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Subject: Executive Update
Date: Mon, 16 Nov 92 12:56:07 EST
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11/16/92


TITLE Executive Update

How To Boost Price Performance - And Profitability

Proper Pricing Can Add More To Bottom Line Than Rise In Volume
Would Marilyn Much In New York

In today's competitive environment, pricing has become a strateg-
ic weapon to gain market share, distinguish products and bolster
revenue.  Price wars have become the norm in many industries,
with many companies touting their value pricing or everyday low
pricing.

But in the process of setting the "right" price, many marketers
may be Marketing

short-changing themselves.  Determining the right price is the
fastest and most effective way to bolster profits, and the wrong
price can shrink profits just as quickly, according to Michael V.
Marn, a consultant in the Cleveland office of McKinsey & Co.
Even a slight improvement in price performance from the manufac-
turers' perspective can translate into a huge increase in pro-
fits. A 1% increase in an average company's unit volume would
result in a 3.3% increase in operating profit, assuming no change
in price, calculates Marn.  But a 1% increase in price, assuming
no loss of volume, increases operating profit an impressive
11.1%.

Because pricing has such strong profit leverage, it is an area
that marketers must manage very carefully.  Marn has developed a
methodology that takes the guesswork out of the job. Called the
"Pocket Price Waterfall" concept, it is based on managing all the
major factors that affect the final transaction price of a pro-
duct or service. It aims to achieve the best net realized price
for each order or transaction, on a customer- by-customer basis.
The approach is based on the following factors:

 Industry supply and demand.  How will changes in supply, such as
plant closings, and demand, like demographic shifts, affect pric-
ing?
 Product marketing strategy.  This looks at how customers per-
ceive a product's benefits and helps reveal those attributes for
which customers are willing to pay a higher price.
 Transactions.

How does a company determine the exact price to charge each cus-
tomer per transaction? What is the base price, and what terms,
discounts, allowances and rebates apply?  Most companies under-
manage price performance at the transaction level, says Marn. And
those that do monitor pricing at this level often fail to measure
the actual or pocket price -which takes into account the full
range of off-invoice components such as promotions and co-op ad-
vertising as well as other factors that vary by customer.  The
pocket price is often 10% to 25% below the invoice price.  "Pric-
ing based on pocket price improves profitability because it pro-
vides marketers with a comprehensive understanding of the rela-
tive pricing attractiveness of customers and transactions, and it
allows them to further differentiate between a good customer and
a mediocre one," said Marn.  Take the way a car battery manufac-
turer prices its products.

The average wholesale price of a car battery might be $21 on an
invoice basis, with an average pocket price to the retailer of
$18 after subtracting such components as volume rebates. But the
manufacturer might receive a pocket price of $26 from some custo-
mers and $14 from others.  Transaction price management helps
companies price products according to extreme differences in
price attractiveness. Once companies understand their customers
more fully, they can undertake programs to motivate higher- pay-
ing customers to make more purchases.  And they can take steps to
get the lower-paying customers to pay more, such as limiting re-
bates.

Another way marketers get customers to pay more for their pur-
chases is by tapping into their value perceptions.  "Customers
pay for the benefits the products provide them with," said Dar
Wiatr#m#cq#m#, vice president at Gemini Consulting Inc. in San
Francisco.  A natural gas producer might base the price it
charges a chemical plant according to the reliability of natural
gas to keep the plant running without interruption. To determine
the right price, the company would look at the number of times
the chemical plant closed down in the past year due to an unreli-
able supply and the costs of the closures.  A consumer products
company might base its pricing on how its product affects a
consumer's self-image or lifestyle. If a certain product in-
creases a person's free time by 20 minutes, the manufacturer can
base its price according to the value perception.

"The key is to try to analyze customers' businesses and lifes-
tyles rather than the cost for providing those benefits," Wiatr
advised.  William Wheeler, a partner with Coopers & Lybrand in
Burlington, Mass., adheres to a different price management ap-
proach - target costing, a technique used by Japanese marketers
to price mature products.  Using this tactic, marketers determine
the price the market will bear as well as the profit margins they
want to achieve. Armed with this information, they then tackle
manufacturing costs. The product's market price equals the target
profit margins plus the unit cost of manufacturing.  "The trick
is to set your price according to your corporate goal and
manufacture your product in a way that will meet that target,"
Wheeler said.

This article is copyright 1992 Investors Business Daily. Redis-
tribution to other sites is not permitted except by arrangement
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