What Price is Right?

This week we learned about pricing.  We performed a detailed price elasticity exercise and learned that a price which results in calculated price elasticity value of 1.00 would also likely be the point that provides the most positive marketing contribution.  This can be confirmed by looking at the Tradeoff analysis.  The picture below (I finally did it!) shows how Allround stacks up with the increased price of $5.75.  This is very close to where the contribution value would be at its maximum.  It is reasonable to conclude that prices which cause your plot point to be left of the tradeoff line would be elastic (absolute calculated price elasticity >1.0), prices which fall on the line have an absolute calculated price elasticity of unity (=1.0), and prices to the right of the line would be inelastic (<1.0).  Although Drucker calls it a deadly sin, if your pricing objective is profit-oriented, it makes sense to try to be on the line and maximize marketing contribution.
    

  

However, you should also try not to have a myopic view of your market.  If you narrowly defined your market to be OTC Cold medications, the Tradeoffs Plot becomes as shown below.  This could give the false impression that you can raise the price even higher to increase marketing contribution when, in fact, you would be moving your price into the elastic region in the previous plot and not achieve maximum marketing contribution.  It might make sense to raise your price based on the value in the OTC Cold market if you were to introduce new products in the cough and/or allergy markets which you know will cannibalize some of your existing sales, anyway, as long as you also price the new products on (to maximize profit) or to the right of (to gain market share) the tradeoff line.

   

One of this week’s prompts is to discuss something interesting that is happening in marketing this week.  During the class we touched on how changing pricing strategy can affect your business and I mentioned that J.C. Penney made that mistake.  Here is an article (actually a WSJ blog post) which details how they are continuing to slide as a result of changing to an EDLP retailer.  The specific quote that really pertains to this week’s topic is “The Company noted that results for the quarter also reflect its prior pricing and marketing strategies, which are being changed under new leadership.”  WSJ online requires a subscription, but they usually allow you to view one article per day, so you should be able to see it.

http://blogs.wsj.com/corporate-intelligence/2013/05/07/the-slide-continues-at-j-c-penney/?KEYWORDS=jcpenney+news

This is a good segway into the most recent audio book that I listened to on my long commute, “The Ten Commandments for Business Failure,” by Donald R. Keough.  Don has some personal experience with failure as he was the one who gave us New Coke.  What was interesting is that they actually had pretty sound reasoning based on research that they had performed.  His warning is that, while many believe that we are living in the Information Age, he thinks we are still just in the Data Age and we should not confuse the two.  That, he says, was his mistake with New Coke.  Data supported the decision.  The taste tests that they performed proved that people liked the taste of New Coke better.  But it wasn’t the taste that led to the failure of New Coke.  It was a part of their past that they identified with and didn’t want changed.  Fortunately for Don, they were able to recover.  Maybe J.C. Penney will, too.  Time will tell.  It’s a witty book that I enjoyed very much and highly recommend it.

 

For those interested, the Ten Commandments are as follows:

1. Quit Taking Risks
2. Be Inflexible
3. Isolate Yourself
4. Assume Infallibility
5. Play the Game Close to the Foul Line
6. Don’t Take Time to Think
7. Put All Your Faith in Experts & Outside Consultants
8. Love Your Bureaucracy
9. Send Mixed Messages
10. Be Afraid of the Future

The right price, according to Drucker, is what the customer values the product or service at in the context of the market.  According to Drucker, this is the starting point and you should then consider costs to determine if the product or service can be sold at a profit, either now or in the future if and when costs can be reduced based on learning and experience curves.  When considering costs, you need to consider the entire chain of costs associated with the product or service and recognize opportunities to also improve those costs.