Thursday 6 June 2013

b.Pricing / Promotion

Pricing
Caveat emptor -   If you are producing generic products or commodities, you will close shop in approximately 3 years. Your products need to be differentiated through value-adding, i.e., the higher the better. Otherwise, you can't even price. You will always be at the mercy of market buyers who are never your friends. So please don't waste time in producing generics. This will be your dead-est meat on the table. 

Price -   (Credit goes to my partner-in-crime) He once said that the price of the product must include all costs, profit-margins and research&development, otherwise hell knows no fury than a man's slow bleed. His reason is very simple:   As long as the product is not priced correctly with all the relevant components, there is no margin to talk about. If there is no margin to talk about, then the business will never survive. How true! 

Value vs price ratio -   Every product has a value vs price ratio. If the value is perceived to be lower than the price it asked, the number of customers would be greatly reduced. If the perceived value is higher than the quoted price, customers will think that it is worth every single penny he/she pays, the product will fly off the shelves. 

Poor start -   Yes. Every new product to market will have a poor start. The greatest mistake is to start it off with a big-bang promotion and marketing. At the initial stages, you really want to conserve all capital to battle out the product's entry into the market. There is no such thing as a new product to the market. Every newly conceived product, no matter how innovative, is merely a reinstatement of an old idea or an improvement to existing products. There is no exception. If from the start, the product is priced correctly with all its components, the price is not going to be good versus its perceived value. Further the consumers don't even trust this new entrant. It is going to be hellish. However, one must never lower price. One needs to keep improving its value by innovations and improvements. The product needs time to enter and win trust. This will be your bitter initial 10 years. 

Product consumption -   New products at the gate will always have 57% consumers trying it. Otherwise, the new cell phone entrant, Samsung, would never have make it to the top. This is good news. If the new product also has a known brand, then it will increase the market penetration by another 25%. In a way, this is like honeymoon period for the new product. Use this valuable gap to improve tremendously its value. Once the honeymoon is over, consumers will get bored with the "old" product and unless the value exists in excess with the asking price, consumption will fall like a rock.The honeymoon period is approximately 1.5 years.

Promotion
Discount -   Promotions simply means discount. By giving discount, the product is now cheaper and hence, it will improve sale. How misguided! If given a chance, never ever give promotion discount. It doesn't work that way. If you notice, established brands such as Chanel, Hennessy and Ikea never give discount. If they do, they do it sparingly to attract visitors and in desperate market conditions.

Say, the product is priced at $100. During promotion, say, a 20% discount is given ($80). Not considering increased cost percentage (the cost is fixed but its cost percentage is now higher since selling at lower price), this reduction in price would require a 25% increase in consumption (customers) to ONLY get the same sale amount back ($80 x 125%).

Since the discount by the retail stores is frequently poorly advertised. Customers only know about the discount only when they reach the retail outlet. With or without the discount, these customers would have purchased the product anyway. If there is any increase, it is marginal. If the increase is merely 10% more, then the business will hit shit, i.e., the sale amount goes down and now has to bear the increase in cost percentage, leaving less to share among the other components. Your overall sale has dropped!

Advertisement - Of course, when you complain to the retail outlet, they would reply that dear bosses, since the problem is in awareness in the promotion and not in its discount (giving discount improves sale), the best way is to advertise in their in-house magazine and promote awareness. Being green horns, of course, this sound so logical. You will go for that full page spread. After the advertisement, you count the sale volume. It is increased further, but after deducting the expensive advertisement cost, you shitted your pants. You realized that you are even worse off than before.

Long-term brand building -   Again you confront your cute retailer for explanation, she just smile sweetly (innocently of course) and say that one can never got the full value from the advertisements one, part or most of it goes towards long-term brand building! 屌你老 ... 

True market value -   So to sum:   Never do promotions and give discounts as much as possible, unless kana force big-time by the retailers. Only then you give in a little. The true market must come from the product value and nothing else. 

Time on station -   Give yourself a break. Rome was never built in a day. Let the product find its footage in the market place. Grit that fucking teeth and bear it through. Light in the tunnel will come approximately 10 years from start. 

Retail stores -   In order to capture consumers to visit their stores, retailers frequently resort to steep promotions. Who do they choose to cut their meat? Of course, the suppliers. Do not therefore fall into their game plan. If one is forced to give promotions, only choose those products that are very slow and obsoleting. Provide the fresh ones only with a lot of terms and conditions to the retailers, such as MOQ (minimum order quantity). Channels are critical to a product's success. This will be discuss under b.Channels 101.

Reminder Advertisements -    Do this only after 10 years of hard work and the product has succeeded.

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