Tag Archives: pricing

Pricing Strategies– Think Thru Your Price Model: Change Irrational Guesswork to Rational Analysis and Relevance…

Pricing strategies, price models– One of the secrets to business success is pricing products properly and it’s probably the toughest thing there is to do…. Price correctly and that will enhance how much you sell and create the foundation for a prosperous business. Get your pricing strategy wrong and you may create problems that the business may never be able to overcome.

According to Charles Toftoy; it’s part art and part science– there’s no one surefire, formula-based approach that suits all types of products, businesses, or markets. Pricing usually involves considering certain key factors, including; pinpointing target customers, tracking how much competitors are charging, understanding the relationship between quality and price… The good news is that there’s a great deal of flexibility in how you set your prices, but that’s also the bad news… adopting a better pricing strategy is a key option for staying viable-relevant.

Merely raising prices is not always the answer, especially in a poor economy: Many businesses have been lost sales because they priced themselves out of the marketplace but on the other hand, many businesses and sales staffs leave money on the table because they price too low. One strategy doesn’t fit all– adopting a pricing strategy is a learning curve that can only be mastered by studying the needs and behaviors of customers, competitors, markets…

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In the article Time to Rethink Your Pricing Strategy by Andreas Hinterhuber and Stephan Liozu write: Companies differ substantially in their approach to price setting but most fall into one of three buckets: Cost-based pricing; Competition-based pricing; Customer value-based pricing. According to Warren Buffett; the single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you must have a prayer session before raising the price by 10%, then you’ve got a terrible business. Yet pricing receives scant attention in most companies.

According to Professional Pricing Society; fewer than 5% of Fortune 500 companies have a full-time function dedicated to pricing… According to McKinsey; fewer than 15% of companies do systematic research on this subject… According to Association to Advance Collegiate Schools of Business; only about 9% of business schools teach pricing… This neglect is puzzling, as numerous studies have confirmed; pricing has a substantial and immediate effect on company profitability.

Studies have shown that small variations in price can raise or lower profitability by as much as 20% or 50%. Over the past 18 months, we interviewed 44 managers in 15 U.S. based industrial companies. These companies varied in size from about 50 to more than 2000 employees and dramatically different pricing capabilities. In the course of research, we found that pricing power is not destiny, but a learned behavior.

The companies we found that achieved better pricing all had top managers who championed development of skills in price setting (i.e., price orientation) and price getting (i.e., price realization). Regardless of their industry, the degree to which managers focused on developing these two capabilities correlated to their companies’ success in achieving a better price for their product than their competitors. Without managerial engagement, companies typically use historical heuristics, such as cost information to set prices, and yield too much pricing authority to the sales force.

In the article How to Price Products by Elizabeth Wasserman writes: The first step is to get real clear about what you want to achieve with your pricing strategy: The biggest mistake many businesses make is to believe that price alone drives sales. The ability to sell is what drives sales and that means– the right sales people and adopting the right sales strategy. At the same time, be aware of the risks that accompany making poor pricing decisions.

There are two main pitfalls you can encounter; under pricing and over pricing. According to Laura Willett; many businesses mistakenly under price their products attempting to convince the consumer that their product is the least expensive alternative and hoping to drive volume; but more often than not it’s simply perceived as being– cheap. Remember that consumers want to feel they are getting their money worth (i.e., value) and most are unwilling to purchase from a seller they believe to have less value.

On the flip side, over-pricing a product can be just as detrimental since the buyer is always going to be looking at competitors’ pricing… There are many methods available to determine the right price, but successful firms know that the key factor to consider is always the customer– first. The more you know about your customer, the better you’ll be able to provide what they value and the more you’ll be able to set your price higher… know the segments you’re targeting, and price accordingly…

The key is to be brutally honest in your evaluation: One size does not fit all. You can only go so far by pricing based on a fixed markup from cost. The price should vary depending on a number of factors including, for example: What the market is willing to pay. How the brand is viewed in the market. What competitors charge. The estimated volume-quantity you can sell. But as important, you must constantly review cost and continuously monitor price and the underlying profitability…

Remember: Listen to customers. Keep an eye on competitors. Have an action plan in place… Be relentless in managing pricing; how you set prices may very well be difference between success and failure of the business.

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In the article Pricing Strategy by Scott Allen writes: The most difficult yet most important issue in business is pricing– how much to charge for product, service… Pricing is tricky, but you’re certainly entitled to make a fair profit and even a substantial one, if you create value for customers. But remember, something is ultimately worth only what someone is willing to pay for it…

While there is no one single right way to determine  pricing strategy, fortunately there are some guidelines that will help with the decision. Here are some basic factors that should be considered:

  • Positioning: How are you positioning in the market? Is pricing going to be a key part of that positioning? The pricing has to be consistent with positioning. People really do hold strongly to the idea that you get what you pay for.
  • Demand Curve: How will pricing affect demand? You must do some basic market research to find this out, even if it’s informal. Get a good sample of people to answer a simple questionnaire, asking them: Would you buy this product/service at X price? Y price? Z price?
  • Cost: Calculate the fixed and variable costs associated with the product, service… determine the cost of goods, fixed overhead… Remember that your gross margin (price minus cost of goods) has to amply cover your fixed overhead in order to turn a profit…
  • Environmental factors: Are there any legal or other constraints on your pricing? For example, for doctor’s insurance companies and Medicare will only reimburse a certain price… Also, what possible actions might competitors take?  Find out what external factors may affect pricing.

The next step is to determine pricing objectives. What are you trying to accomplish with pricing?

  • Short-term profit maximization: This approach is common in companies that are bootstrapping, as cash flow is the overriding consideration. It’s also common among smaller companies hoping to attract venture funding by demonstrating profitability as soon as possible.
  • Short-term revenue maximization: This approach seeks to maximize long-term profits by increasing market share and lowering costs through economy of scale. For a well-funded company or a newly public company, revenues are considered more important than profits in building investor confidence.
  • Maximize quantity: There are a couple of possible reasons to choose this strategy. It may be to focus on reducing long-term costs by achieving economies of scale. Or it may be to maximize market penetration– particularly appropriate when you expect to have a lot repeat customers…
  • Maximize profit margin: This strategy is most appropriate when the number of sales is either expected to be very low or sporadic and unpredictable.
  • Differentiation: At one extreme being the low-cost leader is a form of differentiation from the competition. At the other end, a high price signals high quality and/or a high level of service…
  • Growth: In growth situations you must be flexible in pricing, such that– all costs are covered and the business can still sustaining the growth trajectory…

Once you’ve considered the various factors involved and determined your objectives for the pricing strategy, here are four basic ways to calculate prices:

  • Cost-plus pricing: Set the price with the production cost, including; cost of goods, fixed costs… plus a certain profit margin. So long as you have costs calculated correctly and accurately predicted sales volume, you will always be operating at a profit.
  • Value-based pricing: Price based on value created for the customer. This is usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is pay for performance pricing, in which you charge on a variable scale according to the results achieved.
  • Psychological pricing: Ultimately, you must take into consideration the consumer’s  perception of price, figuring things like: Positioning— If you want to be the low-cost leader, you must be priced lower than your competition. If you want to signal high quality, you should probably be priced higher than most of  your competition. Popular price points– There are certain price points at which customers become much more willing to buy a certain type of product… Fair pricing– Sometimes it simply doesn’t matter what the value of the product is, even if you don’t have any direct competition: There is simply a limit to what customers perceive as fair. A little market testing will help determine the maximum price customers will perceive as fair.

In virtually every facet of business, companies develop strategies based on the truism that customers differ from each other. Diverse customers are courted with a variety of products (e.g., styles, colors, add-ons…), mix of marketing strategies, multiple distribution points… However, when it comes to pricing, companies behave as though customers are identical by just setting single prices. However, an epiphany to better pricing is to understand and actually to embrace the same insight that companies use to create strategies and profit in other areas of their business…

The strategy of pricing involves acknowledging customers have different pricing needs and making efforts to profit from these differences. According to  Mat Marquis; Strategic pricing comes with practice and skills will grow over time. Pricing is a discipline that anyone can learn: But, first and foremost– do customers a favor–  charge  customers what you’re worth that’s proportional to your value  (i.e., don’t over or under price) and you will both be happy…

According to Tejvan Pettinger; optimal pricing strategy will depend on the type of business… For example, for premium brands– cutting price could be perceived as disastrous– as you lose brand image and fail to increase sales… For normal goods, with businesses looking to increase market share and gain more market dominance, it’s more important to offer competitive prices, and using strategies such as; penetration pricing, loss leaders…

According to Nick Wreden; crafting the right strategies will not only strengthen the business, today; but it will also prime it for sustained growth…. Remember the big picture– profitability is not the only prism through which you should view pricing. Other important perspectives include: Impact on customer relationships, impact on the industry…  Also, don’t fight today’s sales wars with yesterday’s pricing strategies– review pricing strategies and models, and make adjustments, now… Pricing is life blood of profitability– it must be monitored, adjusted, kept relevant…

Effectual Pricing Strategy: Walking a Balance Beam between–Customer, Sales, Competition, and Profit.

“Pricing is a tricky business. You’re certainly entitled to make a fair profit on your product, and even a substantial one if you create value for your customers. But remember, something is ultimately worth only what someone is willing to pay for it.”

Building an effective pricing strategy for products or services is the key to a successful business. Selecting the pricing strategy for your price setting methodology means that you need to have a good understanding of a number of different strategies, for example: loss leader pricing, market penetration pricing, value pricing, price skimming, product line pricing, promotional pricing, psychological pricing, and other alternative strategies and pricing methods, such as captive or companion pricing, premium pricing, generic or economy pricing, differential pricing

Many businesses take a very traditional pricing approach: add up their costs and up-charge by the profit margin they wish to achieve. Other businesses take the approach that the market sets the price and that they need to meet that mark.

From the marketer’s point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumer surplus to the producer. A good pricing strategy is balance between the price floor (the price below which the organization ends up in losses) and the price ceiling (the price beyond which the organization experiences a no demand situation). The basic elements of a pricing strategy are:

  • achieve financial goals of the company (e.g., profitability).
  • fit the realities of the marketplace (will customers buy at that price?).
  • support product’s positioning consistent with the marketing plan.

Pricing is the most effective profit lever, and it can be approached at three levels.The industry, market, and transaction level:

  • Pricing at the industry level focuses on the overall economics of the industry, including supplier price changes and customer demand changes.
  • Pricing at the market level focuses on the competitive position in comparison to the value differential of the product to that of comparative competing products.
  • Pricing at the transaction level focuses on managing the implementation of discounts away from the list price, both on and off the invoice or receipt.

According to Bernstein’s article “Supplier Pricing Mistakes”, many companies make common pricing mistakes and he outlines several which include:

  • Weak controls on discounting.
  • Inadequate systems for tracking competitor selling prices and market share.
  • Cost-up pricing.
  • Price increases poorly executed.
  • Worldwide price inconsistencies.

In the article How Much to Charge for Your Product or Service?” by Scott Allen writes: While there is no one single right way to determine your pricing strategy, fortunately there are some guidelines that will help you with your decision.  Here are some of the factors that you need to consider:

  • Positioning:  How are you positioning your product in the market? Is pricing going to be a key part of that positioning? The pricing has to be consistent with the positioning. People really do hold strongly to the idea that you get what you pay for.
  • Demand Curve:  How will your pricing affect demand? You’re going to have to do some basic market research to find this out, even if it’s informal. But however you do it, chart a basic curve that says that at X price, X’ percentage will buy, at Y price, Y’ will buy, and at Z price Z’ will buy.
  • Cost: Calculate the fixed and variable costs associated with your product or service. How much is the “cost of goods” and how much is “fixed overhead”? Remember that your gross margin (price minus cost of goods) has to amply cover your fixed overhead in order for you to turn a profit.
  • Environmental Factors: Are there any legal or other constraints on pricing? Also, what possible actions might your competitors take? Will too low a price from you trigger a price war? Find out what external factors may affect your pricing.

In the articleThe ABCs of Pricing” by Charlie Gilkey writes: Buyers are irrational, and  predictably so. If you product or service provides legitimate value to your customers, then make your prices match their perceptions an economic reality. If those are grounded in a bit of irrationality, so be it—our business is about our customers, which means we need to meet them where they are, not where we think they should be. A framework that will help you with setting prices is knowing about: Anchors, bumps, and charms…

  • Anchors: Every established industry already has anchors in play. The art of pricing, though, is determining how you’ll use those anchors. Significant value-adds allow you to use those anchors as baselines rather than straight jackets. But you still need to recognize that established anchors have a very, very strong effect on your prospects’ first reactions to the pricing of your product.
  • Bumps: If anchors set the baseline, bumps let people know what grade of product they’re getting. When you’re setting your prices, you have to make sure you haven’t unintentionally set a bump that either blurs or mistakenly mismatches the grade of product or services. For instance, a $19.99 and $22.99 pricing methodology isn’t nearly as clear as a $19.99 and $29.99 framework. In the latter example, it’s pretty clear that there’s a bump in grade rather than something relatively minor. At the same time, if your competitors have anchored the price at $19.99 and yours costs $29.99 then, you must re-position at another level.
  • Charms: A price that’s a little less than the round number is called a charm price; for example, $19.99 rather than $20. As annoying as we might find charm pricing, it’s a market dynamic that affects buying decisions. Many people think that using charm pricing is somehow demeaning or tricky to prospectsor that playing such games diminishes the seller’s credibility. Still others think that charm pricing doesn’t work on savvy, smart buyers.

In the article “Pricing Strategy as Part of Your Internet Marketing Plan” by Dr. Ralph F. Wilson writes: You can’t do business on the Internet without having a pricing strategy. One of the first questions you need to answer is What are your site visitors like? Are they bargain hunters? Or, shop for products based on their prestige value?

What does it cost you to purchase (or produce) and market this product or service? Your price will have to be above your costs — most of the time. Here are the various pricing objectives you’ll want to consider. Two main pricing objectives stand out:

  • To maximize short-term profits: Squeeze as much money out of sales as possible, even though fewer customers may make a purchase. Your strategy may be to charge premium prices (i.e., maximize profits), even though you end up with less customers, but you can make more profit off each customer.
  • To gain marketshare: The other main strategy is to price your service lower to gain marketshare. You may want to maximize the number of customers, even though you don’t make as much on each customer. But you know that later you’ll be able to sell these customers other services.

These two objectives are the key ones to understand, but there are two others:

  • To survive: Survival is a worthy goal. Sometimes companies lower prices so they can generate enough revenue to survive short term. But this isn’t a very good long-term strategy. There’s an old joke about the businessman who said, he was losing money on every sale, but he expected to make it up in volume. Good luck. Sometimes it’s better to call it quits before you lose even more.
  • To help society: You might keep the price lower than “what the market will bear” in order to make essential products available to the consumers who would otherwise be priced out of the market. Altruism has its place. Consider, also offering an economy product/service at a lower price, but with clear limitations.

In the article “How to Think About Pricing Strategies in a Downturn” by Nick Wreden writes: When sales and profits are plummeting and customers are demanding better deals, the instinctive response is to cut prices. Pricing decisions should not be viewed as ‘band-aid’ solutions for bleeding income statements, says Reed K. Holden and co-author (with Thomas T. Nagle) of ‘The Strategy and Tactics of Pricing’. Rather, they should be part of a long-term strategy for fiscal fitness.

When economic storm clouds gather, trim your production levels, postpone expansion plans that aren’t absolutely vital to your future growth, and slash nonessential costs wherever you can. Crafting the right strategies will not only strengthen your business now, it will also prime it for growth later. To bolster sales while avoiding a price cut’s dampening effect on long-term profitability, keep the following advice in mind: “Profitability is not the only prism through which you should view pricing”.

In the article “Six Powerful Rules for Pricing Excellence” by Patrick Lefler writes: Pricing is a key element of your brand. It sends a message to the market and creates expectations about value. It’s often the first impression you make, either attracting buyers or repelling them. And it can create the last, and lasting, impression, depending on perceived value for price paid. Think about it: Is your price sending the message you intended? Pricing is complex, but it doesn’t have to be overwhelming. Follow these six powerful rules for pricing excellence to find the pricing strategy that gets the most for your services.

Rule #1: Always price for value.
Rule #2: Anchors aren’t just for ships.
Rule #3: Never underestimate the power of free.
Rule #4: Innovate with price.
Rule #5: Let price drive value.
Rule #6: Price wars are a fool’s game.

In the article “Selecting an Appropriate Pricing Strategy” by Nancy Giddens, Joe Parcell, and Melvin Brees write: Selecting a pricing strategy for your product is critical, because price is most highly visible element of marketing efforts. To price products, you need to know the following:

  • Costs and profit objectives.
  • Customers (demand).
  • Competition.

To determine the price, given price flexibility, the producer will need to factor in the effects of competition and profit objectives. To ease subjectivity, most companies subscribe to one of five main pricing strategies:

  • Premium pricing.
  • Value pricing.
  • Cost/plus pricing.
  • Competitive pricing.
  • Penetration pricing.

Pricing strategies and methodologies are a good bit of science coupled with an equal amount art. To make sure your price is right, you have to continually balance your own cost structure and profitability with customer perceptions of value and your competitors’ tactics.

The good thing when it comes to pricing is that a lot of the work is done for you if you know what to look for. When searching, however, you have to understand that the buying process isn’t as rational as our old economics professors or common sense would have us believe.

It’s irrationalpredictably so. If you try to look at the market from a strictly rational point of view, you’ll end up setting prices that make sense to you but not to your customers. The far easier path is to have a pricing strategy that plays to your customers’ own irrational behaviors.

“Your price should never be lower than your costs or higher than what most customers consider “fair”: Simply put, if people won’t readily pay enough more than your cost to make you a fair profit, you need to reconsider your business model entirely.”

Selling Value and Haggling Price Is Self Destructive: Distinctive Negotiation Behaviors of International Cultures; China, Japan, Russia, Korea, Brazil, Germany, France…

“In business, you don’t get what you deserve, you get what you negotiate” ~Chester L. Karrass

International negotiation. If there’s one thing everybody knows about selling, it’s that serious negotiation starts when you and your customer sit down together to close a deal: Right? “Well, maybe…” The best salespeople start thinking about negotiation much earlier – sometimes even before they’ve made the first contact.

Negotiation is not a destination that you reach at the end of a sale, nor is negotiation about one party winning and the other losing. Negotiation is part of each step of the sales process, and not a one-time event. Salespeople need to find out the customer’s real interests, ASAP: Is it value, price, terms and conditions, or something else?

When you begin early in the sales process, you uncover the buying organization’s real interests and you learn the criteria on which their interests are based. Most important, you discover the deal-breakers & deal-makers and explore how both parties can win. Perhaps even more importantly, you discover ‘if’ both parties can win; after all, it’s far better to lose quickly and exit the situation, than to lose slowly…

In the article “Why Selling on Value and Negotiating on Price Does Not Work” by Grande Lum writes: A common scenario that a salesperson encounters during the final ‘close of the sale’ is when the customer says something like: “We (customer) are all ready to sign the Contract today, and we want to thank you for having invested four months with us to develop the terms. Now, the only thing I(customer) need you to do for me(customer) is to discount the final contract figure by 10% and it’s a done deal.” What’s the salesperson’s response to this time-tested classic?

Seasoned sales executives know from long experience that haggling on price and contract terms can be a costly tactical and ultimately strategic error, most of the time. Haggling can quickly become a self-destructive behavior and damage the customer relationship. In traditional selling the salesperson sells (that’s their job), and at the end of the selling work, then ‘negotiate’, or rather, ‘haggle’. On the other hand, an enlightened view of selling is that there is continuing negotiations from the moment we speak with a prospect, to the moment we close a deal, and beyond…

Rather than seeing negotiation as a transactional activity, we see it as transformational. The classic dividing line between negotiation and sales becomes intentionally blurred: We can’t negotiate without strong sales skills, and conversely, we can’t sell without strong negotiation skills. Negotiation, as a transformational tool, is essential for sales executives as they manage their sales forces, as they manage internal negotiations with all business functions within their organizations, and as they manage the critical customer relationships they seek to broaden, deepen and enrich…

International sales negotiation is an important and very complex process, and often not just between individual people, but between large delegations, each of which is well organized and where every person has a specialized and skilled work responsibility. A big trap in international selling lies in misunderstanding the culture of other countries, especially in the rules that they use to negotiate.

Whereas one country may emphasize politeness and integrity, another might use deception and coercive methods as a norm of negotiation, while being polite and friendly outside of the negotiation arena. An article in Wikipedia identifies the ‘distinctive negotiation behaviors of 15 international cultural groups’; here is a sample:

  • Japan. Consistent with most descriptions of Japanese negotiation behavior, the results of this analysis suggest their style of interaction is among the least aggressive (or most polite). Threats, commands, and warnings appear to be de-emphasized in favor of the more positive promises, recommendations, and commitments. Particularly indicative of their polite conversational style was their infrequent use of ‘no’ and ‘you’ and ‘facial gazing’, as well as more frequent ‘silent periods’.
  • Korea. Perhaps one of the more interesting aspects of the analysis is the contrast of the Asian styles of negotiations. Non-Asians often generalize about the Orient; the findings demonstrate, however, that this is a mistake. Korean negotiators used considerably more punishments and commands than did the Japanese. Koreans used the word ‘no’ and ‘interrupted’ more than three times as frequently as the Japanese. Moreover, no silent periods occurred between Korean negotiators.
  • China (Northern). The behaviors of the negotiators from Northern China (i.e., in and around Tianjin) were most remarkable in the emphasis on asking questions (34 percent). Indeed, 70 percent of the statements made by the Chinese negotiators were classified as information –exchange tactics. Other aspects of their behavior were quite similar to the Japanese, particularly the use of ‘no’ and ‘you’ and ‘silent periods’.
  • Taiwan. The behavior of the business people in Taiwan was quite different from that in China and Japan but similar to that in Korea. The Chinese on Taiwan were exceptional in the time of ‘facial gazing’ –on the average, almost 20 of 30 minutes. They asked fewer questions and provided more information (self-disclosures) than did any of the other Asian groups.
  • Russia. The Russians’ style was quite different from that of any other European group, and, indeed, was quite similar in many respects to the style of the Japanese. They used ‘no’ and ‘you’ infrequently and used the most ‘silent periods’ of any group. Only the Japanese did less facial gazing, and only the Chinese asked a greater percentage of questions.
  • Germany. The behaviors of the Germans are difficult to characterize because they fell toward the center of almost all the continua. However, the Germans were exceptional in the high percentage of self-disclosures (47 percent) and the low percentage of questions (11 percent).
  • United Kingdom. The behaviors of the British negotiators were remarkably similar to those of the Americans in all respects. British people believe that most British negotiators have a strong sense of the right way to negotiate and the wrong. Protocol is of great importance. Some cultures may consider the British negotiation style as extremely cold and arrogant.
  • France. The style of the French negotiators was perhaps the most aggressive of all the groups. In particular, they used the highest percentage of ‘threats and warnings’. They also used ‘interruptions’, ‘facial gazing’, and ‘no’ and ‘you’ very frequently compared with the other groups, and one of the French negotiators touched his partner on the arm during the simulation.
  • Brazil. The Brazilian businesspeople, like the French, were quite aggressive. They used the second-highest percentage of commands of all the groups. On average, the Brazilians said the word ‘no’ 42 times, ‘you’ 90 times, and ‘touched one another on the arm’ about 5 times during 30 minutes of negotiation. ‘Facial gazing’ was also high.
  • United States. Like the Germans and the British, the Americans fell in the middle of most continua. They did interrupt one another less frequently than all the others, but that was their sole distinction.

The differences across the national  cultures are quite complex, and great care should be taken with respect to the dangers of stereotypes. The key here is to be aware of the kinds of cultural differences so that the Japanese “silence”, the Brazilian “no, no, no…,” or the French “threat” are not misinterpreted…

In the article “Equal Pain or Equal Gain? Negotiate for Win-Win by Anne Stuart writes: The best salespeople start thinking about negotiation much earlier; sometimes even before they’ve made the first contact. Specifically, top performers prepare for those at-the-table talks by learning as much as possible about the other party’s needs and concerns: “You have to look for their underlying interests”. “You need to understand what their personal motivators are; what they’re really after”.

It’s equally important for salespeople to understand their own interests: As a salesperson, what is it you want to get out of the negotiation? Of course, the simple answer is selling that product or service. But the best salespeople tend to have bigger-picture goals, such as building the foundation for long-term new relationship or expanding an existing one, top performers achieve those objectives by equipping themselves with knowledge and information about the needs and wants of the customer. 

Salespeople have a tendency to capitulate too quickly and in the spirit of trying to get the deal done; they discount too quickly or leave dollars on the table, which they didn’t need to do: They take shortcuts. It’s easier to just discount something than to go through further discussions to find new value, which takes far more salesmanship.

When salespeople capitulate on discussions involving prices, it’s typically because they haven’t explored the customer’s interests thoroughly enough. “If you haven’t discussed value, then any price is going to sound too high.” A successful salesperson can see beyond the smokescreen of price and rigidity. Be like a detective: Ask good questions. Based on the answers, suggest alternatives: It’s about being a problem-solver rather than just pushing a product…

Negotiation is a critical skill needed for effective selling and sales management. Successful negotiation requires compromise: Both parties must gain something and both parties must lose something. You cannot expect to defeat your opponent or “win” a negotiation by either the power of your negotiating skills or the compelling force of your logic. This is not to say good negotiating ability is irrelevant. In most cases, a range of possible outcomes exists.

A skilled sales person often can achieve a settlement near the top of the range.  The evidence is overwhelming that cooperation is the surest road to successful settlement. Hostility, distrust, stubbornness, self-righteousness, conflict intensification, unjust demands, and attempts to gain unjustified advantages beget non-cooperation rather than concessions, and tend to cause a breakdown in the communication necessary to reach a settlement.

The key ingredient in cooperation, however, is mutuality; you cannot be unilaterally cooperative. If you are making concessions while your opponent is not, you are engaging in appeasement, not cooperative negotiation. Successful bargaining occurs only when you are prepared, both to be cooperative and to demand cooperation from your customer… 

  “You must be fully prepared to lose a great deal in order to make a great deal.”

Predatory Pricing: Myth or Conspiracy?

  “The attempt to reduce or to eliminate predatory pricing is also likely to reduce or eliminate competitive pricing beneficial to consumers”.Harold Demsetz, professor   emeritus of economics at UCLA.

In the article “The Myth of Predatory Pricing” by Thomas J. DiLorenzo, he writes: Predatory pricing is one of the oldest big business conspiracy theories. It was popularized in the late 19th century by journalists such as Ida Tarbell, who in “History of the Standard Oil Company” excoriated John D. Rockefeller because Standard Oil’s low prices had driven her brother’s employer, the Pure Oil Company, from the petroleum-refining business. “Cutting to Kill” was the title of the chapter in which Tarbell condemned Standard Oil’s allegedly predatory price cutting.

The predatory pricing argument is very simple. The predatory firm first lowers its price until it is below the average cost of its competitors. The competitors must then lower their prices below average cost, thereby losing money on each unit sold. If they fail to cut their prices, they will lose virtually all their market share; if they do cut their prices, they will eventually go bankrupt. After the competition has been forced out of the market, the predatory firm raises its price, compensating itself for the money it lost while it was engaged in predatory pricing, and earns monopoly profits forever after.

The theory of predatory pricing has always seemed to have a grain of truth to it; at least to non-economists; but research over the past 35 years has shown that predatory pricing as a strategy for monopolizing an industry is irrational, that there has never been a single clear-cut example of a monopoly created by so-called predatory pricing, and that claims of predatory pricing are typically made by competitors who are either unwilling or unable to cut their own prices. Thus, legal restrictions on price cutting, in the name of combating “predation,” are inevitably protectionist and anti-consumer, according to Harold Demsetz.”

In DiLorenzo’s article he writes: “Predatory pricing is the Rodney Dangerfield of economic theory; it gets virtually no respect from economists. But it is still a popular legal and political theory for several reasons. First, huge sums of money are involved in predatory pricing litigation, which guarantees that the antitrust bar will always be fond of the theory of predatory pricing. During the 1970s AT&T estimated that it spent over $100 million a year defending itself against claims of predatory pricing. It has been estimated that the average cost to a major corporation of litigating a predation case is $30 million.

Second, because it seems plausible at first, the idea of predatory pricing lends itself to political demagoguery, especially when combined with xenophobia. The specter of a foreign conspiracy to take over American industries one by one is extremely popular in folk myth. Protectionist members of Congress frequently invoke that myth in attempts to protect businesses in their districts from foreign competition.

Third, ideological anti-business pressure groups and self-styled consumer group, also employ the predatory pricing tale in their efforts to discredit capitalism and promote greater governmental control of industry. The perennial attacks on the oil industry: When oil and gas prices go up there is the alleged price gouging. When prices go down, there is the call for a “study” claiming that the price reductions are part of a grand conspiracy to rid the market of all competitors. And when prices remain constant, price-fixing conspiracies are frequently alleged.

Fourth, predatory pricing is a convenient weapon for businesses that do not want to match their competitors’ price cutting. Filing an antitrust lawsuit is a common alternative to competing by cutting prices or improving product quality, or both. Finally, some economists still embrace the theory of predatory pricing. But their support for the notion is based entirely on highly stylized “models,” not on actual experience.”

The classic article on predatory pricing was written by economist John McGee in 1958. McGee examined the famous 1911 Standard Oil antitrust decision that required John D. Rockefeller to divest his company. Although at that time popular folklore held that Rockefeller had “monopolized” the oil refinery business by predatory pricing, McGee showed that Standard Oil did not engage in predatory pricing; it would have been irrational to have done so.

Judging from the record, Standard Oil did not use predatory price discrimination to drive out competing refiners, nor did its pricing practice have that effect. Whereas there may be a very few cases in which retail kerosene peddlers or dealers went out of business after or during price cutting, there is no real proof that Standard’s pricing policies were responsible. McGee was the first economist to think through the logic of predatory pricing, laying aside the emotional rhetoric that had always surrounded it. He concluded that not only would it have been foolish for Standard Oil to have engaged in predatory pricing; it would also be irrational for any business to attempt to monopolize a market in that way.

By 1970 more than 120 federal (and thousands of private) antitrust cases, in which predatory pricing was alleged had been brought under the 1890 Sherman Act (revised with the Clayton Antitrust Act of 1914 and the Robinson-Patman Act of 1936 amendment to the Clayton Act). Yet in a 1970 study of the so-called gunpowder trust–43 corporations in the explosives industry; Kenneth Elzinga stated, after an extensive literature search, that “to my knowledge no one has ever examined in detail, as McGee did, other alleged incidents of predatory pricing.” Elzinga found no evidence that the gunpowder trust, which had been accused of predatory pricing, actually practiced it.

Shortly after Elzinga’s work appeared, Ronald H. Koller examined the “123 federal antitrust cases since the passage of the Sherman Act in 1890 in which it was alleged that behavior generally resembling predation had played a significant role.” Ninety-five of those cases resulted in convictions, even though in only 26 of the cases was there a trial that “produced a factual record adequate for the kind of analysis employed” by Koller. Apparently, many of the defendants decided it was cheaper to plead guilty than to defend themselves.

Even though no systematic analysis of predatory pricing was performed in any of the 123 cases, Koller established the following criteria for independently determining whether a monopoly was established by predatory pricing: Did the accused predator reduce its price to less than its short-run average total cost? If so, did it appear to have done so with a predatory intent? Did the reduction in price succeed in eliminating a competitor, precipitating a merger, or improving “market discipline”?

Koller’s criteria give predatory pricing theory more credit than it deserves: Below-cost pricing per se is not necessarily a sign of predatory behavior; it is a normal feature of competitive markets. Moreover, determining predatory intent is an exercise that is far beyond the capabilities of any economist and for which mystics might be better suited. And “eliminating a competitor” is the very purpose of all competition.

Employing those criteria for determining predatory behavior, Koller found that below-cost pricing “seems to have been at least attempted” in only seven cases. That, of course, proves nothing about monopolizing behavior, given the fact that below-cost pricing can be just as easily construed as competitive behavior. Koller claims that in four of the cases low prices seemed to have been motivated by the desire to eliminate a rival. One would hope so! The entire purpose of competitive behavior–whether cutting prices or improving product quality–is to eliminate one’s rivals.

Even in the cases where a competitor seemed to have been eliminated by low prices, “in no case were all of the competitors eliminated.” Thus, there was no monopoly, just lower prices. Three cases seem to have facilitated a merger, but mergers are typically an efficient alternative to bankruptcy, not a route to monopoly. In those cases, as in the others, the mergers did not result in anything remotely resembling a monopolistic industry, as defined by Koller (i.e., one with a single producer).

Despite over 100 federal antitrust cases based on predatory pricing, Koller found absolutely no evidence of any monopoly having been established by predatory pricing between 1890 and 1970. Yet at the time Koller’s study was published (1971), predatory pricing had long been part of the conventional wisdom. The work of McGee, Elzinga, and other analysts had not yet gained wide recognition.

In one of the most famous passages of “Wealth of Nations”, Adam Smith warns of the pervasiveness of business conspiracies: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.”  But in the very next sentence Smith added: “It is impossible indeed to prevent such meetings by any law which either could be executed, or would be consistent with liberty and justice.” Smith clearly recognized the potential for business conspiracies; but whether they were likely or not, he believed that any government regulation of them was improper.                                                                     

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Examples of Alleged Predatory Pricing:

Standard Oil Company – In 1909, the US Department of Justice sued Standard under federal anti-trust law, the Sherman Antitrust Act of 1890, for sustaining a monopoly and restraining interstate commerce. The government said that Standard raised prices to its monopolistic customers but lowered them to hurt competitors, often disguising its illegal actions by using bogus supposedly independent companies it controlled. “The evidence is, in fact, absolutely conclusive that the Standard Oil Company charges altogether excessive prices where it meets no competition, and particularly where there is little likelihood of competitors entering the field, and that, on the other hand, where competition is active, it frequently cuts prices to a point which leaves even the Standard little or no profit, and which more often leaves no profit to the competitor, whose costs are ordinarily somewhat higher.”

France Telecom/Wanadoo – The European Court of Justice judged that Wanadoo (Now Orange Internet France) charged less than cost in order to gain a lead in the French broadband market. They have been ordered to pay a fine of €10.35m, although this can still be contested.

Microsoft  – released their web-browser Internet Explorer for free. As a result the market leader and primary competitor, Netscape, was forced to release Netscape Navigator for free in order to stay in the market. Internet Explorer’s free inclusion in Windows led to it quickly becoming the web browser used by most computer users.

According to an AP article  –  Minnesota forced Wal-Mart to increase its price for a one month supply of the prescription birth control pill Tri-Sprintec from $9.00 to $26.88.

According to a New York Times article – German government ordered Wal-Mart to increase its prices.

According to an International Herald Tribune article – French government ordered amazon.com to stop offering free shipping to its customers, because it was in violation of French predatory pricing laws. After Amazon refused to obey the order, the government proceeded to fine them €1,000 per day. Amazon continued to pay the fines instead of ending its policy of offering free shipping.

Low oil prices during the 1990s – while being financially unsustainable, effectively stifled exploration to increase production, delayed innovation of alternative energy sources and eliminated competition from other more expensive yet productive sources of petroleum such as stripper wells.

Darlington Bus War, Stagecoach Group – offered free bus rides in order to put the rival Darlington Corporation Transport out of business.