• When Do You Consider Price?
  
  

There is a classic example that I have heard over and over in my pricing life. A large manufacturer of photocopy machines introduced a revolutionary piece of equipment. It was the top of the line there was literally nothing that could compare to it on the market and it was priced accordingly. Customers loved it, but sales were terrible. What the manufacturer finally understood from its target customer was that they could not justify to their bosses buying the highest priced machine in the product offering. So the manufacturer went back to the drawing board and introduced an even higher priced product which they had no intention of selling. Sales took off for the product they originally intended. While the price did not change for the original photocopier, the relative price perception of that machine did change. Understanding the role that item played in the product offering was vital to its success.

So what, right? Why is a pricing article appearing in a newsletter generally devoted to Supply Chain and Logistics issues? Because how and when your organization considers pricing can have a significant impact to the supply chain. In an optimal pricing practice understanding the target audience and what they are willing to pay for a good or service should be factored into decisions to develop, source, procure and maybe even deliver product. Profitability alone will not drive every decision for your business, you may have strategic opportunities for products and services that are less that optimal from the profit perspective, but may drive your customers to make decisions that make good “profit sense” to your business (it worked for photocopiers, right?). The idea is that pricing is a strategic business driver, not just 2 or 3 times what an item costs.

The photocopy manufacturer was able to recover from its late understanding of how its target customer perceived price, but how costly was that timing? Many times you don’t get a 2nd chance with your customers and we all know how hard it is to get them back once they stray. Price is tangible to a customer something they can feel good about or feel really bad about. Putting some thought into it at the start of the supply chain can provide serious profit returns.

Think about other ways pricing can impact the supply chain. These are not Earth shattering ideas, but a more systematic and scientific approach to pricing can help your business unlock increased profitability.

Changes in price can impact your demand forecasts.
Are you working with your pricing team to ensure that your supply chain is prepared for large shifts in demand due to price increases, decreases or sales promotions?

Do you have perishable products?
Your pricing team can help deliver markdowns that will get you out of business on old product before the fresh product arrives. Understanding the product lifecycle and decay curve for items to get you out of business with the maximum profit potential should be part of your pricing practice which can support your supply chain.

Ultimately, price is more than just the sticker on an item or the line on a price sheet. When executed properly, price conveys value, creates brand image and encourages your customers to behave in both his best interest and yours. This can lead to increased demand and how long a customer is willing to wait for product. Think about your customers….are they willing to wait a little longer for product and pay less for it. Or just the opposite, are they willing to pay more to get the product early? These are questions that you have to answer in understanding your target customer. Pricing can create both strong customer loyalty and cherry picking--Do you know how your customers shop you?

Pricing as a science, is an emerging discipline. Of course the art of pricing has been going on since the dawn of commerce. What a scientific approach to pricing can do for an organization is add the layer of sophistication to answer the question, “Are we providing the right product, to the right customer at the place at the right time?” How many of those variables impact the supply chain? Your customers “vote” for your pricing each time they open the wallet with you or your competitor. That is not to say that your price must be lower than your competitor, but the value equation, the relationship of perceived quality and actual price, must be higher than your competition. The science of pricing can leverage data to tell you how you are doing in that “vote.” Are your customers leaving you for your competition because the perceived value is lower than the price, or are you leaving profit on the table because your price is lower than the perceived value that you could be getting paid for?

So are you leveraging the intelligence that pricing can provide to make your supply chain more responsive to your customers? Think about it, a penny here and a penny there, after a while you are talking about some real money.


Ms. McMinn holds a Masters in Public Policy and Administration and has focused on quantitative analysis for over 10 years. She has held pricing and strategy positions with major retailers and the leading supplier of aftermarket aviation parts in the world for the last 5 of those.