Marketing: Pricing: How Low Can You Go?
Come on down, the price is right. But there is more to marketing a successful product than setting a low price. Annie Gurton reports
For professional marketers, price is a weapon. It can be as effective as a sniper?s rifle if it is used properly, but all too often it is used like a blunderbuss.
Price is one of the cornerstones of marketing, along with product, promotion and place. Collectively they are known as the Four Ps, and constitute what is known as the marketing mix. Get that mix right, so the theory goes, and you will deliver your product or service to the customer with the optimum balance of cost and availability. Get it wrong and your product is history.
For resellers and dealers that just sell product without services, price is a fairly straightforward figure, often decided by suppliers. But for anyone adding value and engaging in long-term relationships with customers, price is a delicate combination of recommended hardware and software prices, fixed costs and value-added services. Service pricing is more complex than product pricing, but still subject to the vagaries of the market and other forces.
Pricing strategies are usually developed using a combination of four main considerations: what it costs to produce the product or service; the amount that customers are prepared to pay for it; the price that competitors are charging; and the pricing constraints that may be imposed by outside agencies.
In IT marketing there is also a unique consideration which is also a potential sales tool: the price of ownership or the long-term cost. This can have a considerable bearing on the initial or list price of both product and service. Several vendors, such as Tandem, Compaq, Kyocera and IBM?s AS/400 division, make a big deal out of cost of ownership, and it is something which resellers and dealers are increasingly latching on to as an argument for higher-than-average initial prices.
For resellers and integrators, every quotation is likely to be different. For this reason a simple cost-plus pricing model is most often used, because it can be reckoned by junior sales staff using standard cost units for the elements required to complete the job at a predetermined profit margin.
When a contract is being drawn up for a combination of product plus service or service only, it may stipulate that the final price will be based partly on costs, which may vary. Thus the customer may agree to an amount per hour for consultancy or technical support, plus the cost of any products which are supplied. The standard rule-of-thumb ratio is that a person who costs the reseller #200 a day should be charged out at #500 a day to make them pay for themselves.
But Rob Wirszycz, director general of the Computer Software & Services Association (CSSA), says cost-plus pricing is not the best for value-added services. ?Cost-plus is crude and does not give the optimum price, which has to be the best value for customer and the best margin for the supplier.?
He says that the resellers? objective must be to define the value which is being delivered and look at it in the context of the market, to arrive at the best price for all parties.
?It is easily possible to give a too-good service for too little money,? he says, ?which results in the reseller business not making enough margin. Then they try to cut back on the service to try to improve their margins. Obviously, that is not a good path to follow.?
Many channel analysts agree that cost and value are very closely linked, but Wirszycz adds that while customers are extremely cost sensitive, it is perceived value for money which is the key. In other words, it is how services are presented and whether they are professionally followed up which can be as important as the actual cost.
?In setting prices, resellers need to look at their overall package and the appeal of their organisation as well as the competition,? he says. ?Customers are not going to continue to pay for an added-value service which they feel is not actually giving them any extra value. Especially when there are still some resellers offering a lot of added value services for nothing, as part of a sales bundle.?
Julia Jones of specialist IT training company Faculty says that IT budgets are tight and are closely monitored by the boards. ?IT managers have to explain every penny,? she says. ?But if there is a good argument based on quality and return on investment, they can usually get the spend approved.?
Ursula Connolly, channels marketing manager for Xyratex agrees. ?As the demand for large-volume storage has increased, so has the incremental costs to business. The traditional patterns of servers and applications is simply too expensive for many companies to contemplate on a large scale.?
Add to those fixed costs the price of services, and it is not surprising that cost is a sensitive issue and the setting of prices a crucial time for resellers.
Wirszycz says the CSSA cannot help resellers to set their prices. ?It would contravene legislation and we?d be in trouble with the Office of Fair Trading.? But many of the product vendors and suppliers that provide marketing assistance to their channel will also go through the variables and permutations, and consider the market, to help their third parties arrive at the best possible figures for value-added services.
Peter Blampied, communications marketing manager at Compaq Computers, says: ?We have a programme for resellers called Competitive Edge through which they can get help to build the best marketing strategy, and that includes advice on setting prices if they want it.?
He says the work which vendors do in creating branding can also help resellers set the optimum prices which will achieve the best level of customer demand that the reseller is geared up to satisfy.
Sun Microsystems is another vendor which has consultants ready to guide resellers with services pricing. Ian Cochrane, Sun channel programmes manager, says: ?Although we set a basic trade price for all our products and let the resellers charge whatever they want, or give the services away free if they want, we are there to offer advice if it is needed.?
But Cochrane points out that resellers are very protective of their customers and are often reluctant to have the vendors get too close to their sales and marketing strategies. ?It?s true that each market has its own forces and pressures, and the resellers are the ones who know them best.?
Sun?s strategy is echoed by Debbie Walsh, channels programme manager at Microsoft, who says that Microsoft will point out new opportunities to resellers but leave it to them to set the prices they should charge. ?For example, the internet is offering new authoring opportunities which we are suggesting that resellers take advantage of. But we will not make any suggestions about pricing, except perhaps on an ad hoc basis,? she says.
Blampied agrees with Wirszycz that prices that are too low can create a level of demand that is too high to satisfy. ?It is a mistake to be drawn into a pricing war with other resellers who are basing their prices on low-cost PCs,? he says. ?It is short-termism which does no good to reseller or customer in the long run.?
Blampied says it is important to keep prices clear, with a good value proposition to go alongside them. ?Price is part of a package which includes quality, expertise, long-term cost and reliability of product and advice. That has to be weighed against the competition but not necessarily dropped to the point where it is impossible to sustain.?
Cochrane points out that the mid-systems and server market is less price sensitive and so more prepared to pay for consultancy and services than the low-end and desktop markets. ?The academic market is the most price sensitive of all,? he says.
Blampied points out that price is a function of market demand and product supply, the classic marketing theory on price. But he qualifies this theory with practical advice for resellers to segment their market in order to set pricing. He agrees with Cochrane that various parts of the market and various verticals are more price sensitive than others, and suggests that resellers should use price discrimination techniques.
?Resellers should segment between different groups of users, different ways that the service is delivered to the user and the different types of user,? he says.
?Thus a service which is delivered as a routine part of a sale to an existing customer in a vertical which is not particularly competitive, will bear higher prices than one to a customer just looking for some added value to the purchase of a PC.?
He adds that obviously customers are willing to pay higher prices when demand is strong, so, for example, the cost of Cobol programs leading up to the year 2000 will command increasingly high rates.
Steve Meleka, marketing manager at reseller Simply Computers, sees cost as an important tool in the company?s strategy to be competitive, but its business is based mainly on mail order and showroom sales of own-brand PCs.
Meleka says: ?Setting prices too low does not do you any good, in fact it can be harder to sell things sometimes if the end-user price is too low.? He explains this is partly because vendors dislike their products being sold too cheaply and will cut off product supplies to a reseller that undercuts the rest of the market, but also because of perception. ?It?s the old chestnut that customers don?t respect or value something which is priced too cheaply.?
Unlike many integrators, Simply Computers bundles the cost of service, maintenance and support with the hardware, which means that the initial price has to be high enough to fund adequate technical support, but still compete with big brand names.
Even the big brand names are very conscious about price, aware that price-cutting is currently rife as product upgrades continue to make stockrooms obsolete. Blampied recognises that vendors have a critical responsibility towards the channel to help keep prices high enough to give reasonable margins yet low enough to be competitive. He sees the cost of ownership debate as a crucial sales argument. He says: ?Vendors like Compaq which create strong branding for the hardware are able to get people inside the reseller?s door, and part of brand creation is setting the right price.?
But Blampied points out that the price of the tin is only a part of the final bill to the customer, and often only 20 per cent of the final price of the tin over its lifetime. ?Resellers should point out to customers that the cost of IT ownership is far more than the initial price of the hardware,? he says. ?This allows them to validate the charges for their added value services.?
Compaq has been running several ?special price? promotions, which it is careful to pitch as offering best specification for the price, in the context of the cost of ownership issue. Blampied says: ?We are now running a ?more for less campaign?, which is intended to indicate to customers that they can get good prices and services through resellers.?
Blampied says it is fairly easy to resist the temptation to engage in silly price wars. ?For one thing, if prices are set too low then manufacturers like us can have trouble filling the orders and integrators and service-providing third parties can have trouble delivering their promise on quality services.?