Meissner Research Group

To understand how to best set prices, manager first must understand that all products go through four distinct periods in their life cycles: emerging, growth, mature, and decline.

Emerging products have just been released to the public; perhaps they’re even in trial form and only available to select customers. During the next period of growth, the products have entered in the market at full-force and with each passing period, sales continue to grow at a steady rate. This is different from emerging in that your product is now part of the everyday, standard business – not necessarily the newest product on the market anymore. Once your product enters the mature phase of its life cycle, the sales growth has evened out. A large portion of your customers already own your product and only come to you for problems or repairs. And finally, your product will enter into decline – it becomes obsolete (hopefully because your company has already put its replacement into the market) and its sales dwindle to a few stragglers who are behind the times or devoted fans of your product that simply don’t want an upgrade.

Each of these periods of the life cycle change how your product is viewed in the marketplace. Unfortunately, most sales teams are not equipped and don’t even realize when each of these periods happen and the effect they have on your product and pricing. As an executive, it is your duty to recognize the shift in life cycles and to guide your sales staff in pricing accordingly.

Most executives unfortunately don’t like to think of their products having any sort of cycle to them; they prefer to think of their products as entering the market and remaining in the same growth phase forever. This simply is not the case. While it is true that you continually want your profits to grow, a single product cannot manage growth indefinitely. It is up to the executives to watch for signs that a product is entering a maturity phase, or even its decline phase, and react. New products should enter the market, starting new emerging and growth phases for your company. Without adherence to this law of entropy in business, your company will suffer.

A good example of this is the yearly nature of car manufacturers, or the ever-changing nature of Apple’s iPods. The moment one version of the iPod becomes obsolete, or even before (allowing Apple to control when a product enters its own decline phase), a new version appears on the market. Use your knowledge of product life cycles to shepherd your business into continual growth phases.

Franchises have long held the power when it comes to pricing, but after a ruling in 2008 that opened the door for more pricing mandates by corporations, Burger King and several other companies have decided that pricing is their concern and should be under their control.

The current argument between Burger King and its franchise chains is the price of a double cheeseburger (strangely, the same menu item that caused McDonald’s and its franchises issues in 2008). Burger King says that the double cheeseburger should be no more than a dollar, which allows it to be placed on the already corporate-mandated and corporate-priced Value Menu.

Franchise holders say that the move not only cuts into their profits but also into their control, as they previously had exclusive rights to price management. Michael Seid, a franchise consultant, said (Burger King Franchisees Can’t Have It Their Way, Wall Street Journal, January 21^st, 2010),

When you’re talking about changing something as key to a business as what do I charge for my goods, that becomes an issue.

The case highlights the problem faced in transparent markets, namely that a single price must be found. This is caused either through the Internet and price comparison engines or necessitated by a nationwide advertising for a special offer.

Fast food restaurants are just one market among many facing these issues. While the airline industry has networking effects to consider, this is somewhat similar to the situation Arne Strauss and I analyzed the paper ‘Pricing Structure Optimization in mixed restricted/unrestricted Fare Environments’. Having a single price that is available for all customers will result with a high likelihood in some members of customer segments paying less for products they would pay more for. The Burger King case highlights the difficulties managers face when setting prices that have open availability and are without any fences in different locations and markets.

The New York Times announced this week that they would again charge customers for online services. In this new system, non-subscribers (subscribers to the newspaper will have full access to online content) can read a handful full of free articles a month, but after using their allotment, will be forced to pay for an unlimited online subscription. Or, at least, wait until the next month.

This move comes as a form of déjà vu, as this is similar to a failed plan for The New York Times from 1996 that attracted only 4,000 subscribers. After several attempts at paid online services, the Times went free, hoping to attract enough advertisers to cover costs, but because of the recession, they’ve spent the last year developing new plans. The company released a statement containing the reasoning that this will enable NYTimes.com to create a second revenue stream and preserve its robust advertising business. Janet L. Robinson, CEO of The New York Times Company, added (The Times to Charge for Frequent Access to Its Web Site, New York Times, January 20^th, 2010):

We were also guided by the fact that our news and information are being featured in an increasingly broad range of end-user devices and services, and our pricing plans and policies must reflect this vision.

With the creation and mainstreaming of portable devices, like the Apple iPhone and the imminent iPad, that can read the Times anywhere and can fit in your pocket, the Times, and all newspapers like it, must evolve. This leaves the question of while the company will spend 2010 building an infrastructure for this program, can they ever hope to keep up with the changing ways newspapers are read and still manage to charge people. Arthur Sulzberger Jr., the company chairman and publisher, responded:

This is a bet, to a certain degree, on where we think the Web is going. This is not going to be something that is going to change the financial dynamics overnight.

The New York Times is taking what might be viewed as a risky move in the already embattled journalism field. However, the time of the announcement is to be lauded. With the announcement of the Apple iPad next week, this is the best timing to make users view content in a different way. This often is the key to a price increase, introducing a different version or modification of the product. Customers will, more often than not, walk away from raised prices, especially in the case of the Times, since the product used to be free. By allocating their content into something that the customer can see as having actual benefit (like being able to access it anywhere), then the Times may have a chance to attract customers while they were unable to do so before (when portable devices didn’t exist). So, while the timing is perfect, it remains to be seen whether the action pays off big or the free-for-all online culture will prevail.

While we teach in our pricing courses that valuable service components should be unbundled and attract an extra charge, Ryanair has once again been brought to the consumers’ attention for its unfair unbundling practices. The whistle blower this time was John Fingleton, the chief executive of the Office of Fair Trading, who said the following in an interview with The Independent (‘Puerile’ Ryanair under attack by OFT chief, January 4, 2010):

Ryanair has this funny game where they have found some low frequency payment mechanism and say: ‘Well, because you can pay with that [the charge is optional]. It’s almost like taunting consumers and pointing out: ‘Oh well, we know this is completely outside the spirit of the law, but we think it’s within the narrow letter of the law’.

Until last month, the VISA Electron card was the payment option that attracted no surcharge. Now the only payment option without a fee is a prepaid Mastercard, which of course is not widely available and quite inconvenient to use. Advertising rules in the UK (and possibly in the European Union) stipulate that an advertised price includes all non-optional charges. The charge is disclosed only on the very last step of the booking process, making it impossible to compare the total price for the trip upfront.

But even the chief executive of the consumer watchdog acknowledges that it will hard to change by regulatory action, but hopes his public outcry will to customer reaction:

It would be silly to go after something like that every time because they would quickly change it to something else, and it’s trying to establish a general principle that what’s not optional is not in there. Consumer anger and frustration, and an element of transparency, often changes these things much quicker than legal action.

If in case you wonder: usage of lavatories on Ryanair flights is still free at this time, at least on my recent flight back from Germany to England. Ryainair’s CEO Michael O’Leary had toyed with the idea of charges for a visit during the flight, too (Pilots aghast at Ryanair toilet charge, Times Online, February 27, 2009). I read somewhere Boeing had problems building the payment mechanism into the doors on short notice. So maybe I just beat the flight attendant with a credit card reader to the door.

Depending on which politicians and pundits you listen to, they will tell you that at the beginning of this new decade, the economic recovery has not only started; it has happened. Whether or not you believe them doesn’t matter. At the beginning of this new year, you and your company are going to face an upturn as the market slowly pulls itself from the recession.

Now that your company has survived the recession, your pricing will have to reflect the new market. As an executive, you must become your company’s watchdog, keeping an eye on the market, your product, and your company, all to discover exactly where your price point should be. Here are several ideas to keep you and your company in the black in the coming upturn.

1. Don’t Jump the Gun

   This isn’t the free-for-all market economy anymore. After the recession, customers are still weary of big, corporate business and are just as likely to walk over to your competitor as they were before (and during) the recession. If you lowered your price point in a price war to survive the recession, you’re still stuck with that price point. Price points rarely rise after they’ve been lowered for any amount of time, even if the market (or inflation) shows they should be raised. The one thing customers hate even more than faulty products are rising prices, and if you think you can return to pre-recession pricing, your customers will disappear more quickly then they did during the recession. You will need to be careful and if you feel there is resistance to accept a price increase, you might consider introducing an improved version of your product and phasing out the old one.

2. The Market Still Fluctuates

   The thing about our current market era is that everything changes and will be likely to continue to change until further notice. Every day is a new battle. The coming months, overall, will be marked by a slow rise of growth. But the stability in that growth hasn’t happened yet. We no longer live in a period of continual growth, and your pricing should reflect that. Just because your profits are up last quarter thanks to a boost in holiday sales, doesn’t mean that your market is back to what it used to be (or even close to what is used to be). Any particular market could still come crashing down. Be wary that data about consumer demand, such as elasticity, might be outdated faster than you would wish, and customer preferences can quickly shift. As such, it is important that you run constant price trials to be ahead in these time of change.

   Resting on your laurels will only lead to frustration and money loss. As the executive, it is your job to watch the market and predict when the rises and the falls will happen. And then price accordingly.

3. The New Pricing

   Throw away old ideas about price wars and simply having the lowest price. Customers, themselves having survived a recession just like your company, are smarter and far more savvy than they used to be. Instead of creating a price war that is bad for everyone but the customer, take your services and your products and find new ways to market and price them.

   The first step is to keep your existing customers. In a scramble for new customers that may have more extra capital then they did six months ago, don’t forget about the people who got you through the recession. Look for reasons why they stayed with your company and reward them with services and products that reflect those reasons. If you’re an internet and telephone company and your customers chose you over a competitor because you promised them a free phone line for signing up, then give them that free line for another year if they decide to stay. Keeping these core customers should be priority one.

   For new customers, add tangible value to your offerings. Instead of raising the price on your old products and services, add new services, upgraded products, or something else that the customer can actually see as being beneficial to them. Once a customer sees the benefit in your offerings, they will be more than happy to pay a higher price. Just remember to offer these new deals to your old customers, as well.

Essentially, creating a healthy profit from the upturn is as much a challenge as surviving the recession. As the executive, you must take responsibility for your prices and be aware of everything that happens in your market. The market is in flux, and while your prices can’t be constantly changing to reflect that, your pricing strategy must. Be prepared to implement a new strategy the moment the previous one no longer works. By doing so, you’ll create a precedent that will help your company take advantage of the upturn and generate more profits. The market fluctuations might even offer a rare chance for well-prepared pricing managers to get a greater market share without compromising profitability.