Formulating Global Pricing

Simplistically speaking establishing a price for our goods and/or services is simply a matter of a markup on cost. The result is then viewed in comparison to market pricing and purchase conditions.

Where things become more complex when we start to consider the various ways in which product and/or services get to the outstretched hand of the consumer. It’s at this point is when we must consider,

• Outlets for engaging the sales transaction,

o  Direct Sales

o  Wholesale Distributors

o  Upsellers (Value Added Retailers – VARs)

o  Retailers

• Consumer location influences.

Many companies go a bit afield when thinking in terms of simple consumer model in which,

               Cost + Overhead + Markup = Markup Price

Under this ideal it overlooks variations in local consumer market conditions. What you can sell a service and/or Product for in New York will be out of reach for a broad market in Dhaka. In similar fashion a service and/or product produced in Hanoi will be overwhelmed by consumer interest in Los Angeles (although it may also be viewed with price driven quality skepticism).  The question this presents is how you can establish global pricing equity?  Two of the more common approaches are,

• Suggested Retail Pricing and
• Suggested Retail Pricing/Multi-locational tiers.

What this involves is to conceptualize the top and the bottom of the consumer range deduct the cost and establish a mid-point margin (1/2 of normal markup).  This produces a price that creates a compromise condition for the span of consumer markets. However, this is not always possible when contending with thin margin conditions or competitive pricing that exists.

Although we are firm believers in simplicity there are times when conditions are such that more depth is necessary in order to achieve the purposes being sought. It’s at this point that we need to look at the various outlets that being utilized to reach the consumer. In the wholesale/VAR/Retailer scenario,

               Markup Price – Volume Discount = Volume Wholesaler/Retailer/VAR.

As the provider of services and/or product it is important to be aware of consumer market price tolerance even though it’s the wholesaler/retailer/var that will be setting their markup pricing. The importance of being aware of this is in order to facilitate product/service demand and movement. Therefore their pricing must reflect,

   Vol. Wholesaler/Retailer/VAR – Disc. + Markup < Supplier Markup Price (direct)

As previously stated this price must also market competitive.

Added Issues

In delving deeper into pricing there is the potential that the service and/or product cannot be priced to support overhead, markup and cost recovery. In these cases a company must resign itself to considering that not all markets can be reached by price alone. It’s at this point than whatever pricing has been set remains as such without adaptations. When this occurs the company resorts to utilizing either direct consumer sales or utilizes a wholesale/retail or VAR outlet that can service regional demand.

The question arises as to how ancillary charges are accommodated. The simplest and most effective way is to treat them as separate additions. Things like travel expenses (although these can be capped and are often a separate negotiable element to the sale transaction), shipping, taxes, assembly, levies and packing are added considerations to the sale of the service/product.

When faced with pricing issues it opens up consideration of location. As we observe many companies chose to domicile or contract without resources in locations that provide lower labor costs. These may also place them closer to material supplies and human capital resources that produce the product and/or service. It also provides flexibility in regulating production and often operating under less stringent regulatory mandates. On the downside we must contend with the added complexity involving supply chain and foreign location risks stability. This creates a risk vs. reward situation that cannot be adequately addressed without consideration for pricing.

A more aggressive pricing scheme involves volume production vs projected sales potential. This is a much risker because it anticipates sales projections while driving this based upon produce volume savings. To hedge on this ideal one has to,

• Have some sort of realistic sales prediction indicators that reduce the risk from failed anticipation. Such things as demand indicators, backorders, and forward commitments bring into light the basis for ramping up production/delivery, and
• Production/delivery must have known available slack capacity in production, material/stock volume savings (and availability), and resource capacity. Without these pricing can create adverse anticipatory effects which diminish future consumer interest.

Pricing Tale Applicability

Startups and Small-Medium-Enterprises (SMEs) are most likely to face the pricing challenge. The trap that often occurs is when pricing is based upon,

• Cash urgent demands,

o  Takes needs and derives margin based on anticipated volume. Overlooks capital reinvestment, overhead recovery and growth requirements.

• Simplistic thinking (total enterprise cost/anticipated volume= cost per unit),

o  Thinking simple doesn’t mean oversimplification that overlooks the elements of cost and the basis from which volume estimates are determined. Failure inhibits market expansion and product/service development.

• Pricing that overlooks market rates, and

o  Inherent tendency to look solely on self-price and not market conversation using price as one enabler element. You can do as much damage by overpricing as you can by underpricing when you overlook enablers.

• Driving volume based on anticipation of profit returns.

o  Dreams are great when based upon sound rationalizing. It is seldom that you can go from zero to hero without some form of intermediate plateaus. This occur as a result of external factors that occur that are beyond you ability to control, but not beyond you ability to anticipate and adapt for.

Market Driven Numbers

Using pricing as the fuel for your business, applying pragmatic calculations and adjusting for global conditions creates a enterprise pricing model (EPM). The EPM become a tool when applied in dynamic fashion and not in a static form. The fluidity of cohesive movements between manufacturing inventory, supply chain and consumer becomes an infeed for price adaptive consideration.

The dynamics of IR4.0 (industrial revolution 4.0) Interconnective permits intelligent fluidity to take place. For example in a retail setting (one of our clients from 2017-18),

• Manufacturing (supplier) makes product offer (with wholesale pricing),
• Merchandising makes purchase decision,
• Purchasing (retailer) makes purchase,
• Retail management calculates pricing (or system generated from purchase),
• Retail outlet receives product, cost recognized in inventory, pricing pre-established for floor,
• Sales transaction made (sales recorded, inventories reduced, profit recognized),
• Inventory levels trigger out-of-range holding flag,
• AI invoke markdown to pricing control (acquired during sale scan),
• Analytics on sales profits earned and holding costs occurs,
• Analytics provides product performance information back to supplier, and
• AI triggers alert to merchandising on product performance.

In this simplified holistic example we see the dynamics of pricing and its influence created by subsequent events. We also start to understand how our roles interact and create invaluable insight about pricing/sales production. This leads us to making intelligent and clear decisions as to whether relationships should continue, are healthy and whether we are fulfilling market needs/demands.

Decision Points:

• Is our pricing model appropriate, sound, reliable, adaptable and equitably considerate?
• Have we adequately consider price variations across served markets?
• Is our understanding of the event dynamics of manufacture/supplier to purchaser/consumer provide sufficient insight as to the influence it has on pricing?
• Has our pricing attention been to heavily influenced by jeopardizing factors (eg. cash demands, return on investment goals and 3rd party investment pressures)?
• Are trigger points established that will raise attention for pricing adjustments?

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Clarity Group Global is an intellectual decision validation institution dedicated to the support of leaders, companies and organizations that face challenging choices. Making right decisions that produce significant value equates to less disruption and chaos, "non-tradition made exceptional".

Examples and illustrations are used for purposes of contextually clarity. These fervently adhere to our unwavering commitment to client confidentiality and should be construed as a ploy to self-promote.