We teach an MBA course on Pricing Strategies. Each student does a pricing audit for an organization of their choice, recognizing all organizations have a pricing strategy. Many of the organizations chosen by the students for this exercise are either retail stores with one location or service providers with limited staff. Other organizations include several major consumer products companies. The students are required to recommend improvement in pricing effectiveness of the organization.
The students had been taught to construct a pricing waterfall to detect all leakages (discounts, allowances, special deals) that could, in a given transaction, cause the seller to receive a lower pocket price. We used the text material in The Price Advantage by Marn, Roegner, and Zawada as our base information on the management of discounts and allowances. The students were looking for the “low hanging fruit” to get a 1% improvement in pricing results. They recognized discounts given, but not earned, are a major source of quick improvement in pricing.
When we reviewed the results for 70 such pricing audits completed in the past month, we were somewhat surprised to find many pricing audits focused on discount strategies: what discounts were offered and decision rules about when to give the discounts.
Examples:
A store which sells small, unique gift items gives 10% discount automatically to any purchase over $100
An oil change company that has a list of over 50 discounts that can be given to any customer by any staff member taking the order for as much as 40% off the list price
The idea behind effective discounts: only give the discount when it makes a difference in the purchase decision by the customer.
In example 1 above, the owner of the gift store decided to remove the 10% discount unless the customer specifically indicated they expected it and that it was a part of their decision to buy form this gift shop. The first day of the “new” discounting policy, a local company ordered $1,400.00 of a gift item for the annual Christmas gift for their employees. The invoice went out for $1,400.00 and was paid in full the next day. The owner called our student and said she just made $140.00 more on this transaction because of the pricing audit and her willingness to implement the recommendations.
In example 2 above, the owner of the franchise decided to incentivize the staff at their 10 local oil change shops. The incentive was to increase the pocket price by increasing the percentage of full pay customers for the basic oil change. They already had incentives for up selling other products and services.
It is easy for discounts that are intended for selective use to become available to everyone. We had a guest speaker who is Corporate Vice President of Strategic Pricing for an $11 billion manufacturer. The speaker showed us a scatter plot for a major product which showed that no customer paid higher than 90% of list price, because there was an available discount to be given by the salesperson of 10%. There was no approval needed and the customer did not have to ask for the discount; it became an automatic leakage to the pocket price for that product. The company changed to requiring a sales manager approval AND the company began to track the results. The new scatter plot shows many accounts getting less than a 10% discount.
So, the lesson here is to identify the discounts that make a difference in purchase behavior for specific customers or customer types. Then, manage the discounting such that discounts are only given when appropriate.
The students had been taught to construct a pricing waterfall to detect all leakages (discounts, allowances, special deals) that could, in a given transaction, cause the seller to receive a lower pocket price. We used the text material in The Price Advantage by Marn, Roegner, and Zawada as our base information on the management of discounts and allowances. The students were looking for the “low hanging fruit” to get a 1% improvement in pricing results. They recognized discounts given, but not earned, are a major source of quick improvement in pricing.
When we reviewed the results for 70 such pricing audits completed in the past month, we were somewhat surprised to find many pricing audits focused on discount strategies: what discounts were offered and decision rules about when to give the discounts.
Examples:
A store which sells small, unique gift items gives 10% discount automatically to any purchase over $100
An oil change company that has a list of over 50 discounts that can be given to any customer by any staff member taking the order for as much as 40% off the list price
The idea behind effective discounts: only give the discount when it makes a difference in the purchase decision by the customer.
In example 1 above, the owner of the gift store decided to remove the 10% discount unless the customer specifically indicated they expected it and that it was a part of their decision to buy form this gift shop. The first day of the “new” discounting policy, a local company ordered $1,400.00 of a gift item for the annual Christmas gift for their employees. The invoice went out for $1,400.00 and was paid in full the next day. The owner called our student and said she just made $140.00 more on this transaction because of the pricing audit and her willingness to implement the recommendations.
In example 2 above, the owner of the franchise decided to incentivize the staff at their 10 local oil change shops. The incentive was to increase the pocket price by increasing the percentage of full pay customers for the basic oil change. They already had incentives for up selling other products and services.
It is easy for discounts that are intended for selective use to become available to everyone. We had a guest speaker who is Corporate Vice President of Strategic Pricing for an $11 billion manufacturer. The speaker showed us a scatter plot for a major product which showed that no customer paid higher than 90% of list price, because there was an available discount to be given by the salesperson of 10%. There was no approval needed and the customer did not have to ask for the discount; it became an automatic leakage to the pocket price for that product. The company changed to requiring a sales manager approval AND the company began to track the results. The new scatter plot shows many accounts getting less than a 10% discount.
So, the lesson here is to identify the discounts that make a difference in purchase behavior for specific customers or customer types. Then, manage the discounting such that discounts are only given when appropriate.
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