February 27th, 2012
Globalization has enabled unprecedented hyper-competition, and all types of dynamic comparative pricing models. Yet pricing within many segments of our economy appear like something from the The Stone Age.
If you go into a white tablecloth restaurant and order the sea bass on a Wednesday, you might pay $30. If you return to the same restaurant on a Saturday the price would be the same, even though demand in the restaurant is likely to be very different. Eateries price on the cost plus model built in the industrial age; the price is based on some multiple of raw materials (or labor).
Our economy doesn’t work this way anymore. Consider the market for sports tickets. Sports franchises (the Lakers for example) set the initial price for a ticket. But the market resets the price in real time based on supply and demand. If it is a Tuesday night game against the Raptors, a seat may command a few dollars more than the face value. A Sunday game against the Celtics could command double that within a market being energized by the likes of Stubhub and other online exchanges.
Variable pricing based on nuanced supply and demand is the future, and it is the present. Marriott has historically been the most profitable hospitality company, as its revenue per available room (the industry benchmark) often exceeds that of rivals. In the case of hotel rooms (or airfares), business-to-consumer pricing models can shift daily based on numerous variables such as weather, events, or the calendar. Like it or not, exchanges that provide comparative prices are proliferating, in both B2C and B2B.
I am not advocating the companies participate in such portals: they the fastest way to commoditize an industry. What I am saying is that the acceptance of such tools points out a broader problem (or opportunity), that markets re-price based on real demand, not arbitrary prices set by the seller.
Businesses, including those that market products and services business-to-business will need to be more analytical about which products and services could and should command higher prices and which will command less. To set up a fixed pricing schedule seems overly convenient in a world where buyers have far more sensitivity over some purchases than others. A software developer may need to sell a project at a low cost to win the business, but could charge far more (on an hourly basis) for change orders that are not foreseen by the client.
Most small and mid-market companies have not done enough research to understand the relationships between the products and services they sell. If an accounting practice sells tax work and audit services, how should they price one against the other and what is the likelihood that clients will gravitate to them as a result of their pricing model or other variables? I think few really know.
Companies should test various pricing strategies to see what works best, and be more purposeful about tweaking pricing to reflect current demand.
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Posted by Marc Emmer - President - Optimize Inc.
December 14th, 2011
About 4 years ago, our firm began to implement an enterprise system. Several months into the project, I had to hit the abort key. The software did not gel with my team’s habits, processes, preferences and collaboration techniques. We just weren’t ready.
I, like many entrepreneurs, fell into a trap. I was romanced by a technology. Those of us committed to improvement often see tools that are sexy, and interesting and we feel like we have to have them. Technology and gadgets can be like crack.
This is why many information technology professionals are cynical about new tools, especially trendy ones that don’t fit within narrowly defined parameters. They see the potential flaws, and often act to mitigate the risks. We should listen to them, and avoid the tendency to chase shiny objects.
What I see in entrepreneurial firms is that having the right solutions is very important, and implementing them at the right time is equally important. I have seen clients wait too long to implement enterprise tools and that has hurt them (creating a competitive disadvantage). But the opposite is also true-attempting to execute technology projects based on arbitrary target dates is a slippery slope.
Successful technology implementations require a complete organizational commitment, from top to bottom. In order to affect successful projects, companies must vet a software’s capabilities, and carefully plan its implementation. The cost of failure is very high. Rushing to judgment, skipping steps and trying to cut out expenses such as scoping and training can cause dire consequences.
In most implementations, there is a single point of failure; users and contributors rely solely on IT to manage the project. A very consistent problem is that nearing completion, users realize their new toy doesn’t fulfill the company’s needs, or offer features of the software it is to replace. If users are not required to be accountable for scoping a project from the onset, they are almost always disappointed.
I once read that over 90% of ERP implementations are late, not to mention over budget. In such instances, people are quick to blame IT or their vendors, when it is often organizational inertia that blows up the project in the first place. Unfortunately, there are very few technologists that are savvy enough to write business requirements that capture everything software must do to satisfy its users. That is why the users themselves have to take a more active role in understanding how their systems will work.
As you consider upgrades to your system, whether they are minor or significant, select your system carefully, plan the steps rigorously, and implement at a point in time when your team has the bandwidth to manage the project effectively.
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Posted by Marc Emmer - President - Optimize Inc.
September 7th, 2011
Google’s behemoth $12.5 Billion acquisition of Motorola’s phone business set a salvo across the bow in technology circles. Google’s largest acquisition raises the stakes in the quest for platform dominance. The trend towards vertical integration is clear, as Coke and Pepsi buy up their bottlers, and manufacturers such as General Motors and Boeing eat up suppliers.
Consider the plight of HP, who has no software dancing partner in the world of mobile computing and announced last week of their exit from the desktop business. Investors penalized the company (who bought competitor Compaq a decade ago) severely, erasing $12 Billion in market value with a matter of days. [i]
And then there is e-textbook publisher Kno, the VC backed darling of Silicon Valley, who recently shelved plans to create a tablet for the education market after realizing that they did not have the chops to compete on a global scale with tablet manufacturers. The company moved towards an App for iPad only to have their margins raided by Apple (who earns a 30% royalty). [ii] While Kno has enormous upside, it is unlikely to realize its vast potential unless it owns or is owned by a distribution partner.
Today’s turf wars are not with a single competitor, but with their entire distribution platforms (as in the case with mobile devices). So the consequences of globalization persist; the large get larger and the small find the right alliance or face considerable competitive disadvantage. Vertical integration provides a recipe for greater control of cycle time and quality and a significant cost advantage. At a time when margins are slimming, companies are looking to participate both up and down stream.
It appears that the swell of distribution channels has made distribution even more important, so those who can find unique methods of delivery are creating a first to market advantage, such as Amazon has with books. As private equity investors look for deal flow, and shrewd entrepreneurs look for bargain basement acquisitions, they should look not only at competition, but for suppliers or customers that present control and cost advantage throughout the entire supply chain.
With so much cash on the sideline, some sectors may be ripe for another round of consolidation. The choice many businesses face today is will they be the consolidator, or the consolidated?
[i] Investors Rebel Against H-P Plan
[ii] A Startup Tries to Turn the Page
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Posted by Marc Emmer - President - Optimize Inc.
July 26th, 2011
Businesses often fall in the trap of thinking that because their customers are happy, that they will remain in the fold. Global competition has brought about switching options that did not exist before the world was flattened like a pancake. Businesses who serve other businesses (B2B) must go deeper than the occasional sales call, Christmas gift and customer satisfaction survey; they must find ways to box customers in.
I often travel on behalf of clients, who arrange rooms at the Marriot, Hyatt and upscale locations such as the Four Seasons and Ritz Carlton. If any of these chains solicited my feedback, I would give them high marks; I am satisfied. Yet given a choice, I will go out of my way to book a Hilton. As experts at J.D. Power and elsewhere have pontificated, there is a chasm between satisfaction and loyalty.
I find it fascinating that the term Customer Relationship Management (CRM) has become synonymous with overpriced and monotonous software. The CRM revolution offered the promise of analytics that promoted tracking the most profitable customers as calculated by their lifetime value. The premise of CRM is to treat valued customers differently than less profitable ones. Somewhere along the way, many organizations lost sight of the point.
While frequent flyer programs and the like are popular, few realize the promise of customer loyalty. In the case of Hilton I receive free breakfast, cocktails, bottled water, Internet and frequent upgrades. Hilton truly treats me like a VIP, and they have boxed me in at a very low incremental cost.
So how can a B2B enterprise apply such thinking to deepen their customer relationships? There are certainly ways to provide special benefits to your best customers. The definition of best should not be limited to the customers that buy the most. It could mean who pays on time, participates in key programs, attends vendor events, etc. Special rebates can be paid to customers who demonstrate their loyalty and are easy to do business with.
There are also other intangible benefits such as direct customer service lines and faster cycle times that can be extended to those who meet certain thresholds. Companies that utilize distributors should evaluate, score and incent those that represent their product best, and meet specific performance criteria.
Your best customers are worthy of this investment, as they are the ones that are most apt to look beyond price when making decisions about their vendors. Treat your best customers like VIP’s.
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Posted by Marc Emmer - President - Optimize Inc.
