Your CEO comes to you for advice. It seems employees in the marketing department are laboring over how much to charge for a new product. After getting their recommendation and hearing how the marketing mavens ran simulated tests and even test-marketed the product, she doesn’t feel confident about the price they are suggesting. Plus, she’s in a hurry for an answer.
So she has come to you, she explains, because, as a CPA, you’re trained as a financial person, and she believes you’ll approach the problem in a more numbers-oriented way.
So how do you respond?
Point out to her that using numbers alone—and for that matter, marketing research alone—is not the best way to come up with a pricing solution. The best way is to combine the two approaches, and it just so happens, after reading the JofA , that you have a suggestion, which, while not particularly sophisticated, uses a mix of numbers and intuition and can provide a reasonably good answer quickly. And that, you should add, may prompt the marketing department to revisit the problem with fresh thinking.
Here’s what to do: Begin by asking the marketing people to pick the best possible price—that is, what they would like to charge if they had done no pricing research at all—in other words, a strictly intuitive judgment. Then, ask them to select two other prices: the highest they believe customers might accept and the lowest the company can afford.
Then ask them to select two more price candidates—one outrageously high and another outrageously low. Now calculate the sales-to-cost ratio at each price level and find the optimum profitability.
Is it perfect? No, pricing-strategy methods rarely are. But if time and money are limited, it’s a pretty good approach and a way to stimulate innovative thinking on the subject.
Alternative to Matching a Price Cut
Your competitor suddenly lowers the price on a key product. What do you do—match the cut, cut even deeper or ignore the reduction?
Hold on! You have another option: Consider instead attaching a new feature to the product (faster delivery, longer guarantee) that adds value but at a cost far lower than the sales revenue you’d lose if you reduced the price.
Track the Competition
While this may not be your area of immediate responsibility, pass this tip along to your CEO so he or she will recognize that you think beyond the balance sheet.
Here are some effective, easy and inexpensive ways to monitor the competition:
Track the views of major industry analysts via the Internet; just click into any of the major investment banking firms’ Web sites.
If a competitor is situated in another city, subscribe to the dominant newspaper there for current information about the company, and watch especially for staff changes, new products and plans. And be sure to check out its ads.
Keep tabs on any talks competitors’ managers give at business or community functions.
Caveat: But don’t pay too much attention to the competition. Companies with eyes glued to what others in the industry are doing make themselves little more than second-rate followers, not pace-setters.
|An Invitation |
The JofA publishes a monthly collection of Golden Business Ideas and invites readers to contribute their favorites (for attribution, if you like).
Send your ideas to Senior Editor Stanley Zarowin via either e-mail ( firstname.lastname@example.org ) or regular mail at the Journal of Accountancy , Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881.