By: Darrin Duber-Smith
(Continued from Part One)
The fact that they all begin with the letter “C” makes them easier to remember as a framework for pricing strategy, but although easy to remember, "The Five C’s of Pricing" are nonetheless challenging to apply. The point of the model isn’t to choose one or more of the C’s, but rather to first consider all five simultaneously. Indeed, one of the “C’s might eventually be favored over the others as a strategic focus, but all should be considered nonetheless. Whether I am consulting or teaching business students, I like to use a white board with cost on the far left, channel and company in the middle, and competition and consumer at the far right of the board. This way, it is easy to see how each element contributes to the final manufacturer’s suggested retail price point (we all know that retailers can ultimately charge whatever they want). The Five C’s of Pricing are:
-Cost -Channel -Company -Competition -Consumer
(COGS, G/A, SM) (Dist./Retailers) (Profit margin) (current prices) (what will they pay?)
Cost: This category includes all of the elements involved in making a single unit (Cost of Goods Sold) as well as “per unit contributions” from General and Administrative expenses (non-unit producing activities like overhead) and Sales and Marketing. One must first estimate the quantity to be produced so that the proper per unit contributions for each of the three areas can be established. Together, these three elements comprise the per unit cost of whatever it is the marketer is trying to sell. “Cost” is a good place to start in pricing because this is one of a marketer’s major constraints; but the nature of ingredients and packaging, as well as the quantity produced are all variables a marketer might be able to manipulate in order to achieve a desired COGS number.
Channel: In the majority of cases, the manufacturer doesn’t sell directly to the consumer, and so the distributor and retailer each take a major cut of the total retail price for their services. Sometimes this commission can run upwards of 60% of the total retail price, which is why so many branded product marketers are looking for ways to bypass the intermediaries and sell directly to the consumer with lower prices and vastly higher profit margins. Of course this also has the potential to create “channel conflict” and can result in the intermediaries dumping your product in favor of more cooperative brands. This is becoming a very thin line to walk as the channels of distribution for supplements and other natural products continue to expand and the lines between natural and mainstream become increasingly blurred. The bottom line with this particular “C” is that the marketer has just about zero control over what it has to pay its downstream supply chain partners for their services. For those who prefer an “indirect” channel to the consumer, this is just a cost of doing business, and luckily the increased volume that these intermediaries offer can help make up for the shortfall that smaller profit margins create. In other words, if you sell more stuff, your margins don’t have to be terribly high. Wal-Mart provides an instructive example.
Company: Profits are what makes the world of commerce go round, and company objectives always revolve around turning a profit so that earnings can be reinvested in the company or returned to shareholders. As such, any contribution model must consider a per unit profit margin, which is really just the difference between cost and channel considerations and the final retail price point. Unless a marketer is employing “ROI Pricing”, which favors “company” over all of the other C’s, profit might be simply what’s left over.
Competition: Unless you are creating an entirely new product category, which is exceedingly rare in marketing, there are probably already a number of competitors that offer the same category of product and meet the same set of consumer needs. This means that a competitive analysis must be conducted to determine how to price the product in relation to competing products in similar stores. Pricing a product at, slightly above, or slightly below the competition is a strategy often used in a hyper-competitive environment when “competition” must be favored over all of the other C’s.
Consumer: Obviously focus groups, surveys, and simple observation can tell us much about which segments of consumers are likely to pay what prices for what goods, and so no pricing strategy should be initiated until it is somehow validated by marketing research. Marketers don’t necessarily need to conduct their own studies in most cases because, unless you are creating an entirely new category, there is probably already a ton of secondary data out there. You just need to find it. But, if you do have the time to do some primary research, you might learn some interesting things about your brand in addition to pricing considerations. The often-employed “premium” pricing strategy mentioned earlier in this article has largely resulted from research (both formal and anecdotal) that shows that most people will pay somewhat more for a natural product. Indeed, marketers do have a great deal of control over the “suggested” retail price.
(To Be Concluded in Part Three)
You must be a registered user to add a comment. If you've already registered, sign in. Otherwise, register and sign in.