Tag Archives: Profit

3 Golden Rules of Pricing for Value

For any business setting the price of your products is one of the hardest decisions that you have to make (along with picking a brand name, choosing the logo colour, deciding on your range…!) There are a few different approaches that you can take, but the most important thing you need to do is build value. This post will discuss the role of value in pricing and show you the 3 golden rules for building your price on a value proposition.

What is Value?

Value is a perception. It’s the reason why a well cut, good fitting little black dress for $150 can be as savvy a purchase as buying 3 tanks for $20. The price paid is considerably different, but so is the expectation of quality, enjoyment and longevity. Value is the combination of all our feelings towards the item we are purchasing. To set the price, we need to understand the value of our product to our consumer.

Many years ago I was the category manager for a premium cosmetics and perfume company. When it came to setting the price on skin care products that were perceived to rewind the aging process, we set the price by analysing what the consumer would pay, based on what it was worth to them – the value they saw in the product. The product cost was around $10, yet the consumer valued it enough to be willing to pay well over ten times that amount.

In our post “How to Measure Success” we looked at how to analyse your gross profit and your wholesale margin, which are both valid ways to set your retail price. But some products are worth far more than they cost to produce, be it because of desired design, quality workmanship or inherent benefits, and this is where developing your price model around value is most beneficial.

3pricing for value profit margin Golden Rules of Pricing for Value

1.       Understand Value-Based Pricing

When you set price using a value based model your objective is to determine the level of satisfaction a customer derives from your product and what price they are prepared to pay for it. How valuable is the solution your product brings to their life? How long do they perceive it will last? How important are the attributes to them?

Defining value includes analysing tangible and intangible attributes – that is what we can and cannot touch. The price of a Mercedes-Benz is set by what the brand believes the consumer will pay. The value is based on what they can touch – leather seats, alloy wheels, superior styling; but also what they can’t – associations of prestige, confidence and luxury.

There is no formula for value-based pricing, as each product will have its own value. You may find it helpful to do a competitive review to see how others are pricing similar offers and also survey your target market to understand what your offer means to them.

2.       Create a Value Perception

Creating a value perception involves positioning your product or service in the market so that it is desirable. The more consumers want your product the more they will be willing to pay. How to do this depends very much on the type of product or service and who the target customer.

Generally speaking you can create positive value perceptions by paying attention to:

  • The presentation of your brand elements including your logo, brand name and website / store front
  • Building social media networks to have large numbers of engaged and active followers
  • Educating your target on the benefits your product can bring (remembering both the tangible and intangible)
  • Demonstrating brand advocacy through customer reviews and testimonials

 

3.       Maintaining your Value Proposition

When you use value-based pricing, your approach hinges on your target market buying into your offer and seeing the value in it. As it comes time to promote your product, the strategy you choose is critical. Thinking back to Mercedes-Benz, how often do you see an ad for Mercedes-Benz:

“Mercedes Benz A-Class, was $90,000, now $50,000. For three days only!”

A product that is marketed on its value needs to maintain that value and it can easily be tarnished. If you can sell your product for half the price you were charging, your consumer will start to question its true cost, and the value they see in it may decline.

Value adding strategies are the best way to maintain value in your product while creating new reasons to buy. The most well-known value add strategy is the free gift. Offering a free gift with purchase does not devalue the original product in any way, you may be directing some profit into funding the gift instead of using some profit to discount the gift.

Free gifts can also be used to drive multi unit purchases e.g. Spend $52 dollars to get your free gift, setting the spend qualifier above your key products.

With the rise of online stores, another strong value add offer is Free Postage on a required spend. Firstly, we suggest you have a flat postage rate in place e.g $6.95 Flat Fee Postage, that way you have created a value for the postage; then set a minimum spend to receive the postage free e.g. Free Postage on orders over $100. This will encourage multi unit purchases, delivering you more profit per transaction, helping you fund the free postage profitability.

Following the 3 golden rules of pricing for value has the potential to deliver you more profit than pricing to make a margin requirement. What is your product? Can you price for value? As part of our mini marketing plan, we analyse your competitors pricing models and give you recommendations on how you should price within the market. For more information visit our product page.

Until next time, V is for Value and I hope you found it valuable!

Mary-Anne


How to Measure Success

In my very first blog post (5 Steps to Host Your Own Census) I made this huge confession:

“Being a passionate and dedicated Marketer, over the years I have become near obsessed with measuring; measuring results, measuring profitability and of course measuring the target market.”

So as M drew closer in the ‘A-Z of Marketing’ series I was filled with excitement and jotted on copious post-it notes the measurables I wanted to share with you.

Measuring your performance, not just financially, but also your connection with your consumer gives you a reality check. It uncovers the true effectiveness of your strategies and guides you in how to improve your business and stay ahead of the competition.

5 KPI’s (Key Performance Indicators) for your Business

1. ROI (Return On Investment)

In the marketing sense ROI is used to analyse the profit on a campaign you have run, to determine the percent return on investment.The formula is:

Return on Investment Formula

This result would mean we had a 62.5% return on our investment. You will need to get a benchmark of what is acceptable for your own business and work to improve over time. A negative ROI means that you have lost money and in that case you would need to question the appropriateness of your strategy.

2. Wholesale Margin

Use this formula to determine the margin you are giving a retailer. Often the wholesale expectation sits between 45-55% of retail depending on the outlet.

Set the RRP you believe the market will accept for your product and then use this formula to calculate the wholesale margin you are giving to your retailer.

wholesale price formula

GST TIPS: To remove GST divide by 1.1, to add GST multiply x 1.1, to work out the GST component divide by 11

 3. GM (Gross Margin)

Use this formula to determine how much money you will make from each item you sell. As this is Gross Margin, we are only concerned with the costs associated with making the goods or service.

This is the key way we measure if a wholesale price requirement will be profitable for our business. The formula is:

gross margin formula calculation

4. CTR (Click Through Rate)

The CTR tells us how many people are clicking through (clicks) our online advertisement as a percentage of the total times our ad was shown (impressions). We measure CTR on the banner and badge advertising we do on websites and also when we undertake pay per click campaigns E.g. Google AdWords, Facebook Ads. The formula is:

Click Through Rate Formula

The CTR benchmark is different by business and will differ based on whether you operate in a broad or niche category. The DoubleClick Benchmarks Report, published in 2010  lists 0.10% as the CTR benchmark on static online ads.

5. CPV (Cost Per View)

We recommend our clients estimate a CPV when approached with an advertising opportunity. We are all often wondering “Should I advertise in this publication?” and “Is this advertising opportunity worth it? Measuring the CPV helps you to break down the advertising costs and assess them at a leads level. If you could buy a mailing list for $1,000 and it gave you 1,000 names you would say it was a $1 per sales lead. Similarly CPV is calculated with the formula:

Cost Per View

You would then evaluate the CPV against how valuable the lead is. Further you may want to take the distribution and cut it down to what you believe is your target market, e.g. the distribution is 20,000 of which 5,000 are your target, say Elderly Couples on the Pension, you then would work out the CPV against just your target:

2,500
5,000

=$2

 Your CPV has increased greatly, but with few mediums that get in front of that target and the targets affinity with local newspapers, we would say it is a reasonable CPV.

Check your Web Stats to Monitor Web Traffic

If you have a website (is it even worth asking anymore?) you may feel uncertain at times as to whether anyone visits it, if it’s working as hard as it can for you and most importantly, is it converting browsers into customers.

Your web stats are measuring every interaction browsers are having on your website, all you need to do is logon and analyse them.

The two stats we pay the most attention to are both functions of time. When we undertake a Website Effectiveness Audit, firstly we look at the Bounce Rate. This is given as a percent and tells us how many people landed on our page and clicked off (bounced) straight away. A high bounce rate tells you that the majority of traffic to your site are arriving and deciding instantly you’re not the right fit. Work on decreasing your bounce rate by improving your home page appeal or direct traffic to the page most relevant to them e.g. product page, location page etc.

Dwell Time, is the other time based base measurement we encourage you to look at. Once we remove the people that ‘bounced’, we want to know how long the rest of our traffic stayed for. These are usually presented in bands of time e.g. 0-30 seconds, 31 – 2 minutes etc. Again we want our traffic to stay as long as possible, browse many pages and convert. If you have a very low dwell time, work on engagement with your traffic, add more images, a video, a blog, FAQs, any valuable content that will increase the time your potential consumer spends on your site, getting to know you.

We run a Website Effectiveness Audit for just $49.95 which includes a “Traffic Light Report” on how your website is performing, please get in contact if you would like to know more.

When you set out to measure success you need to remember that success looks different to everyone (and to every business). The key is to benchmark against realistic targets for your business.  Focus on how to be more profitable whilst exceeding your customer’s needs and your business will continue to grow.

Until next week M is for Measurement and also for Making it to the halfway Mark in the A-Z of Marketing!

Mary-Anne

www.wiseupmarketing.com.au


Long Live your Product (with Life Cycle Management)

Countless products are launched every year, landing in the market with a reason to be, a well thought out way to connect with the consumer and hope that the investment will pay off for the brand owner. But what comes next?

Product Life Cycle Management is the key to ensuring your brand thrives year in and year out. This post will help you understand its importance to your marketing strategy and give you the tools you need to identify the different stages of your products life cycle and strategies to maximise growth throughout.

What is Product Life Cycle Management?

I love a good analogy as much as the next marketer and this one was just too hard to resist.

Think of your product like roses in your garden, it is not enough to simply plant (your new product in the market), water it (with promotions occasionally) and expect it to flower year after year. At some point, its vitality is going to dwindle and you need to either deadhead them or dig them up and start again.

The product life cycle (PLC) refers to the stages a product travels through from launch to eventual obsolescence. Managing the PLC is an important part of your marketing strategy and guides you in adapting your approach by product, to ensure you are promoting, developing and phasing out products at the right time.

Four Stages of the Product Life Cycle

Product Life Cycle Management

1.      Introduction

This is identified as the launch stage of your new product.  Sales are increasing slowly, as there is currently limited awareness. Costs are high with large amounts of advertising and promotion required as well as the product development and production costs having been incurred.

The introduction stage will see your business operating at a loss and so this is the most critical stage in your product lifecycle, ideally  you want to move through this stage quickly. Understandably this is where the  highest percentage of failure occurs.

Strategies for success during the introduction phase:

  • Clearly define your market so that at launch you  are effectively targeting the consumer most likely to become your customer
  • Build a dominant market position, stand out from  your competition, don’t just be a “me too” product, have a unique reason for consumers to connect with over the competition
  • Pioneer something; be the first to launch, a true new product is rare but valuable (See Ideas and Innovation).
2.      Growth

Once awareness has increased and with an appropriate distribution strategy, you will identify that your product is in growth, which will be when you first break even (this will be discussed in next week’s post on Measuring Success) and begin to make a profit.

When your product is in growth, the market has accepted your product and consumers are trialling it. This is the time to increase your distribution to make sure you are matching supply of your product with demand.

During growth, naturally, competitors will enter the market. Noticing a new popular product will motivate them to launch similar products in order to capture some of the market (see Get Competitive with your Competitors).

Strategies for success during the growth stage:

  • Monitor pricing to ensure you stay competitive against new competitive offers
  • Confirm your actual customer matches your forecasted target customer and adjust your message. For example we have a launched a building and construction product for children, but on researching sales we find out it is popular amongst teens. We therefore want to ensure our marketing and promotions do not exclude teens by being too “childish”
  • Look for new distribution channels – use your sales history to sell the product in and growth your market share
3.      Maturity

Your product can be identified as being in its maturity phase when sales volume slows down and beings to plateau, that is becomes “stuck” at a certain level, stops growing and may be just slightly declining. This is the sign that action is needed or your product will begin to rapidly decline.

Products reach maturity for various reasons including competition reaching saturation, price wars giving unpredictable volume (this week’s special gets the sale) and the initial excitement for the product settling. This leads of course to a decrease in profit, both from a decrease in sales but also from an increase in promotional expenditure.

Strategies for success during the maturity stage:

  • Apple is the first company that comes to mind that demonstrates innovative product lifecycle management. Realising most mobile phone users are on 18 – 24 month contracts, Apple releases a new modified iPhone around every 18-24 months, by addressing that the current model is reaching maturity and releasing an update they effectively refresh the product lifecycle back to introduction and growth every two years. The result is a loyal following that feels they are up to date with the latest technology and will not move to a competitive offer
  • The Apple example illustrates the strategy of modify or relaunch. Create new news and interest around your product. Survey your customers (See Market Research ) to find out what is missing from your product; monitor your competition (see Get Competitive with your Competitors) and find out your competitive gaps; re launch your product to recapture market share and return your product to growth
  • Look for new users or new uses for your existing product and develop strategies to communicate and increase awareness for your product with these groups
  • Create new promotions, competitions and offers to maximise sales of your product while it is in its maturity phase
4.      Decline

This phase is identified by both a decline in sales volume and tapering off of profits. Allowing the product to reach decline should be strategic, meaning you identified the product in maturity and planned that it would not be refreshed, but instead would be deleted at some point in the future.

The choice to let a product decline can be as there is a new product planned for launch which will replace the current product but is not going to be positioned as an update or refresh.

Strategies to minimise loss during decline:

  • Minimise spending promotionally rather than trying to stimulate sales with competitions and discounts, allow sales to taper off naturally
  • Decrease the number of SKUs over time, so delete the worst performing sizes or colours first so you have a tighter offering in the market, then gradually run out of the product

The most important advice for using PLC management in your marketing strategy is to regularly review your sales volume and profitability; this is where the flags will be going up that will help you identify what stage your product is in, allowing you to plan your products life more effectively.

What stage in product life cycle is your product in? What are you planning to do, to maximise that stage?

Until next week L is for the life cycle of your products and also for the lifecycle of the rose, which evidently go from maturity back to growth every year, if only we could bottle that ability!

Mary-Anne

www.wiseupmarketing.com.au


A is for Analysis

To start at the very beginning is a very good place to start (or so we have heard), so where better to start our A to Z of Marketing than at A.

A is for Analysis. When I started in marketing well over a decade ago, the era of the long lunch, the fluffy campaign and the big budget with no accountability were on the way out (poor me) and ROI (return on investment), measurement and metrics were the new rage. It suited me fine as I am a numbers girl at heart, but over the years I have had staff come and go with the terrible realisation that todays marketing roles are almost accounting roles in disguise (with better shoes and more interesting events).

5 Easy Areas for Analysis

1. Analyse your Web Traffic Stats – if you have a website, you have access to very valuable information just waiting to be analysed! It is believed that a new visitor to your website spends around 6 seconds deciding whether your business meets their needs, is credible and trustworthy. So how do you know if you are succeeding?

By analysing your website traffic you can begin to understand:
– where traffic enters and exits your site
-how long they stay
-what pages are browsed; and
-sometimes even demographic information.

Half a day a month spent analysing your website traffic can give you some powerful insights into how to adapt your page to ensure you are maximising your traffic.

2. Analyse your Current Customers – if you sell a product, you have already succeeded in connecting with your target consumer. They found you, they trusted you; and they have initiated a relationship with you and your business. Asking each customer a few questions as part of your checkout process gives you the opportunity to collate data that you can analyse. Consider asking “Where did you hear about us?” “What’s your favourite Website?”. A quick question can give you a deeper understanding of who your consumer is and will help you target your message to them.

3. Analyse your Past Performance – when we do our Mini Marketing Plan for our clients, the first step we take is to have them fill out our Business Analysis Tool, which is really a survey of the business’ past. We use this tool to analyse what the business has done and also to consider what has and hasn’t worked before to find clues as to what the target consumer might be like. You can analyse past performance by looking at the results you received and then interpreting what they mean. For example, you have distributed over 500 flyers with an offer (always use a coupon code so you know where the responses have come from) but you only received 5 redemptions. You sent an email out to 100 subscribers with the same offer and got 25 redemptions. On analysing this I would think that perhaps your target consumer responds better to offers they can instantly action or your consumer doesn’t pay attention to flyers. I would analyse over a period of time and if this trend held true, I may decide not to use flyers anymore.

4. Analyse your Competitors – when sales are down and enquiries have gone quiet don’t go straight to market with a deal or fear the end is coming. Analyse your competitors. This is as easy as searching for your product or service, and seeing what comes up. Think like your consumers; how did they find you? Are you a bakery? Do most people find you by walking past? Go for a walk around the local area. Has something else popped up that you didn’t know? Look at the supermarket, have they changed their pricing strategy. Or do you sell Dog Outfits online? Start searching in different ways “cute dog clothes“, “designer puppy outfit“, “dress for my dog“, look at the websites that come up, think your consumer could shop at any of these, analyse the strengths and weaknesses and form strategies of how you can improve your offer.

5. Analyse your Profitability – profitability put simply is income minus your expenses, but do you keep track of all your expenses? So many small businesses muddle the line between the owners and the business and expenses are often covered by an owner without them being factored in against the income of the business to really understand profitability. Analyse the profitability of your business as a whole every 3 months or so. Think of it like a household budget – add up all the payments in, then take away every single expense incurred to determine whether you made a profit or a loss. Analyse the expenses to see if savings can be made. Also analyse the profitability of individual campaigns. For example, if you advertise in a publication for $1,000, and your product delivers you $10 profit per sale, you will need to sell 100 products for the campaign to be profitable. Unless you go back and analyse campaign profitability, you can’t be sure it is a cost-effective way to target your consumer.

What analysis do you do in your business? Are you often surprised by the results?

Until next week, here is some more of what A is for http://www.enchantedlearning.com/Aisfor.shtml

Mary-Anne Amies

Wise Up Marketing Solutions


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