Saturday, August 30, 2008

Profit Impact Marketing Strategies

Profit Impact marketing strategies (Pro-IMS) - I will summarize the most important factors that I have gone in to developing profit-impact marketing strategies that you can use it to develop your own system of monitoring profitability of marketing strategies implemented.


  1. Concept of ROI (Return on Investment) or ROE (Return on Equity) is very important – it is a measure how much have you invested in your business and the profit that you are earning from it. For example if your investment is $10,000 and your ROE is 10% it means that your profit for that year is $1,000. What should the ROE be for your business? - check publicly available statistics or trade associations and always try to achieve the highest possible ROE - this will motivate you to aim high.

  2. In this model (it's called Pro-IMS) I have used marketing channel as the basis of determining market strategy profitability but you can replace this with whatever suits your particular industry.

  3. The potential market is the total demand that there is for your product or service - identify the size of the market through market research. If you are catering to a smaller segment of the market (also known as a niche player) you should be careful that you do not overestimate the size of the market, since this adversely affects your ability to convert sales leads. The poor sales conversion is due to lack of focus on your niche customer requirement or not catering to a particular niche requirement..

  4. Once potential market has been recognized ensure that all sales leads are being logged as this provides invaluable information on customer wants. Also ensure that leads are being generate cost effectively.

  5. Sales leads conversion ratio (how many real sales are made from sales leads) needs to be checked continuously and reason for any decline in lead conversion needs to be explained early.

  6. All attempts should be made to increase average sale value per customer for this item alone a separate market and sales tactic needs to be formulated.

  7. There is a technical point that the Pro-IMS hinges on is the sales mix among channels/ strategies is based on contribution cost ratio of each. A larger portion of sales effort is directed at the channel/ strategy with a better contribution cost ratio.

  8. The chief advantage of the Pro-IMS model is that you are able to achieve target ROE at a lower than target sales level - which is a lower risk strategy.

It is crucial that the following ratios be assessed monthly/ weekly:


Sales leads/ Potential market - if the leads are low then advertising/marketing campaigns need to be reassessed or the potential market needs to be re-evaluated (especially if it is a niche market)
Marketing & Selling cost/ Sales leads - is your marketing campaign cost effective?
Marketing & Selling cost/ Sales - this could also be used as a means of measuring the selling effort.
Sales/ Sales Lead - If this ratio is low then selling techniques need to be reviewed carefully. It might also be a problem with the selling proposition - does it meet the requirement of the (niche) market.
Actual Average Sale/ Required Average Sale



The Pro-IMS system has been graphically illustrated in the diagram below:





Some things to keep in mind in implementing your marketing strategies:



  1. Be Careful of the high cost of inventory - in attempting to increase sales, inventory levels invariably increase, this reduces your profitability.

  2. High interest cost of debtors - level of debtors will increase if more sales are made on credit - think 'outside the box' on ways of making more cash sales.

  3. High cost of funds - cost of borrowing increases as more funds are required.

  4. Product mix - selling more of a low profit product will bring down overall profits - so check product profitability

  5. Customer mix - service only 'profitable' customers - look at our CRM articles for more pointer on this..

  6. High salary cost of employees - maybe outsourcing or automation is an option.

It should be noted that most companies that try to increase there sales also increase their overheads resulting in lower profits.



Profit impact marketing template is a measure to ensure that sales are increased without affecting overheads/ costs.



The Excel workbook that can be used as a guide for Pro-IMS and the steps that can be used is given below:



  1. Calculate the current ROE of the business.

  2. Set a target ROE to be achieved.

  3. Identify the new profit that should be achieved to get to the target ROE. What should be your target ROE? The best target ROE will be the highest for your industry (you might have to do some research) and benchmark against the best!.

  4. From the profit figure calculated in (3) above work out the sales that should be achieved.

  5. Now that you know the new sales figure that should be achieved (for target ROE) devise marketing campaign to hit new sales target

  6. To control costs of marketing campaigns use the ‘Profit Impact Marketing Template’.

  7. Use instructions given in the profit-impact.doc file to fill out the Pro-IMS Excel file

The home selling process

Selling your home and moving on is one of those life-changing events. Having a Real Estate Agent that knows the local market and can incorporate your individual needs into a custom marketing plan can make all the difference. We strive to provide the best marketing tools to bring your home maximum exposure, and the best services to keep you moving in the right direction.


Choosing A Realtor®

The home selling process begins by selecting a Real Estate Professional to market your home and work with you throughout the entire process right up to moving day. In looking for a Real Estate Professional we suggest considering the following:
Availability - How available is the agent if you need to contact them? Will they provide you with marketing updates and how frequently?
Market Knowledge - Does the agent have local area knowledge? Where will the buyers come from for your particular home? Do you require an agent with specific property experience, such as Historical homes? Is the agent a member of the National Association of Realtors®?
Exposure - Where will your home be advertised? What Internet sites will it appear on? Will it be enhanced on these sites to include additional photos, guided tours and full property descriptions?
Tools - Does the agent (or company) offer you tools or reports to view activity and feedback on your showings? Can you tell how many times your home has been viewed in detail on their web site?
One Stop Shopping - Can you get all the services you need in one place; Mortgage Services, Title Services, and Relocation Assistance?


The Home Selling Process


Marketing Your Home


Anyone can list your home, we want to sell it! Our Internet advertising and marketing strategies are second to none. Understanding where buyers come from is what allows us to focus our marketing strategies more effectively.As you can see by this chart a large number of buyers find their home on the Internet. According to the National Association of Realtors®, 72% of all potential buyers start their search on the Internet. Here at Prudential Verani Realty we are constantly improving our Internet presence and features to bring more buyers to your home.



Role of Enterprise Strategy

Successful companies are those that focus their efforts strategically. Strategy should be a stretch exercise, not a fit exercise.

To meet and exceed customer satisfaction, the business team needs to follow an overall organizational strategy. A successful strategy adds value for the targeted customers over the long run by consistently meeting their needs better than the competition does.



Strategy is the way in which a company orients itself towards the market in which it operates and towards the other companies in the marketplace against which it competes. It is a plan an organization formulates to gain a sustainable advantage over the competition. The central strategic issue: why different companies, facing the same environment, perform differently.
Strategy answers the following questions:
what are the sources of the company's sustainable competitive advantage?
how a company will position itself against competition in the market over the long run to secure a sustainable competitive advantage?
what are the key strategic priorities?


Strategy is an agreed-on guide to action that should lead business to success in the marketplace by satisfying customer needs better than the competition does. Strategy formulation is the major task for the company entrepreneur and CEO, but it is the task of middle managers and project managers to carry this strategy out and turn it into results.


Strategic Leadership
As a strategic leader your prime responsibility is to ensure that your organization is going in the right direction. To be able to identify the right strategy and pursue it to the desired result, you need to master two important functions: strategic thinking and strategic planning.


Ten Major Schools of Strategic Management
Ten deeply embedded, though quite narrow, concepts typically dominate current thinking on strategy. These range from the early Design and Planning schools to the more recent Learning, Cultural and Environmental Schools8... More


New Approaches to Strategy Formulation
The currently dominant view of strategy is the resource-based theory. Traditional strategy models, such as Michael Porter's five forces model, focus on the company's external competitive environment. Most of them do not attempt to look inside the company. In contrast, the resource-based perspective highlights the need for a fit between the external market context in which a company operates and its internal capabilities. According to this view, a company's competitive advantage derives from its ability to assemble and exploit an appropriate combination of resources. Sustainable competitive advantage is achieved by continuously developing existing and creating new resources and capabilities in response to rapidly changing market conditions.
In relation to the 10 traditional approaches, today, strategy formulation should also be a combination of them - judgmental designing, intuitive visioning, and emergent learning; it should be about transformation as well as perpetuation; it has to involve individual cognition and social interaction, co-operative as well as conflictive; it must include analyzing before and programming after as well as negotiating during; and all of this must be in response to what can be a demanding environment.8


Blue Ocean Strategy: 6 Principles
Blue ocean strategy is about revolutionary value innovation.
The six principles drive the successful formulation and execution of Blue Ocean Strategy. These principles attenuate the six risks... More



Empowered Employees (Metal):
People are sharply aligned with corporate vision and strategies... More


Build Your Sustainable Competitive Advantage
Sustainable competitive advantage is the prolonged benefit of implementing some unique value-creating strategy based on unique combination of internal organizational resources and capabilities that cannot be replicated by competitors... More


SWOT Analysis: Questions To Answer
What is your strongest business asset?
What unique resources do you have?
What do you offer that makes you stand out from the rest?... More


New Goals for Strategic Planning
In a business environment of rapid changes, heightened risk and uncertainty, developing effective strategies is critical. They prepare executives to face the strategic uncertainties ahead and serve as the focal point for creative thinking about a company's vision and direction.
Many companies get little value from their annual strategic-planning process however. To meet the new challenges, this process should be redesigned to support real-time strategy making and to encourage 'creative accidents'1


Your Strategic Intent
Strategic intent is a high-level statement of the means by which your organization will achieve its vision. It is a core component of your dynamic strategy. Strategic intent cannot be planned all in advance. It must evolve on the basis of experience during its implementation... More


3 Market Leadership Strategies
The market leader is dominant in its industry and has substantial market share. If you want to lead the market, you must be the industry leader in developing new business models and new products or services. You must be on the cutting edge of new technologies and innovative business processes. Your customer value proposition must offer a superior solution to a customers' problem, and your product must be well differentiated... More

Case in Point 7-Part Competitive Strategy of Microsoft
Although Bill Gates, Founder of Microsoft, built his empire on technological products, his business mastery is even more important than his technical skills, and his competitive urge is a huge driving force.
The early success of Microsoft was founded on the company's 7-part competitive strategy... More


Your Innovation Strategy
The innovation portfolio provides visibility that allows your firm pace the introduction of new products and services.


You should balance the introduction of revolutionary products with incremental improvements in others so as to maintain a steady flow. By having a comprehensive view of your initiatives over time, you can avoid either overwhelming or underwhelming the marketplace.

3 Primary Criteria to Assess Your Innovation Portfolio
Besides assessing each initiative individually for risk, investment, return, and timing, assess your total portfolio to ensure that you have the right initiatives in it:
Stretch and strategic fit. How much does your portfolio push the industry frontiers, and how well does it fit with your business goals and strategy? ... More

Case in Point Silicon Valley Companies:
Deciding If Your Innovation Portfolio Has Enough Stretch
Adapted from Relentless Growth, Christopher Meyer
Balance between revolutionary and evolutionary initiatives. First, Silicon Valley companies assess the overall balance between revolutionary and evolutionary projects. The ultimate arbitrator of portfolio stretch if the innovation leaders’ judgment, experience, intuition, and luck... More

The Owl and the Field Mouse
A little field-mouse was lost in a dense wood, unable to find his way out. He came upon a wise old owl sitting in a tree. "Please help me, wise old owl, how can I get out of this wood?" said the field-mouse.
"Easy," said the owl, "Grow wings and fly out, as I do."
"But how can I grow wings?" asked the mouse.
The owl looked at him haughtily, sniffed disdainfully, and said, "Don't bother me with the details, I only advise on strategy."

Friday, August 29, 2008

Crochet Along Christmas Theme

This week's interview is with Cathy Callahan, the multitalented crafter behind Cathy of California. Her colorful and kitschy creations are inspired by the projects she made as a little girl, yet they have a fun and fresh look that makes them totally modern. Cathy's crafts include fun home items like wastebaskets, tissue box covers, and pincushions made from retro supplies like felt, burlap, ribbon straw and rickrack--as well as the occasional bit of papier-mâché jewelry. Her booth has become a real standout on the craft show circuit, and legions of readers flock to her blog, where she shares photos and projects culled from her huge collection of vintage craft and design books, magazines, and ephemera. Read on to find out what doing it yourself really entails.



JENNY: Do you run your indie business full time, or do you have a "day job" to help keep you afloat?
BONUS: If the latter is the case, how do you balance your time/make time for crafting?
CATHY: I am a freelance window dresser and merchandiser so I am totally in charge of my schedule. My whole crafty thing really grew out of that because alot of the props I was making had a crafty element to them. And then my blog is a spin off from all of that. So for me it's kind of all one big thing. There is no way I could have a conventional full-time job and a crafty business at the same time.

JENNY: How did you make the transition to working for yourself? How do you structure your days when you're the boss?
CATHY: In my case the decision for my transition was made for me--which looking back was not such a bad thing. My last full-time gig was at a dotcom. After I was laid off, I vowed never again to devote myself totally to any one thing. I think it's been really good for me to have several things going on. If one part of my business slows down, I have the other part to make up for it and vice versa. As far as structure goes, I am by nature the type of person who just has to keep really busy at all times. So my advice here is, if you want to start your own business take a good look at yourself to make sure you can naturally keep up the pace on your own and will able to handle the downtimes--and by that i mean financially, spiritually and creatively.

JENNY: How important has the internet been in relation to the growth of your business? Also, would you say the bulk of your business comes from your own website, or from wholesale accounts and/or craft show sales?
CATHY: When I first left school in the '80s I had my own jewelry business (totally new wave stuff I sold to shops on Melrose!). Comparing that experience to how I am able to promote myself now it's total night and day. I actually started my current crafty business about 6 months before I had a website. Things just exploded the second I launched my site. In terms of sales, the bulk of that is from the craft fairs. So I think the internet is really a promotion tool for me at this time. I have only been doing the crafty side of my business for little more than a year so I think I'm still gaining momentum.


JENNY: Is there anything you wish you'd done differently when starting your business, knowing what you know now? BONUS: Any resources for upstart craft businesses that you'd care to recommend?
CATHY: You're going to make some mistakes, you just have to be able to be open enough to learn from them. Actually I've had some "happy accidents" that have steered me away from where I thought I was headed, but ended up in not such a bad place. So have some goals in mind but be open to some shifts and changes.
As far as resources (web design, business cards, logo, etc.) go I would recommend that you network with your friends and colleagues. Chances are if you're a crafter, you hang out with other creative types who would just love to help you out.
And with any business there's the whole government/legal side of things. Make sure you do everything by the book. Research what is needed in your local area and do not try to skate around anything--they can and will go after you. Get your resale certificate, collect and pay sales tax, get whatever business license your city/state requires, etc. In the state of California actually having a resale certificate is really good for crafters--you can buy alot of your supplies wholesale. Your supplies cost you less so you'll make more in your mark up (just make sure you collect the sales tax!). Keep good organized records and save all of your receipts.


JENNY: How would you compare the challenges of working for yourself with working for "The Man"?
CATHY: I worked for many years in "corporate" situations and was generally very unhappy. I think I'm just not the type of person suited to have a "regular job". So even the worst day for me now in no way compares to what I went through in the past

JENNY: Any tips on how to keep your business fresh and thriving/growing?
CATHY: Keep an eye on what else is going on out there--blogs make that part so super easy. You have to keep fresh ideas constantly flowing in your mind so you can come up new products. If you get good response to something that's really great, but know that the public can be fickle and they are going to want to see something else new from you the next time. And don't take it personally if something doesn't go over very well--learn to cut your losses and go on to the next thing.


JENNY: Anything other random tips or info you'd like to add on the topic?
CATHY: Make sure you're having fun. Making things with your hands is such a joy. Make sure you realize you're getting into the business of selling your wares and that you will now be having to balance all of the responsibilities that go along with that with actually having to design, produce and sell your crafts. Look at the real practical side of things. Let's say it takes you an hour to make that super cute necklace that you've been charging $20 for to cover your materials and time. Well, what if you get a wholesale order for 50 of them? Your wholesale price will be $10 each and you now have to crank out 50 of them. The fun you had making a few of them will become a huge chore and you're really not going to make any money.

Thursday, August 28, 2008

Promoting Your Business



Don Hofstrand, Co-Director, Ag Marketing Resource Center, 641-423-0844, dhof@iastate.edu
Promotion of a value-added business and/or its products and services is important, especially for businesses selling directly to consumers. Promotion includes all activities designed to inform, persuade and influence people when they are making the decision to buy.


Types of Promotion
There are a variety of ways of promoting your business or product. Promotion is usually made up of advertising, publicity and sales promotion. Sometime personal selling is also included.


1) Advertising – Advertising includes all nonpersonal paid communications transmitted through mass media. It is controlled communication about a product. Through symbols and language, it tells what a product or service can do for the consumer. A well developed overall advertising program can tell consumers what a product or service can do for them compared to similar products on the market. If consumers are convinced, they will buy the products.


2) Publicity – Publicity provides free communications for a company through news stories in newsletters, newspapers, magazines, radio and television. It can be attained by sending a media release to radio, television, newspaper and magazine offices. A media release is a two page letter identifying a newsworthy event and outlining the who, what, when, where and why of the story. A media release is appropriate to announce the start-up of a new business, introduction of a new product, or any other success story related to the company. The media will publish or announce the story as a news item and, consequently, there is no expense for the processor. Publicity is one of the most effective and least costly means of promotion.


3) Sales promotion – Sales promotion includes all forms of communication not found in advertising, publicity and personal selling. It includes direct mail, coupons, volume discounts, sampling, rebates, demonstrations, exhibits, sweepstakes, trade allowances, samples and point-of-purchase displays.


Promotion Objectives
What do you want to accomplish with promotion? Your promotion objectives need to be clearly stated and measurable. They must be compatible with the mission and objectives of the company, as well as the competitive and marketing strategies of the business. Objectives vary for different products and different situations. For example, you must promote differently to brokers than to wholesalers. When promoting to a broker, you must promote what you want the broker to present to the wholesaler. When promoting to a wholesaler, you simply want the wholesaler to purchase the product.
There are five general promotional objectives to choose from. The five types of objectives for promotional activities are:

  • to provide information
  • to increase demand
  • to differentiate the product
  • to accentuate the value of the product
  • to stabilize sales


Promotional Strategy
A promotional strategy or plan will help you select the tools and processes needed to reach your promotional objectives. Once you have reviewed all the possible promotional tools, you must devise a promotional strategy. A promotional strategy should address the following issues:

  • What is the objective of the promotion? It is possible to have more than one objective, but it is recommended that a company target its audience or run the risk of losing focus.
  • What do you want to say and who will say it. • What types of promotion should be used?
  • What effect should the promotion have on the customer?
  • What are the criteria for measuring success?
  • Which promotion is working?
  • Which promotion is not working?
  • What are the costs of the promotion compared to the benefits?

Setting Promotional Expenditures
Establishing the amount to spend on promotional is difficult. Below are some factors to consider in setting the size of your promotion budget.
Market share - A company that has a higher market share generally has to spend more on advertising to maintain its share.
Sales from new products - If a company has a high percentage of its sales from new products, it has to spend more on advertising compared to companies with established products.
Market growth - Companies competing in fast-growing markets should spend comparatively more on advertising.
Plant capacity - If a company has a lot of unused plant capacity, it should spend more on advertising to stimulate sales of product.
Product price - Both very high-priced (or premium) products and very low-priced (or discount) products require higher ad expenditures because, in both cases, price is an important factor in the buying decision. The buyer has to be convinced (through advertising) that the product is a good value.
Product quality - Higher quality products require greater advertising effort because of the need to convince the consumer that the product is unique.
Breadth of product line - Companies with a broad line of products have to spend more on advertising compared to companies with specialized lines.

Selecting Media Outlets
Once you have determined the amount to spend on promotion you must allocate the money among various media and promotional outlets. But don’t just select outlets based on low cost. Before looking at the dollar costs of different promotional media.
It should be decided:

  • Which media are most likely to reach the target audience.
  • Which media suit the product image.
  • If any product-specific features make one medium more appropriate than another (i.e., is a visual demonstration necessary?).
  • What is the promotional budget.


Common errors to avoid are:

  • Trying to focus efforts on too broad a market.
  • Allowing the quality of a promotional piece to lapse in order to afford more distribution, or lack of planning and coordination.
  • No measurement of effectiveness.
  • Relying on one source of media.


Inexpensive Promotion Suggestions
If your promotion budget is small, below are some inexpensive, appropriate and effective methods of promotion for the new food processor include:

  • Personal selling
  • Product demonstrations
  • Direct mail
  • Business cards
  • Yellow Page listing
  • Seminars
  • Newsletters
  • Contests
  • Flyers
  • Statement stuffers
  • Window banners
  • Greeting cards
  • Sports team sponsor
  • Home parties
  • Ethnic services - languages spoken


Of course, one of the best free methods of promotion is good “word of mouth.”

Wednesday, August 27, 2008

The Pragmatic Marketer: Volume 3 Issue 5

In this issue:
Where Does Product Management Belong in the Organization?
Product Management’s placement in an organization is an indicator of the CEO's understanding of its potential. In an ideal world where Product Management has a seat at the table with the executives, it is positioned to play a critical role in a company's overall success in the marketplace.

A Better Reference Process Means Better Launches
In a company where public relations is often an afterthought, proper planning and sufficient lead time can result in publicity that will wow even the toughest executives—and launch your product into the spotlight.

Effective Sales Presentations: Advancing the Sales Cycle
Sales presentations should be more than just bulleted lists and fancy tables. They should be templates that can be tailored to suit the myriad audiences that the sales team may encounter on its way to closing a deal.

Pricing for Software Product Managers
Pricing has far-reaching effects beyond the cost of the product. Here is the ultimate guide to understanding pricing and how critical it is to product managers.

Download complete magazine (,pdf)

Pricing for Software Product Manager

Pricing has far reaching effects beyond the cost of the product. Pricing is just as much a positioning statement as a definition of the cost to buy. By Daniel Shefer
Daniel Shefer
Director, Business Development
SanDisk

Pricing has far reaching effects beyond the cost of the product. Pricing is just as much a positioning statement as a definition of the cost to buy. Price defines the entry threshold: who your buyers are and their sensitivities, which competitors you will encounter, who you will be negotiating with and what the customers’ expectations will be. Good pricing will remove the price issue from being an obstacle to a sale. Pricing is also used as a weapon to fight the competition as well as gray markets. Pricing is unique from other marketing decisions for several reasons:
Price is the only marketing element that produces revenue. All other marketing decisions produce costs.
Pricing is the most flexible marketing decision.
Pricing reflects a product's strengths and weaknesses. It implies value as well as positioning.
Pricing has the most immediate impact on the bottom line. In the high tech industry, a 1% increase in prices can lead to a 10% (or more) increase in profit. This is twice the effect that the same change in volume, fixed or variable costs have on profits.

Pricing Software Products
When it Comes to Pricing Software, Economics 101 is not Applicable
When pricing software, the “Economics 101” taught in college is irrelevant. There are many reasons for this:
Supply and Demand curves are based on the assumption that the marginal cost for manufacturing additional products is non zero and that it decreases with quantity. In the software industry, the marginal cost for an additional copy of software is zero.
Estimating price elasticity for a specific product is practically impossible. Hence, pricing decisions cannot be based on supply and demand curves.
Estimating the potential market for a product is possible but estimating demand is problematic. Most customers tend to be enthusiastic when seeing a new product but their input is not a good indicator for real demand.
For enterprise software, sales numbers are too small for a statistical significant study. By the time a company has sold enough licenses, it has advanced on to a newer version or the market has changed or both.
For most products, there are competing products and their influence on the demand curve is hard to estimate.
Product life cycles are short, making comparisons more difficult.
Purchasing decisions are complex and are influenced my many, constantly changing factors.
When setting the price for a software product, classical economic theory comes up short. Here is an empirical, iterative method to arrive at a price.

Guidelines for Setting the Price of Software in Existing Markets
The purpose of these guidelines is to arrive at the "right" price. This is the price that lets the company accomplish its goals for revenue, profit, market share, renewals, etc. The method detailed below will help you identify the highest price a market with existing competitor presence will bear:
The price of the software must be less than the ROI it provides. The smaller the ratio of the ROI to the cost of the software, the easier the sale.
Create a market segmentation chart based on feature sets. Identify all competing products and place them on this chart. Identify and group the value elements in the product that address the needs of each of segment. For each segment, identify the features that customers are willing to pay extra for and that differentiate your product from the competitor’s. Attach a price tag to the value of each attribute that is not identical such as: 1) The feature and functional differences. 2) The difference in brand value that customers attribute to the products. 3) The difference of cost for implementing the respective products. 4) Any other item that customers attach value to such as localization of the application, geographic proximity (for services) etc.
If the product excels in a certain aspect, then simply add that value to the price, if it lags, simply subtract the value. This step must be iterated for each competing product. The price of the software must be similar or less than that of the main competing product in each segment minus the difference in price that are justified by the functional and other aspects previously identified.
The price must be below the purchasing authority of the targeted decision maker signing off on the purchase.
The price should be outside the “Dead Zone” of $5000--$20,000. [For details on the “Dead Zone,” below.]
The price must fit how the market perceives the product category. For example, desktop utilities – up to $50, productivity tools, up to $500 etc. If the product is priced too high, the price will become an issue. If it is priced too low, customers will perceive it as not worthy.

Guidelines for Setting the Price of Software in New Markets
If there are no reference products, the approach is slightly different. The first step in setting a price is identifying how customers will position it in their mind. If the product is perceived by customers as a utility or productivity tool, price in these ranges. That is, until the product can be positioned (in the buyers’ minds!) as belonging to a higher place in the food chain. See below for examples of products and typical price ranges.
If the product does not fall into the previous category, start by defining the price ceiling. This is the highest price based on a product’s benefits. A high price will work if early adopters are willing to pay a premium for a new product. However this price level may prove to be unrealistic as there may not be a sufficient number of buyers for a new product at that price level.
Then, choose a “penetration” price. Penetration pricing is used when a product is first launched in order to gain market share. A low penetration price is used to discourage competitors from entering the market and to gain market share. Its drawbacks are lower margins, difficulty in raising prices in the future because pricing expectations are now set and the risk of customers perceiving the low price as a low quality indicator. The penetration price has to be sustainable and higher than the company’s variable costs. If possible, the price should be low enough to remove the price of the product from the buying decision.
These two markers set the price range for a new product. Follow the relevant guidelines in the previous section to finalize the price point.

Comments on Setting Prices
Before making pricing decisions, you must thoroughly understand your target market’s decision-making and buying processes.
Properly priced software will not guarantee the company’s profitability.
The price has to take into consideration what the customers feel is reasonable. For example, market leaders are expected to charge more hence their higher prices can be perceived as “legitimate” (up to a certain level).
When deciding on which product competes with your own, the market’s perspective is what counts.
Internal company parameters such as distribution costs come into play only when looking at the potential profitability of the product. I.e. can the company make money selling the product at a given price point?
The price of the software must be higher than the cost of selling it and the margins must be higher than the cost of creating, marketing, selling and supporting it. Or else the product will lose money.
Using the pricing model as a differentiator is always worth considering as long as the model is easy to explain and it makes sense to the customer.
The costs of training, implementing and supporting the product are perceived as additional costs by the customer.
When new to a market, being a small, unknown company minimizes brand value. Lower, “penetration” pricing may be required.
If customer segments value the product significantly differently, this may justify segmenting the product for each of these markets.
When attempting to price commodity products, it is basically the competition that sets the price of the product. Setting a higher price in a commodity market is limited to the company’s ability to differentiate the product from its competition. On the flip side, offering a lower price in such a market is sustainable only if the company has a lower cost structure.
When setting the price within a range of competing products, it is important to understand how reference prices affect your customer’s price evaluation. This is imperative when customers have limited product or price knowledge.
Just like other aspects of the product, pricing needs to follow the technology adoption lifecycle of the product. Early market buyers may be interested in your product but tend not to be willing to pay its full price. It may make sense to price the product at its target price for larger markets and offer early adaptors the product at a discount.

The Software Price Dead Zone
The Pricing Dead Zone is a price range between $5,000 and $20,000. Some would even say that the range extends up to the $40,000--$50,000 range. Software products in the “Dead Zone” are the exception. This is because software priced in this range is hard to sell profitably. Products that cost less than ~$5,000 can be sold over the web or through channels. A purchase of this size is within the decision authority of middle managers and there is no need for on site visits to close a sale. More expensive products require higher level signing authority or purchasing committees. A committee’s decision can cause the sales cycle to drag on for months and get entangled in internal politics. These products require sales reps’ on-site visits but have to produce enough profit to support this type of sales effort. $20,000 is at the bottom of the price range that can support a complex sales process. The exact boundaries of the “Dead Zone” depend on the specifics of how the product is sold.

Typical Software Price Ranges
Utilities cost up to the $50--$70 range. Purchases of utilities are many times spur-of-the moment decisions. Customers need to feel that the potential financial risk of buying the wrong product is minimal.
Productivity tools – $100 to $500. These are purchases that are within the budget of a low level manager.
Professional tools – $1000 to $5000. Applications that are required by professionals to do their job such as computer aided design tools such and many others.
Enterprise applications--$20,000 and up. Applications that impact many functions and departments in the customer’s organization and that require an evaluation process and sometimes, a purchasing committee. Selling into such a customer is many times a costly and labor-intensive process.

Perpetual vs. Subscription Licensing
Subscription software is an application that is “rented” on a temporary basis. Licensing is usually on an annual basis but monthly terms are available as well. Salesforce.com is a classic example of a hosted product that is priced per user per month. Subscription licensing works when customers see an ongoing benefit from the software. From the customers’ perspective, it lets them buy into the product while minimizing their initial investment and exposure. From the ISV’s perspective, it keeps them focused on making the customer successful with the product rather then the "fire and forget" approach to selling software.
Moving from a perpetual license to a subscription model increases the vendor’s risk as it becomes easier for customers to bail out on them. It may also have a negative effect on the short-term stock price due to Wall Street's focus on quarterly revenue vs. cash flow as the vendor is mortgaging their present for their future. This is because, over time, the income statement reflects the growth from prior years’ bookings, as the deferred subscription revenue is transferred to the income statement. Over the long term, the subscription model allows for significantly better revenue visibility and consistency. This is beneficial, as Wall Street loves companies that make their numbers. For example, when signing a three-year license for $100,000, one twelfth of it can be recognized each quarter with high certainty. In such a case, cash flow becomes the much more representative indicator of income. This works as long as the renewal rate is high.
By offering a subscription-pricing model, customers face smaller payments. From the sales reps’ perspective, a lower initial price lets them aim their pitch lower in the customer’s organization. Another advantage for the sales process is that a calculating an ROI on a shorter time scale makes it more tangible, hence helping the sale along.
When offering a subscription model, the vendor is betting their future on their ability to keep customers. For hosted apps, setting up a hosting environment, can be very costly and by doing so, the vendor is basically giving customers a loan that will be paid back over the length of the contract. This creates additional risks that vendors may want to steer away from.
So now, the bottom line. How much do you charge for a subscription model? There are no axioms here but many companies charge one third of the cost of a perpetual license for an annual term. When offering a subscription model, maintenance is usually mandatory.

Pricing Maintenance and Support
For enterprise applications, 18% to 20% of the list price is the “standard” cost of support [1]. This usually includes support over the phone for a single contact from the customer during regular business hours as well as product updates (both point and major releases). More advanced packages that include 24/7 support are priced higher, in the 20-25% range and require a minimum of $30,000-$100,000. Minimums of $200,000-$300,000 are the norm for packages that include assigned support engineers. Onsite support should always be priced as an extra.
Most companies have a no-discount policy on support. That is, even when the software is discounted, the support pricing stays at a percentage of the list price. Very large deals may justify a discount. For example, if all support calls are routed from a single person at the customer. One approach is to give away a few months of the first year. Psychologically, it’s better to give away “months” than to lower the price of the yearly contract.
For non-corporate users, there are two basic models for providing support:
The per-incident model: The most common model for personal support is “per incident”—that is, a flat rate for resolving each support question, regardless of call length. The median per-incident price for surveyed companies [2] that offer this option is now $100, with 50% of these companies charging per-incident prices between $35 and $185. Support for developer tools and more technically advanced issues run into the hundreds of Dollars per incident. For example, a call into Microsoft’s tech support for developers costs $245. These models typically include a refund if the problem is determined to be a defect in the vendor’s product.
The per-minute model: A less-popular model is a “per minute” rate. Here, there is less variation in pricing: The median per-minute price is $2.71 and the 50% range is $2.00 to $2.95. Note that the $3.00 per-minute rate is one of the few service prices where there’s significant customer sensitivity and pushback.

Discounting and Non-Linear Pricing
Discounts come in two variations, scheduled and negotiated. Scheduled discounts are those that are pre-approved by the company, based upon pre-defined criteria such as the volume of the purchase. Negotiated discounts are an ad-hoc result of the sales process that differ from or go beyond the pre-set scheduled discounts. This article will only discuss scheduled discounts.
Volume Discounts
There are multiple reasons why ISVs offer volume discounts:
Many times, the utility to the customer of additional licenses decreases as volume increases. To guarantee that the value to the customer is more than the price of the software, the price must decrease as the volume goes up.
In many sales situations, the cost of sale per unit decreases. This savings can be then passed on to the customer.
A volume purchase increases the customer’s investment in your product and reduces the chance of their buying the competitor’s product.
Large customers are convinced that it is their God given right to pay less per unit than smaller customers.
Buying more units now than in the future has a discounted current value.
Once a discount is offered, buyers will assume that that discount—or a better one—will be offered for all future purchases.
Before offering discounts, you have to understand the impact on revenue. When offering a 10% discount at a contribution margin of 70%, you’ll have to increase sales – above baseline – by 17% to make a positive contribution to profit. For more on how to calculate the volume changes needed to compensate for a change in price, see Appendix B.

Calculating Volume Discounts
The way most companies calculate their discount schedules is surprisingly off the cuff. They simply decide how much money they would like to get from a large target customer per user and then draw a curve between the price of one unit and the price of a unit at the high volume level. They then stand back, look at the curve and play with it until “it looks good.”
Another, more rigorous method for calculating volume discounts, is to select a consistent discount rate for every growth in units. For example, a 10% discount on the 10 – 20 units, a 10% discount from the previous price on the next 10 units (=a 19% discount from the original price) and so on.
For three slightly different ways of calculating volume discounts, see Appendix C.
MarketShare’s report on discounting in the software industry [3] found that:
Discounting is widespread, and significant. All the companies surveyed reported using discounts, and those discounts averaged nearly 40% of list price.
Company growth rates appear to be inversely related to the extent of discounts allowed by respondent companies, with respondents in faster growing companies reporting discounts that were nearly 20 percentage points less than discounts given by slower growth companies.
Nearly 75% of respondents acknowledged one or more important benefits to monitoring discount activity.
The actual extent of discounts given is not generally known nor documented by respondents. Less than 50% of respondents reported that they track discounts either frequently or regularly.
Negotiated discounts were significantly lower in companies where discounting is tracked. Negotiated discounts by "trackers" averaged approximately 7 percentage points below what was allowed by "non-trackers."

VAR Discounts
Value Added Resellers (VARs) get the software they resell at a discount. Discounts are typically between 40% and 60%, depending on the marketing and sales efforts required by the VAR to promote the software. Many companies incentivize VARs by creating volume thresholds that increase their discount level. Tier discounts require VARS to commit to sales volume. For example, a15% discount for no commitment, 35% for very serious commitments. VARs receive training & licenses for an additional cost. Just as a comparison, reference partners whose activities are limited to referring customers to the vendor, get 5-10% of the deal.
When setting a pricing schedule for VARs, one must take into consideration that the VAR has to make a profit and may be feeding their own distribution channels. This approach is relevant to OEM pricing as well.

OEM Pricing
One of the difficulties of pricing OEM deals is that there are no industry standards or accepted price ranges. A recent survey by SoftLetter [4] shows that:
Royalty-based payments are by far the most common model (92%) and the rest are "flat fee" deals.
Royalties paid for OEMing are “all over the map” and range anywhere from 1% to 60%. The data doesn’t show a distinct median or a bell curve around a specific royalty level so “average rates” are not applicable.
The median deal size for royalty-based OEM contracts is $875,000, compared to only $200,000 for flat-rate deals.
Exclusivity yields twice the median royalty rate and almost twice the median deal size compared to nonexclusive licenses ($1,500,000 vs. $800,000).
Stand-alone products yield significantly higher royalty rates--30% vs. 6% for embedded or integrated features.
When signing an OEM agreement, some companies require an up front fee for Non Refundable Engineering (NRE). NRE are engineering efforts needed to tailor the product to the OEM’s specific needs. NRE fees include charges for developers, QA and project management. These fees can easily run into the six digits. Some OEM deals will tier their pricing based on the up-front fees and volume commitment. As a rule of thumb, the higher the commitment and up-front fee, the lower the royalties. See below for more details.

Site Licenses
Site licenses give customers unlimited use of a product across their enterprise while paying a flat fee. A buyer’s request for a site licenses is mostly a purchasing ploy. Their reasoning is that with a site licenses they don’t have to worry about counting seats. However, it’s only another way to ask: “what is your best price?” One problem with this model is that as a vendor, you lose your ability to track the number of installations at the customer site, and if your product is successful, you will be leaving money on the table. Another drawback of site licensing is that when you sell a site license, you have effectively lost that customer for any repeat sales. If you are concerned about getting the product in front as many users as possible, just offer steeper discounts to encourage proliferation and use. Hence, rule #1 for site licensees for vendors: avoid them.
If you must, here are a few tips on making site licenses work [5]:
Make sure the site license fee bears a relation to the value derived by the customer. Have a site license price schedule that will ensure that a customer with a small number of users (or whatever you want to count) should pay less in total than the same application licensed to a large company. Whatever measure you use, make sure it is public. Consistency is probably better than accuracy and reduces the room for manipulation.
Site licenses need to be limited to a specific site so any changes to the site will trigger additional payments. This is especially important when an industry is consolidating and physical sites are sold off and logical or virtual sites are expanding.
Maintenance and support fees can be independent of the license fee and can scale independently (e.g. number of employees, number of updates distributed, etc.) Maintenance and support does not have to be fixed so it can provide the upside that a site license limits.
Site licenses must provide adequate safeguards so keep usage within the boundary of the site. Customers may not want to count “seats” but they need to have a means for controlling the use of the product.

Academic Pricing
From a pricing perspective, products that are sold to academia can be divided into two. Products that are used for teaching and that a company can expect the students to purchase later in their professional career and all other products. For the former, companies tend to price their products at a deep discount. For the latter, ISVs usually offer up to 40% discounts. A slightly different approach is for ISVs to start academic pricing at the “second copy” price. In other words, the discount offered is what they would give normal commercial users for purchasing a second copy.
Re. hardware products – due to the lower margins, vendors cannot offer the same level of discounts that software vendors offer. Whatever discounts are available, they are much smaller.
Pricing Discrimination
Price discrimination is a technique for maximizing profits by offering the same or similar product at different prices to different customers. The idea behind this is to set prices so that purchasers who are able and willing to pay higher prices do so. Pricing discrimination allows vendors to capture additional market share by addressing segments that attribute a lower perceived value to the product.
Price discrimination can be explicit or implicit. Explicit price discrimination is when a special price is limited to customers who meet certain criteria. For example, academic pricing is a form of explicit price discrimination because only students and faculty can buy at that price. Implicit price discrimination is when all customers are technically eligible for the special price, but the vendor inserts a condition that makes it unattractive to some. For example, rebate programs are a form of implicit price discrimination.
The justification behind price discrimination is that different market segments value the product differently and will therefore be willing to pay varying prices. If segment A values the product at $1000 and segment B values it at $500, when the price is $900, only segment A will purchase it. If the product is priced at $400, both segments will purchase but with respect to segment A, money will be left on the table.
To make Pricing discrimination work:
Each segment needs to have a version unique to that segment.
One market segment cannot buy the product created for another segment.
The difference in pricing must be justifiable and must not create a feeling with customers that they are being treated unfairly.
Academic pricing is one example of price discrimination where the same product is sold at a discount not available to other market segments. This works because other segments hold a common belief that education is important and that businesses are expected to support it. International pricing is another example of pricing discrimination.
Another common form of pricing discrimination is introductory pricing. The idea behind this technique is to release a new product at a price premium and to lower the price in time. This is a common technique in the computer chip industry where power hungry buyers are willing to pay a premium for the latest and greatest. The reverse can also be true: introduce a product at a significant discount for a limited period to stimulate early sales and then return to the higher list price once the initial surge of excitement has passed.

Illegal Pricing Discrimination
The Robinson-Patman Act made it illegal for sellers to directly or indirectly discriminate in the price of similar commodities, if the effect hurts competition. This is especially important when selling to distributors and VARs. For example, if a vendor has two distributors that compete with each other, they have to be offered the same basic terms. If one distributor is allowed to buy software from you at a lower price than another, competition is adversely effected because the second distributor, buying at the higher price, will have a greater difficulty in reselling the software.
A detailed discussion of the implications of the Robinson-Patman Act is beyond the scope of this article but it is important to note that there are situations where pricing discrimination is explicitly legal. These include situations where the vendor’s manufacturing, delivery or financing costs are different for different customers as well as situations where a competitor dropped their prices. Meeting the lower price is not illegal even if this price is not offered to other customers.
Note that the law applies only to products and not to services.

International Pricing
The international prices of identical products vary many times compared to US pricing. The “uplift” as it’s called, varies anywhere from zero to a premium of 50%. This uplift is justified by increased costs due to the need for localization of the product as well as marketing and sales expenditures the vendor faces in foreign markets. The cost of localizing the software has to be considered but in many cases is not the bulk of the investment in foreign sales. Higher support costs are due to the additional languages needed, the more expensive labor (at least in Western Europe) and of course increased business risk. On the flip side, in some geographies such as in Asia, services are less expensive than in the US.
Note that differential pricing in international markets runs the risk of creating a “gray” market for the product.
Another issue that makes international pricing difficult to manage is the fluctuations in exchange rates. There are two approaches to adjusting prices when the exchange rates change:
Adjust the local price to reflect the price in U.S. Dollars. This approach may cause difficulties in countries where the currency’s buying power decreases compared to that of the Dollar.
Adjust the local price to partially compensate for the change in the exchange rate.
Both should be done with an eye on optimizing sales, taking into consideration how revenue is affected as well as the effect the change has on gray market pressures.

Bundling
Bundling is when a group of products (or services) is offered as a single package. By offering bundles ISVs can increase their sales to segments that would buy only one product. There are two types of bundling:
Product bundling. Product bundling is when two products are integrated into a single package. The purpose of product bundling is to create a combined product that has more value to customers than the separate parts. An example of product bundling is the Oracle ERP package where the database and application layer are bundled into a single package.
Price bundling. This is when an ISV provides a discount to customers that buy two or more products at the same time.
There are basic differences between price and product bundling. Whereas price bundling is a pricing and promotional tool, product bundling is more strategic in that it creates added value. Price bundling products does not create added value in itself. Therefore, a discount on their combined prices has be offered to motivate consumers to buy the bundle.
Bundling can be “pure” or “mixed.” Pure bundling is when a vendor does not offer any other option but the bundled products. Pure price bundling is basically forcing a customer to buy at least one product that they are not interested in and can be illegal. See below for details. Mixed bundling is when a vendor offers both the bundle and the products separately.
Price bundling is used to:
Increase sales to segments have different perceived values for the vendor’s products.
Expose a new product to a large customer base.
Provide product visibility and a low cost opportunity for customers to test a new product.
By offering bundles, vendors make it difficult for consumers to price-shop.
Product bundling is used to create added value for customers. By using integrated products, customers can increase productivity, performance, lower costs of ownership and reduce purchasing costs.
In both types of bundling, vendors can increase customers’ switchover costs by selling them more products than they intended to buy.

An Example Price Bundling
Let’s look at two Microsoft products – Word and Excel that cost $250 each when purchased separately. Assume a market segment of office managers that value Word at $350 and Excel at $100. Because Word is priced lower than its perceived value, this segment will buy Word. On the other hand, because Excel is priced higher than its perceived value, this segment will not buy Excel. Assume a second segment of accountants. By contrast, accountants may value Word at $150 and Excel at $300 and will thus buy Excel but not Word. Also, for the sake of simplicity, we’ll assume that each segment has one member. In this scenario, each segment will buy one of the products, resulting in $500 total revenue.
A more profitable scenario can be created by bundling both products for $400, a price point that places both products beneath each segment’s value for the bundle. Both segments value the bundle at $450, and therefore will purchase it. With this approach, the total revenue is $800.
There are several requirements for successfully implementing a pricing bundling scheme:
The products are complementary and not substitutes to each other.
Individual segments have different perceived values for the specific products but similar overall perceived value for the bundle.
The unit costs for the parts of the bundle must be sufficiently low so that selling bundles at a discount is more profitable than individual products.
There is no coercion of customers to buy something they do not want.

Compensating for Bundling Affects on Profits
An issue that has to be addressed when offering products as a bundle, is the potential lose of revenue. The higher the variable costs for the products in a price bundle, the larger the increase in sales needed to overcome the discount involved. For example, consider two offerings: a refrigerator and stove costing $2000 and $1000 with variable costs of $1600 and $800 respectively. The second offering is a bundle of a spread sheet and a package of financial macros costing $300 and $100 with variable costs of $20 and $10 respectively. When sold separately the packages will provide $600 and $370 of profit. By offering a discount of 10% on the bundles, the profit will be reduced to $300 and $330 respectively. Therefore, the appliances company has to sell 100% more units to make up for the discount vs. the software company that has to increase sales only by 9% to make up for the discount. For more on how to calculate the volume changes needed to compensate for a change in price, see Appendix B.

Legal Issues When Bundling
All mixed bundling strategies are legal. This is because the customer’s ability to choose the product they want is not hindered. On the other hand, pure pricing bundling is illegal if the vendor has “market power.” Market power means that the vendor can force a consumer to do something that he would not do in a competitive market or when “a substantial amount of commerce is at stake.”
If a vendor possesses market power, pure product bundling is legal only if the benefits to consumers offset potential damage to competition. For example, in the Microsoft vs. DOJ case, Microsoft’s claim of consumer benefit was enough to justify the integration of Internet Explorer with Windows. Note that merely combining products together in a single installation does not constitute integration and will be difficult to defend as providing benefit to consumers.

Unbundling
Unbundling is a process where a product offering is split up into modules with some modules becoming optional. By taking a complex product and splitting it into modules, the product can become attractive to additional segments. Furthermore, each segment tends to become less price sensitive regarding the modules they need. For unbundling to make business sense, sales to additional customers have to make up for the optional modules that customers passed over. Another drawback of unbundling is the added complexity to the product. After unbundling the product, there are multiple options for customer installations, managing the product and supporting it increase in complexity. One risk of unbundling is that if the product becomes too granular, vendors run the risk of giving the customer a feeling that they are “nickel and dimed.”
Retail Pricing

Natural Price Points
Natural price points are prices at which there are discontinuities in the price / demand curve. Customers expect to see commodity software products priced at natural price points that are traditionally, $19.95, $29.95, $49.95, $99, $199, $495, etc. The effect of increased demand for $19.95 mouse vs. one that costs $20 may stem from an underestimation mechanism. One explanation is consumers' tendency to round prices down and to compare prices from left to right. [6]
As a side note, the origin of the “$.95” at the end of the price tag was to force cashiers to give customers change.

Temporary Discounts
Temporary discounts are used to stimulate short-term increases in sales and for enticing price sensitive buyers that would otherwise be reluctant to buy at the regular price. A temporary discount can increase customer demand for a product. However, this peak in demand is usually temporary and will many times decrease future short-term demand. Price promotions may entice new, price-conscientious buyers but they can actually hurt future sales to the existing customer base. Promotions are tactical, not strategic, and they need to be managed that way.
By reducing the price of a product, ISVs reduce the risk to consumers trying an unfamiliar product. Assuming that the consumer has a good experience with the product, they will be more likely to purchase it the next time, even without a discount. This is especially true if by using the product, there are significant switching costs for the customer. From a competitive perspective, rebates and other forms of temporary discounts are used to lower prices while attempting to avoid a price war.
When executing a promotion, vendors have to beware that:
By reducing the price of their product, even temporarily, vendors risk implying that their product has inferior value.
If a temporary price promotion goes on for too long customers may begin to expect the lower price. The “reference” price is then perceived as expensive and customers are reluctant to pay it.
The promotion must be targeted to new buyers and not to repeat buyers.
One way to meet these criteria, is by creating a trial offer. This is basically a type of temporary discount. Usually, a condition is attached to emphasize the trial offer’s “special nature.” This can be done by setting an expiration date to the offer, requiring an additional purchase (a form of bundling) or an exchange of something of value. For example, the customer’s agreement to present at a tradeshow on the vendor’s behalf.

Rebates and Coupons
Rebates and coupons are discount mechanisms. There are several ways rebates and coupons work [7]:
A discount at the register. The discount is given automatically at the register. This has a 100% redemption rate. Due to the high redemption rate, it is not used very frequently.
Coupons at the shelf. The buyer needs to tear it off and present it at check-out. Redemption is in the 30% range in the grocery industry and is strongly related to the amount of the coupon. What about the remaining 70% of coupons? They stay in customers’ pockets and aren’t discovered they get to their cars or do their laundry – e.g., after the purchase has been completed.
Mail-in rebates. Redemptions vary depending on the purchaser, the value of the rebate, and the number of steps required to complete the forms. Typically each hurdle will decrease the redemption rate. Rebates that are $10 or less tend to have redemption rates of less than 30%. Rebates of $50 can rise up to 90%. Redemption rates are a critical factor in calculating the actual costs of a rebate program.
In consumer packaged goods inserts in newspapers are frequently used. The purchaser needs to clip these coupons and redeem them at the cash register. Redemptions rates are in the 1-2% range and the percentage is dropping. This is probably due to consumers being more time-pressed than in the past.
Another type of rebate is given to the retailer. These are given after the consumer’s purchase and are a form of a discount to the retailer. These rebates are used primarily for adjusting prices to fit the closest natural price point.
Another factor to consider is the cost of administrating mail in coupons. The cost averages between $1.5 and $3, depending on the processing services offered with the rebate program.

Tuesday, August 26, 2008

ACNielsen 2002 Trade Promotion Practices Study

For the last 12 years, ACNielsen has conducted the annual Trade Promotion Practices and Emerging Issues study, which addresses major areas of trade promotion practices including spending, category management and frequent shopper programs. The study asks retailers and manufacturers for their actual practices and perceptions about these major trade promotion issues. In this year's survey, there is much manufacturer/retailer agreement on a number of issues. But as in years past, the opinions and perceptions revealed show that there is still a very wide gap between retailers and manufacturers in some key areas of trade promotion.

Trade Promotion Spending

Overall, manufacturers reported that trade promotion spending was 14% of gross dollar sales. This is up from the 11% reported in 2001. Manufacturers in the Food category reported trade promotion spending at 16% of gross sales while HBC manufacturers continue to report lower levels of trade promotion spending (9%). Over the 12 years of the Trade Promotion Practices study, overall trade promotion spending as a percentage of gross dollar sales has ranged from a high of 15% to a low of 11% [See chart 1].

About 65% of surveyed manufacturers report a measurable increase in their total advertising and promotional budgets over 2000. While the 2000 study reported that 28% of surveyed manufacturers decreased total budget spending, this year's results indicate that only 15% saw a decline. However, 58% of surveyed manufacturers report that their organization's trade spending as a percent of gross dollar sales decreased in 2001, extending the downscaling that started in 2000. Only 16% of manufacturers report an increase in trade promotion spending as a percentage of gross dollar sales versus 33% in 2000 and 49% in 1999.
There was relative concurrence in the level of trade promotion spending reported by manufacturers versus what retailers perceived that they received. Forty percent of retailers reported an increase in trade promotion dollars received in 2001 over 2000.

Trade Promotion Impac
The study asked manufacturers to rank their perception of trade promotion spending value as “excellent," “good," “fair" or “poor." Less that one-fourth of the manufacturer respondents rank trade promotion spending value as an “excellent" or “good" value. In the 2001 study, the top two values for this ranking were a combined 37%, a historical high. There was no increase in the “poor" value perception ranking (22%) from the levels reported over the last two years.
The study asked retailers to rank their perception of the share of manufacturer trade promotion dollars they are receiving as “more than enough," “sufficient" or “not enough." The majority of retail respondents (83%) reported that their share is “not enough," with less than one-fifth reporting that their amount of trade promotion dollars is sufficient. The “not enough” ranking by retailers was 70% in 2000, 84% in 2001 and 83% in the 2002 study.
Manufacturers were also asked to rank their total trade promotion/consumer-promotion/media-advertising budget allocation compared to the previous year as “increased," “remained the same" or “decreased." Overall budgets reported as “increased" were 65% in 2001 compared to 68% in 2000. Fifty-seven percent of respondents reported trade promotion spending levels as “increased" in the 2001 study, the same level as 2000. The percentage of manufacturers reporting that their consumer promotion spending had “remained the same" or “decreased” was 54% compared to 42% in 2000.

Trade Spending Allocation
Manufacturers and retailer were asked how the allocation of trade promotion dollars had changed versus the previous year. Both retailers and manufacturers reported increased spending in pay for performance and frequent shopper programs. There was disagreement on spending allocations for slotting allowances. Manufacturers reported considerably higher levels of increased spending allocation toward slotting allowances than retailers report receiving (58% of manufacturers reported slotting allowance spending had “increased,” while only 8% of retailers reported increased slotting allowance dollars received).
Manufacturer and retailer perceptions regarding the time period associated with off-invoice/trade promotion funding in 2001 were fairly aligned, with manufacturers reporting 9.6 weeks and retailers reporting 8.2 weeks. Perceptions among manufacturers on this ranking have shown a fair amount of variation in the last few years. The average number of weeks allowed for off-invoice promotion during 2001 reported by manufacturers was nearly 10 weeks, a return to 1999 levels (12 weeks) after a sharp increase seen in 2000 (20 weeks). Retailers reported receiving funds for an off-invoice/trade promotion in 2001 after eight weeks, which was similar to the 1999 figure of nine weeks, but a decline from the 2000 figure of 11 weeks.
The incidence of annual trade promotion agreements/contracts reported by retailers was 83%, while only 46% of manufacturers reported signing up for these contracts. Over the years there has been a significant disparity in “perception” on this issue between manufacturers and retailers [See chart 2].



Reasons for Trade Spending

The primary reason manufacturers site for trade promotion spending is “increase sales volume” (57%). When retailers were asked the primary reasons for trade promotion spending, the two most frequent reasons were “increase store sales” (85%) and “increase basket size” (83%).
Manufacturers and retailers agree on the impact of trade spending on brand loyalty, but differ somewhat on the extent of benefit. Twenty-one percent of retailers say trade promotion spending “definitely helps” brand loyalty versus only 12% of manufacturers. The 21% of retailers rating “establishing brand loyalty” as a benefit of trade spending was down from 40% in 2001 and 58% in 2002. Manufacturer scores on the brand loyalty benefit are fairly consistent over the last three years. HBC manufacturers' brand loyalty benefit scores were the lowest, with a “definitely helps” score of 8%.

Category Management
Manufacturers were asked their primary reasons for practicing category management. The highest ranked reasons were “influence decisions on categories” (84%), “ensuring category leadership” (82%), “creating positive relationships with retailers” (76%), and “optimizing item mix” (75%). When asked the same question, retailers responded that the most important reasons were “increase profitability” (90%), “optimize item mix” (80%), “increase revenue” (68%) and “identify new opportunities” (63%).

Frequent Shopper Programs
There was some definite disparity between retailers' and manufacturers' perceptions and opinions of frequent shopper programs. About 80% of manufacturers participate in retailer frequent shopper programs, while almost 70% of retailers report offering a program that benefits frequent shoppers. Frequent shopper program participation rates for both retailers and manufacturers fell versus the 2001 study.
Overall, manufacturers are less enthusiastic about the benefits of frequent shopper programs than are retailers. Manufacturers rated the benefits of frequent shopper programs to retailers and consumers to be about equal, while reporting that they received substantially less benefit from these programs. Retailers, on the other hand, reported that they received the least amount of benefit from frequent shopper programs versus consumers and manufacturers [See chart 3].


There was agreement on the fact that retailers do not share their frequent shopper data with manufacturers. Only 18% of manufacturers reported that retailers “frequently” share data and less than 5% of retailers reported “always” sharing their data with manufacturers. Because of the low level of data sharing, 58% of manufacturers report “never” using frequent shopper data in everyday decision making, while the balance of the respondents report “occasional” usage.

A very high percentage of retailers (93%) use frequent shopper data to develop direct marketing programs to target individual consumers based on their purchasing habits. This was consistent with scores reported in 2001. Among manufacturers and retailers currently involved in frequent shopper programs, nearly all plan to continue.

Critical Issues of Concern to Manufacturers and Retailers

The study asked both retailers and manufacturers to rate the most critical emerging issues as they relate to trade promotion spending. The top two issues for both retailers and manufacturers were “promotion efficiency and effectiveness” and “category management.”
Retailers were more concerned than manufacturers about several issues, including the following: “customer loyalty/retention,” “food safety,” “making the retailer a brand” and “private label products.” Manufacturers ranked “the ability to market at store levels” and “efficient consumer response” higher than retailers did [See chart 4].