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What would a potential new price/payment method be that could be revolutionary? If a company is...

What would a potential new price/payment method be that could be revolutionary?
If a company is operating at a deficit, but has happy customers, what would the best strategy be to make money?
Why should a company’s pricing strategy reflect their core values ?
Should consumers make it a point to review a company’s core values before investing?

Product pricing is one of the most important determinants of company success. A product’s market price must account for numerous competitive factors, including research and development costs, target market size, lifetime customer value, marketing and acquisition costs, and competitive positioning. Yet for all the complexity involved in determining ideal pricing, a Chargebee and ProfitWell survey of software founders and executives found that companies spend an average of just 12 hours on their pricing. Not 12 hours for each product — just 12 hours total in the history of the company.

One reason for the disconnect between pricing’s impact and the time invested could be difficulty in understanding pricing strategies. As recently explained in a guide by Cobloom, the software as a service market employs a variety of pricing models (e.g., flat rate, usage based and tiered), strategies (e.g., free trials) and psychological pricing tactics that impact how buyers process pricing information. Such psychological tactics include tricks like charm pricing (featuring amounts that end in nine, such as $39 instead of $40) and decoy pricing that places an obviously less desirable option among three bundled packages to increase the perceived value of the other options.

While these strategies might seem obvious or purposefully deceptive, they continue to be used, because they work. Research has found that decoy pricing generates additional revenue. And if you think no one falls for charm pricing, guess again. A famous study by researchers at the University of Chicago and MIT found that an item of clothing marked $39 outsold identical items priced at $44 or even $34.

As CFO, I focus on developing pricing that supports customer acquisition and long-term fiscal stability. But as part of a purpose-driven leadership team, our product pricing is also viewed through the lens of our corporate values considering shared customer value and sustainability. While we are absolutely driven by revenue, we also gut check our decisions against core company values. Below are some of these values and how they can help your company’s own pricing strategy.

1. Put customer value first.

Many of the widely used technology pricing strategies focus heavily on company revenue and internal metrics rather than end-user value. As an example, many companies take the simplified approach of calculating their product development and production costs and then adding their desired margin, and they use that information to set pricing. Unfortunately, this model is based entirely on internal metrics that have no connection to customer preference, price sensitivity or even competitive pricing. Another widely used example is pay-per-feature pricing. This model relies on a core set of features to entice new customers and adds charges as users evolve and want more advanced functionality. While it offers companies a reliable growth channel, this kind of pricing tends to create resentment with users who are paying for a product and can’t access all of its features.

Putting customer value first requires an innovative, research-based approach to understanding how end users will be using your product, as well as flexibility in designing pricing structures to take into account different product usage rates and feature consumption between departments and locations. Some examples of innovation in pricing include companies such as Amazon Web Services, Uber or Airbnb with prices based on actual usage. The only drawback to this approach is it can lead to higher-than-expected bills when customers need to add capacity or service during popular or “surge” time frames. And while these strategies might work for the vendor, research indicates consumers and technology buyers prefer the simplicity and predictability of flat-rate pricing

2. Keep your pricing promises.

In 2011, Netflix lost 800,000 customers after an unexpected price hike and service change. Based on backlash, the company quickly reversed the change. Earlier this year, history repeated itself as new subscriber acquisition slowed and Netflix announced a new price increase, followed immediately by a stock price plummet and the loss of more than 126,000 subscribers. Customers usually don’t react well to paying more without a significant increase in features, usability or overall value — a lesson many freemium-driven companies are finding out the hard way. Although there are some success stories, such as Spotify’s impressive freemium-to-paid conversion rate, sticking with your pricing strategy in the long term can be as important as the strategy itself when it comes to customer retention.

3. Lead; don’t follow.

Most new companies founded today will enter a market with existing competition. As a leader focused on consumer value, I would challenge you to do your customer research and set your initial pricing based entirely on your unique offering and reason for being. Only then look at the rest of the market and determine how your choice will support or ensure success. When our company launched conference-calling services more than 20 years ago, there was significant competition in the space charging hundreds of dollars per month to deliver services to big corporate clients. Our founder looked at the market from the consumer point of view and found a way to deliver services for free while still generating revenue from carrying calls on our network. Other examples of pricing leadership include Slack, one of the pioneers of charging based on active users, and Creately’s albeit-short-lived “pay whatever you want” experiment.

No single decision can have a more far-reaching effect on company success than pricing. But pricing decisions should always be considered holistically as part of a long-term, value-based model. Pricing strategies that leverage who you are as a company and what you value create a foundation of mutual benefit that helps everyone from your customers and partners to your shareholders and employees.

In: Operations Management

“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Products Division. “But I want to see the numbers before I make any move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.”

Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company’s Office Products Division for this year are given below:

Sales $ 22,440,000
Variable expenses 14,094,600
Contribution margin 8,345,400
Fixed expenses 6,130,000
Net operating income $ 2,215,400
Divisional average operating assets $ 4,480,000

The company had an overall return on investment (ROI) of 18.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,430,600. The cost and revenue characteristics of the new product line per year would be:

Sales $9,705,000
Variable expenses 65% of sales
Fixed expenses $2,591,710

Required:

1. Compute the Office Products Division’s ROI for this year.

2. Compute the Office Products Division’s ROI for the new product line by itself.

3. Compute the Office Products Division’s ROI for next year assuming that it performs the same as this year and adds the new product line.

4. If you were in Dell Havasi’s position, would you accept or reject the new product line?

5. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?

6. Suppose that the company’s minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.

a. Compute the Office Products Division’s residual income for this year.

b. Compute the Office Products Division’s residual income for the new product line by itself.

c. Compute the Office Products Division’s residual income for next year assuming that it performs the same as this year and adds the new product line.

d. Using the residual income approach, if you were in Dell Havasi’s position, would you accept or reject the new product line?

1. ROI FOR THE YEAR		%
2 ROI FOR THE NEW PRODUCT LINE BY ITSELF		%
3 ROI FOR NEXT YEAR		%

4. ACCEPT/REJECT?

5. Adding the new line would increase the company's overall ROI.
Adding the new line would decrease the company's overall ROI.

6.

1	RESIDUAL INCOME FOR THIS YEAR
2	RESIDUAL INCOME FOR THE NEW PRODUCT LINE BY ITSELF
3	RESIDUAL INCOME FOR NEXT YEAR

6D- ACCEPT OR REJECT?

In: Accounting