This post is based on the webinar “Art of Negotiating Price with Your Buyer” featuring guest speaker Scott Sanders, Client Partner at Revenue Architects. Scott brings 20 years of experience in consulting on sales management, marketing, and price strategy for Fortune 500 and private- equity backed consumer packaged goods companies. For the full in-depth webinar, please click here.

 


The Power of Pricing

Many often don’t realize the power of price as a profit lever. Based on a business review from Harvard University, price is the most impactful when improving profit, compared to other factors such as variable cost, volume, and fixed cost.

What we at Askuity have realized is that a lot of the time, people are focused on volume. Now, of course an increased volume directly correlates to an increase in sales growth. Price optimization can be a key lever in growing your business, but more often than not, it is overlooked. The most common way of thinking about pricing is adding up all the costs related to the bringing the product to market, then landing on a retail price based on the desired profit margin. However, this method does not consider other factors such as the consumers themselves.

Below are three pricing scenarios:

 

Scenario 1: Retailer Captures Retail Margin Improvement

In this scenario, the retailer conducts research stating $1.99 is better than $1.89. With this knowledge, they are able to improve their margin from 35-42%.

Scenario 2: Manufacturer Shares Margin Improvement

In this scenario, the manufacturer is the one who conducts the research and concludes with the same results. The manufacturer brings the findings to retailer, and by making the change from $1.89 to $1.99,  both parties benefit.

Scenario 3: Manufacturer Shares Margin Improvement and Captures Benefit From Pack Improvement

Similar to the last scenario, the manufacturer conducts the research, except this time, the subject is on the effects of different packaging. In this case, the research shows that there is a different type of packaging that consumers like more and it costs 5 cents less. This increases operating profit and the retailer also makes a little more.

If you are able to be proactive and be ahead of your retailer or buyer, coming to them with the pricing suggestion, you are more likely to capture that profit, rather than it going to the retailer.

After discussing the importance of price, here are 3 tactics Scott provides in order to negotiate price effectively:

Tactic #1: Measure what is happening in your market

Competitive benchmarking is a way to determine success measured based off competitors in your market. It is important to identify where you and your product want to belong. Are you aiming to compete with high end products or drug-store products? What should my price points be? And most importantly, how can I backup my claim?

Here are Scott’s top tips to do this:

  1. Bring Sales Data: The more granular the data, the better. When your data is close to store-level and weekly, it displays natural elasticity more vividly. If your data prescribes a 50 cent decrease in price in order to increase sales, showing that to your buyer will make the suggestion more convincing, knowing that your claim has substance and is not based on a gut-feeling.
  1. Visualizations: The best way to kickstart a pricing discussion is to visually display price analytics. In another blog post, Scott gives an in-depth analysis of 3 powerful tools to visualize prices. Each tool provides a range of insights that can help drive strategic thinking. For example, visualizations can be effective in demonstrating the effects of a price change – they act as a proof of concept to show how a change in price will affects sales, profits, etc. Visualizations are also important to bring to buyer meetings as they can help support your claims surrounding any potential price changes.

Tactic #2: Survey Research

 

 

Here are Scott’s top methods when conducting survey research:

  1. Gabor-Granger Method – helps to determine the highest price the respondents are willing to pay. It is conducted by asking purchase intents at multiple price points. If the answer is a “probably buy” or “definite buy,” the respondent moves to the next increased price point.
  1. Van Westendorp’s Price Sensitivity Meter – helps to identify the bound of acceptable price ranges by asking what prices would be too cheap, cheap, expensive, and too expensive.
  1. Conjoint Analysis – helps to identify values of product attributes, including price, by having respondents choose from among multiple product and price combinations. This tool can determine which attribute is the most influential when making a purchasing decision. It is commonly used to test similar shelf sets in order to better approximate a real-world shopping experience.

Tactic #3: Engage with your buyer

With data on the table, there is a middle ground between you and your buyer. Both parties can use this information to derive strategies as well as make confident decisions because of the backbone it has created. Buyers are known to use conventional methods that are effective but can be further optimized using data.

A common tool to gather data to support a price change is through an eCommerce site. Transactions through online sales can provide superior knowledge on demographic data (age, location) as well as behavioural data such as items commonly purchased together. By using it as a testing ground, you have the opportunity to refine and correct mistakes in inventory and pricing. Taking this invaluable information to a buyer can better initiate a change in pricing strategy. Have a look at our other blog post for more tips to approach a buyer, given by a former Target buyer herself.

The more data you have, the more prepared you are for your buyer meeting. With research to defend your pricing strategy, you have the support to make your argument more convincing.