Canadian Vending

Features Consumer Behaviour Trends
dispensing strategies: A Penny Left on the Table

A Penny Left on the Table


March 31, 2008
By Michelle Brisebois

Topics

There’s an artist I know who makes handmade jewelry. She tours the art
and craft fair circuit and sells her wares to people attending these
shows.

brisboisThere’s an artist I know who makes handmade jewelry. She tours the art and craft fair circuit and sells her wares to people attending these shows.

About a year ago she decided to try and gauge the value of her work so she tried a new approach. At each show, she took one piece of jewelry and added an extra zero just before the decimal point. She found that more often than not – the piece sold. Her lesson was: consumers don’t sit and ponder her talent, the cost of the materials, or her business overhead when they decide to buy her jewelry.

The fact is, if they want it and can afford it – they buy it.

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The real question around pricing is: if there’s a penny to be left on the table, don’t we owe it to ourselves to claim it for our own?

Obviously it’s easier to hide a huge mark up in a non-commodity item such as handmade jewelry than in a snack or can of pop, but it’s important for all businesses to constantly find that sweet spot on the pricing grid – and sometimes we do sell ourselves short.

The people who retire early are typically those who were able to turn a larger profit in a shorter time frame than the rest of us – you can bet they weren’t operating on razor thin margins. The incredible power of even a small pricing increase can be an “Ah ha” moment for even the largest companies.

Lloyd Hansen, controller for the Ford Motor Company, was charged with the responsibility of jump starting Ford’s lagging profit growth. As Hansen looked diligently for ways to increase profitability, he wondered if Ford was pricing its products correctly. His analysis of the effects on Ford’s bottom line if an additional 1 per cent were added to the company’s net profit margin yielded stunning results. By securing an additional penny of profit from each revenue dollar, Ford would increase its net income by 33 per cent and cash flow by 45 per cent.

By sustaining this increase over time, Ford’s stock market value could grow by 45 per cent (market value usually closely follows changes in cash flows). Hansen went on a mission to overhaul Ford’s pricing strategy.

McKinsey Quarterly reports that in best-in-class pricing organizations, the CFO commits at least 20 per cent of his or her time to the pricing effort. Unfortunately, many companies base their pricing decisions on gut feel and the vocal opinions of a small group of sales people. It’s a hazy science at best but there is a way to put method to madness.

What determines an appropriate price for a product are two factors: the market environment – how competitive it is (a key driver of supply) and the scope of the opportunity (a key driver of demand). To be able to distinguish amongst your sales branches, you must first sort them by their market conditions.

Group your machines by location and type of customer. High volume machines in locations with transient non-repeat consumers (airports and arenas) will have similar market conditions. Lower volume machines with regular customers such as offices will have different pricing issues.

Chances are that your wiggle room (pricing elasticity for the marketing mavens in the crowd) will be greater in the high volume transient locations.

Basically, you have more latitude to charge more where there is little opportunity and motivation for the consumer to get something comparable elsewhere. Consumers will also pay more when they perceive they’re getting something of value.

The new 100-calorie chocolate bars recently launched may seem overpriced to us pound for pound. But, the consumer is looking at a different pound when she chooses this product.

Ms. Consumer isn’t angry that she’s getting a chocolate bar with less weight when she puts her loonie in the machine – she’s thrilled she will gain less weight because that smaller bar is portion controlled and she knows that whether it’s a small bar or a big one, she’s going to down the whole thing.

She’s buying a guilt free snack. That’s huge.

Consumers no longer view vending as a lesser channel. We are so used to serving ourselves that quite frankly – it’s now a level playing field. This means we must start thinking like retailers and not vendors. Product mix, pricing and promotion are the classic “P’s” of marketing so take some time to analyze these issues and make the necessary changes.

It’s ironic that penny starts with “P” as well. Do yourself a favour and get that penny off of the table and into your pocket. It just may be your ticket to an early retirement and a lot more golf. o


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