period, and he generously referred me to a colleague leading a team of business consultants to Warsaw to work for the Ministry of Finance!

Since then, Professor Sachs has become the Director of Earth Institute at Columbia University, where has has the simple charter of ending world poverty. I now see and hear Professor Sachs being interviewed by Bill Maher (who thought “Dr. Sachs” was a medical doctor), Jon Stewart, Jay Leno, NPR and Good Morning America – sometimes along with Angelina Jolie or Bono – while also serving as advisor to U.N. Secretary General Kofi Anan.

This time I e-mailed Professor Sachs and invited him to speak at the Harvard Club of New York. In preparation for the event, I downloaded and viewed a number of podcasts of prior lectures, taking note of how others introduced him. I then streamed MTV footage of Jeff and Angelina in Africa (on my iTouch) and watched interviews of him on various MSNBC shows on my laptop.

The event which was entitled, “Where Do We Go From Here,” drew a record-breaking 409 people – what Jeff might term an “overpopulation” of Harvard Hall. Over dinner, Dr. Sachs consulted me (!) on how LinkedIn and Facebook could be of value to him in his work. (He is already an extensive user of Skype for multi-national lecture series.) How far we have come.