Is The Price Right?

by Li Haohan
Photography by Chino Sardea
05 Jul 2017

Understanding how vendors arrive at the ‘right price’ can stop you from feeling that you are paying through the nose

Pricing is directly related to finance overall, as developing the right pricing strategy can have a huge impact on a company’s financials. Public and private sector organizations alike must take a critical look at how they are pricing their products and services and make sure they are considering all the factors at play, not least the value of their offering – something that organizations often don’t look at critically enough.

Pricing has been a hot-button issue of late – debates have arisen from water and taxi surge pricing in Singapore, to airline overbooking and drug pricing globally. These issues will only continue to exacerbate with advances in disruptive technologies, as they constantly change the way businesses, governments and consumers interact.

Through big data analytics, artificial intelligence, automation and cloud technologies, new pricing models such as dynamic pricing have sprouted up in recent times, bringing with them a slew of benefits (e.g. better service for consumers) and controversy (e.g. transparency issues).

PORTFOLIO interviews Jan Weiser, Partner at Simon-Kucher & Partners’ Singapore office. He has over 12 of experience in consulting national and international clients, all in the areas of strategy, pricing and sales. Jan leads Simon-Kucher’s private equity, insurance and life sciences practice in Southeast Asia, China and ANZ. Simon-Kucher & Partners is the international pricing consultancy behind some of the world’s most prominent products.

Give us a general picture of pricing, and in particular, the work that you do for Simon-Kucher & Partners.

JAN WEISER: Pricing is a very broad field. We know how to manage it professionally. In the past two years alone, we completed more than 1,000 pricing projects, boosting our clients’ return on sales by 100 to 500 basis points on average. Drawing on this wealth of experience, we built our “pricing universe”, probably the largest database of its kind covering all industries and regions. It contains price models, price elasticities etc. of countless products and services and is further enriched with every project we conduct.

Simon-Kucher & Partners is a global consulting firm specializing in TopLine Power®, which encompasses strategy, marketing, pricing, and sales. Founded in 1985, the company now has 1,000 professionals in 33 offices worldwide. Simon-Kucher’s practice is built on evidence-based, practical strategies for profit improvement via the top line. The company is regarded as the world's leading pricing advisor and thought leader.

Our worldwide projects have given us deep experience in every industry, product, service and aspect of pricing. From headache medications to sports cars, from mobile phone tariffs to banking fees, from new product launches to huge organizational transformation programs, we have developed price strategies, price models, price tags and everything else that the term “pricing” may cover.

How did you develop your scientific methods of optimizing product and service prices, and what are some of their salient points?

Price is the most powerful economic force in our day-to-day lives and one of the least understood. In fact, price is the most important profit driver, more powerful than fixed or variable cost, or volume. This means a price increase has the highest positive impact on profit, while a price reduction can destroy profits the fastest.

Over the years, we have developed a proven set of methodologies and tools. Most are a result of our project work, where we need to be creative and innovative. We continuously incorporate new scientific findings in the field of pricing, such as behavioral aspects, or trends such as digitalization.

How has pricing evolved in the past decades, and what were the important or disrupting factors?

The methods haven’t changed much. There are three main methods on how to price: based on cost + margin, competition and customer’s willingness-to-pay.

There are four important factors, out of which I would only call one factor ‘disruptive’:

In the 80s, businesses started becoming aware of the importance of pricing, and creating pricing functions within organizations. Companies began to realize how important pricing is as a profit driver. Until then, most improvement programs were focused on strategy development and rollout, and cost optimization. Pricing was more or less a transactional process, which was managed by Sales and Finance.

A second factor is globalization, which got a boost in the ‘90s primarily due to the rise of the Internet and cheaper shipping costs. The result was a steep increase in trade, knowledge, capital and underlying services to support this exchange. From a pricing side, this created opportunities but also significant challenges for companies to deal with higher complexity.

A third factor is that innovation and product cycles have become much shorter over the past 10 years. R&D budgets have never been higher – it’s estimated that companies spent close to US$2 trillion on R&D globally in 2016. We’re also seeing established companies easily exceed 20-30 per cent of their annual revenues on R&D, e.g. in the pharma and technology sector.

How does this relate to pricing?

From our global pricing study, we know that 82 per cent of all companies complain about increasing price pressure, which is alarmingly high; 49 per cent of companies state that they are involved in a price war. They also believe that one possible way to escape price pressure and price wars is to develop new and innovative products and/or services. We also know that 72 per cent of all products do not meet their profit targets.

One of the key factors to develop successful products is to integrate the monetization opportunity in early stages of the product development, and then design the product around the price. Porsche for instance has several pricing checkpoints along their product development process to ensure the product meets the expectations of their customers, both in terms of design/features and price.

And finally, the fourth and most significant factor is digitalization. This really disrupts all industries and sectors, no other mega trend exerts such high pressure on prices. Digitalization and the endless possibilities of the Internet are leading to significantly higher price transparency, resulting in increased price pressure. Many companies see this as a cause for concern. However, digitalization opens up enormous opportunities in terms of dynamic pricing, price differentiation and innovative price models.

Let’s take as examples Uber’s fantastic price model, or dynamic pricing as seen with Amazon and Google: all impossible without the Internet. We must not forget that the Internet also creates transparency not only in terms of price, but also benefit and value. The user can review almost any product or service. This is the most important prerequisite for value pricing and excellent news for high-quality providers. We are still at the start of a rapidly evolving journey.

Would you say pricing is more of consumer acceptance of a specific figure, rather than what is based on actual cost and delivery of goods and services?

Yes. In all seriousness does any consumer really care what the cost of a product is?

Consumers care about the benefits the product provides. And the benefits can be manifold: different cars for instance can provide convenience, can be fun to drive and thus create joy, and can provide status… Nobody really cares much about the total cost of a car.

Cost is an important input factor for pricing, as it is necessary for companies to allow for their planning and controlling. Many companies, however, still price their products and services mainly or purely on a cost plus margin basis and then align prices with competition, i.e. often giving additional discounts.

The better way for companies to price their products is to define the right target market, measuring how the products or services are perceived relative to competitor products or services. The more value the consumers attribute to the products or services, the more they can charge. To mention some examples where this value pricing method is common, we see this often in the fashion industry, in the automotive industry, in branded pharmaceuticals or in cosmetic products.

"When making pricing decisions, all companies should be clear about ethical considerations such as price fixings or moral considerations that can create a massive backfire and thus place the whole company in a bad light." - Jan Weiser

Are there classes or categories of goods and services that are less regulated than others? What would be some of these?

Usually less price regulated products or services do not come in to play with basic needs such as staple food or basic healthcare. There may be regulations how a price has to be displayed, but on the price level as such there are no restrictions.

Examples of less (price) controlled products are most luxury goods, most food and beverages (other than alcoholic beverages), cars, furniture, leisure and sports equipment.

Examples of more (price) regulated products and services are commodities, public transportation such as buses, trains and taxis, healthcare and public health related consumer goods, pharmaceuticals, insurance, and telecommunication.

What would be the key components of pricing, say, imported luxury goods?

The key components are:

(a) knowing what the customers value,

(b) how they perceive the brand and the product benefits, and

(c) a good representation at the point of sale.

While (a) and (b) are influenced by a refined marketing, advertising and communication strategy and the adequate research behind it, (c) depends on location, venue and display. For instance you will find Louis Vuitton stores only at strategic and usually prime locations. Also when you walk into a Louis Vuitton store you might also walk past a S$20,000 product first. Then you might pass by other products that cost several thousand SGD. After all of this a bag that costs S$1,500 does not look so expensive anymore.

We’ve seen the uproar caused by what seems unscrupulous increase in the pricing of EpiPen and Daraprim. Are moral or ethical considerations involved in arriving at the right price?

When making pricing decisions, all companies should be clear about ethical considerations such as price fixings or moral considerations that can create a massive backfire and thus place the whole company in a bad light. Needless to mention that with modern communication means any information can be shared and go viral within minutes or hours.

Although most companies struggle to increase prices higher than inflation rates, there are also examples of companies who have successfully managed to increase their prices significantly over time. Over the first five product generations, P&G has increased the price of its razor blades for Gillette shavers between 25 per cent and 50 per cent. The price increases were accompanied by a next generation product (e.g. going from two to three blades, adding other features, etc.). It is much harder when the product remains the same or very similar, and a strong reference price point exists in the market already.

In doubt companies should conduct consumer tests to get transparency if price ranges that are perceived as acceptable, expensive, prohibitively expensive, or seen as rip-off.

To what would you attribute variations in the pricing of the same product offered or sold in different countries? Are there mechanisms in place so that prices of the same product are harmonized?

Usually you find different prices for products in different markets/countries. Main reasons are the different level of competition, and how the brand and products are perceived between different markets.

Only a few companies have harmonized prices, again Apple being one of them. Prerequisite is to have a strong global brand, the right local support, and at the end of the day a good control of the whole value chain, e.g. to ensure that retailers adhere to this pricing guideline.

How has globalization, specifically the movement of goods across markets, affected pricing?

Globalization has a massive effect on pricing. And with the Internet and digital apps transparency on both price and product, quality is higher than ever. Despite local/regional differentiation prices are expected to become more harmonized in the future. However, it is not expected, and in general also not ideal for companies, to have absolute uniform prices across markets/countries.

Latest political developments also show a stronger trend towards protectionism, hence availability of products can be affected because companies have to weigh effort and returns. Given import tax or even punitive tariffs price differences for these products between countries can remain high.

In general, what do you predict to be the focus and direction of pricing in the future? What do you see developing as prime considerations in pricing?

Consumers continue to be the winners on the pricing side. The digital sales channel provides them with convenience, low prices, and the right promotions.

For companies it is much harder. The biggest need for companies is to get their pricing strategy and price models ready for the digital age. Especially when it comes to dynamic pricing, price differentiation and innovative price models, digitalization offers an array of opportunities.

Technology has lowered marketing and distribution barriers to entry: This is especially so on the marketing front where reaching consumers no longer requires huge investments in national media. Instead, social media empowers up-start brands to rapidly break into the landscape, often with share of voice that far outpaces actual share of physical distribution.

Consumers have increasingly come to expect a faster pace of ‘newness’ and higher degree of perceived customization: the CPG industry is facing many of the same disruptive headwinds that media and the rest of the digital world have had to confront over the past decade and a half, compounded by skepticism toward large national brands. This leaves CPG manufacturers less equipped than before to resist the increased pricing pressure from retailers and competitive pressure from smaller brands or private label.

For more Special Report stories, click here