Insight and analysis 2015

Insight & analysis in 2015
From the Knowledge Centre
© Ranson Pricing Ltd 2015 1!
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TABLE OF CONTENTS
These articles were written by pricing expert Oliver Ranson and published on
ransonpricing.com during 2015.
Page 2
Is the end of 99p pricing coming? (Published in January)
Page 3
Simon Cowell the pricing strategy expert (Published in January)
Page 4
Doubling-up on loyalty (Published in March)
Page 6
It’s cold outside, so why can’t I buy a coat (Published in March)
Page 7
Pricing & organisational structures (Published in May)
Page 10
How is B2B pricing distinct from B2C? (Published in May)
Page 13
The case against promoting your SALES (Published in September)
Page 15
How a plane ticket can ‘go viral’ (Published in September)
Page 17
Umbrellas and randomised pricing (Published in September)
Page 19
A brand new distribution channel – are you ready to price in augmented
reality? (Published in September)
Page 20
Rapid reaction pricing – handle with care (Published in November)
Page 21
Pricing checklist for SME (Published in November)
Page 24
Packaging, packing and pricing (Published in November)
Page 25
Why are there no jokes about pricing? (Published in November)

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IS THE END OF 99p PRICING COMING?
For almost as long as currency has been decimalised in the UK businesses
have been quoting their prices as one penny less than the next full Pound. So
instead of £6.00 they would charge £5.99. The logic has always been that
customers are inclined to analyse the cost of an item based on the first digit.
But Ranson Pricing has noticed that more and more businesses seem to be
moving to a ‘cleaner’ set of prices with a zero or five at the end. We have
identified five reasons why this might be the case.
Customers pay using card rather than cash
Now that plastic is such a common payment mechanism there is less risk of
money not reaching the till. Under 99p pricing models, shop staff had to open
the till to give customers their change, but plastic removes this requirement.
New incentives to purchase increase perceived value
Many retailers now offer loyalty schemes that provide points in accordance
with the number of whole Pounds spent. Accordingly customers may prefer
items that are pennies more expensive if it allows them to reach their points
target without spending Pounds on extra items. Furthermore, if retailers offer
‘challenges’ (for example to spend £30 per shop), saving some items to
purchase later may incentivise customers to visit the shop more and more
times, improving the retailer’s market share.
Closer analysis of willingness to pay
Clean, complete data and statistical techniques now allow retailers to estimate
their elasticity of demand more precisely than ever before. If their analysis
suggests that the optimum price is £5.27, it may be better to set a price of
£5.25 or £5.30 rather than £4.99 or £5.49.
Consumer backlash against ‘complex’ pricing
Ranson Pricing has noticed an increasing amount of unsettlement against
aggressive pricing practices, particularly for ‘essentials’ in the supermarkets.
A clear Pound is an easy to understand price and some reluctant shoppers
might even prefer to pay £1 than £0.99 because it is ‘simple’.
Bundling opportunities inspire consumers more than subtle prices
Retailers are now starting to offer many products in bundles. Good examples
would be paints and brushes, coffee and milk, and rail tickets with buffet
vouchers. These bundles may inspire consumers more than subtle prices. For
example, consumers may prefer to buy a pot of paint and a brush for £3.00
rather than paint for £1.49 and a brush for £1.49 (total = £2.98). Multi-buys
may have a similar effect.
As always, it makes sense to trial & improve initiatives
Businesses seeking to move away from the 99p pricing model should be sure
to mitigate risk through implementing their changes in a phased manner with
plenty of trial & improvement exercises.

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SIMON COWELL THE PRICING STRATEGY EXPERT
In an episode of the X-Factor last year the media mogul Simon Cowell offered
his Mini as a prize in a competition. No doubt he realised that the yields from
his share of the entry fees would exceed the price when selling the car in the
second hand market. It looks to us that Simon Cowell understands a key
driver of pricing strategy decisions – he understands how to make the most
from different sales channels.
In your business, the prices appropriate to different sales channels may vary
in accordance with the market segments that they serve. Understanding the
willingness to pay of each is an important pricing strategy challenge and there
are three key issues to consider.
Three-step process to understanding market segments & distribution
channels
Ranson Pricing’s three-step process applies to cross-channel pricing in a
similar way to the ancillary revenues process. See this earlier article for more
information. The first step is to conduct fundamental research using well-
known survey methods, (not forgetting to ensure that results are both
measurable and meaningful). With survey data in-hand, take a look at your
internal data to validate the survey results and formulate hypotheses about
how you would expect cross-channel pricing initiatives to perform. Finally, roll
them out in a cautious manner, measuring the results and expanding them to
other markets and products if the prove a success.
Different segments may migrate to new channels over time
It is possible that over time some of your market segments could migrate to
new channels and each group could have different buying habits. Pricing
teams will need to understand the position of each to serve each customer
with the right price. For example, early adopters of a particular feature in a
mobile phone app may be characterised by higher or lower willingness to pay
than people who start using that feature some years later.
Translate the data into competing stories to convince other stakeholders
Channel management is often assigned to people outside the pricing group,
who they may think differently to your pricing specialists. If this is the case,
Ranson Pricing recommends translating the data into compelling stories that
colleagues can easily understand rather than presenting a rigorous statistical
evaluation. Ranson Pricing finds stories that refer to families of four, retired
couples and groups of students particularly effective.

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DOUBLING-UP ON LOYALTY
Loyalty schemes, which reward customers for making purchases, have been
an important ingredient of pricing strategy for many years. But now that there
are so many loyalty scheme operators there is a risk that a ‘simple’ model
rewarding all customers equally might not be enough.
In order to make a loyalty scheme distinctive there might be opportunities to
cause valuable customers to believe that your loyalty scheme is the most
worthwhile of them all. Ranson Pricing has identified three of these, which
operate both directly and indirectly.
1. More points per transaction for regular customers
Airlines and hotels have for many years offered a ‘tiered’ loyalty programme,
where high-spending customers or regular users are rewarded proportionally
more for their spend than customers spreading their purchases around a
range of suppliers.
The Gold or Platinum frequent flyer card is not only seen as a status-symbol
in some circles, but can also be extremely valuable if an air mileage bonus
allows a family to either travel in a higher class of service or take a second set
of nearly-free holiday flights.
Operators seeking to implement such a tier-based system will find that there
is a trade-off between offering rewards on a transactional basis (where higher
spend in one instance results in more loyalty points being awarded) or a
regularity basis (where high frequency users are rewarded, even when
making small transactions).
A tier-based loyalty programme need not be confined to travel operators. For
example, retailers could make it easier to jump to higher tiers for customers
either visiting more frequently, spending large amounts more often or buying
higher value products. Entertainment operators could offer customers buying
‘prime’ seats at a film or concert faster promotion too.
2. More bonus awards to regulars
Even if loyalty operators do not adopt a formally tiered system, there are still
opportunities for them to reward higher spending or more frequent users.
The first of these is to give more awards to regular users or high spenders
than others. For example, a supermarket giving out vouchers for money off or
bonus reward points may give more or higher value coupons to the customers
they wish to incentivise the most. Turning loyalty on it’s head, this idea could
also be used to encourage first-time or irregular visitors to come to the shop
more.

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3. Competition
A second opportunity for loyalty schemes that are not tiered is to hold no-cost
competitions to give customers an opportunity to boost their points. Ranson
Pricing is absolutely committed to fair and open competitions. But we believe
that provided that the top prizes are accessible with equal odds to all, a loyalty
operator can legitimately guarantee higher prizes for their most valuable
customers.
For example, a supermarket might guarantee to award at least GBP 1 in value
of points following a GBP 20 spend. But for customers who have spent GBP
2,000 in the past twelve months or visited more than 100 times they might
guarantee to award at least GBP 5 in value of points.
Such guarantees may or may not be advertised, but if an operator tells a
customer about their high guarantee in advance then that customer may feel
more valued, become more loyal to the business and offer a higher proportion
of their spend in return.
Balancing incentives
There is an important strategic dilemma for loyalty operators seeking to
encourage their most valuable customers to keep spending in their shop. This
is whether or not to offer rewards based on the size of individual transactions,
total spend over a long period of time, the number of visits or a hybrid of any
of these. As is our normal practice, we recommend taking such decisions on
the basis of robust and rigorous analysis.

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IT’S COLD OUTSIDE, SO WHY CAN I NOT BUY A COAT?
The maximum temperature in London today is forecast to be 12 degrees
Celsius. Although Jack Frost may be jetting off to the southern hemisphere, it
cannot really be said that weather is actually warm.
Yet when Ranson Pricing’s in-house Pricing Expert Oliver Ranson was
walking by his favourite clothes shops the other day he was interested to note
that shorts were available for sale but coats were not. At Ranson Pricing we
have carefully considered this apparent paradox and think that we have come
up with a pricing-related explanation.
This is that clothes shops’ most valuable market segments may care enough
about their display of fashion to pay a premium to plan ahead, buying shorts
before the weather gets warm and coats before it gets cold. Which leads on to
that old chestnut of how pricing links to product development, in this case that
fashion is a different product to simple clothing.
In other words, it’s all about market segmentation!
There may be some other examples of products that could be considered
much more than what they seem. Flights are about much more than carriage
through the air and hotels are about much more than a comfortable bed. Both
of these products facilitate greater things, be they a family holiday, an
important business deal or a chance to explore the world.
Even the basic food and drink products sold on the high street might be part
of something more if they cause friends and families to enjoy a memorable
meal together.
Fortunately it is easy to find out how your customers are inspired by your
products through standard surveys and customer research, as well as
evaluating any data that you might already have in house. But it is important
that the insights gathered can be used for effective pricing strategy and
marketers may need to work closely with pricing specialists during the
development process to ensure that this is the case.

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PRICING & ORGANISATIONAL STRUCTURES
Where should pricing sit within an organisation? It might be in marketing,
revenue management, sales or even on it’s own. Each business will have
unique requirements and an organisational structure should be designed to
help align pricing with wider strategic objectives, not forgetting that pricing
people tend to be skilled in general quantitative analysis and can help other
teams boost their performance too.
Ranson Pricing has identified five key issues relevant to pricing’s position in a
larger organisation. They each come with their own set of costs and benefits
which reorganisation exercises will need to take account of. There is also an
important risk management element to ameliorate the cost of employees
retiring, resigning or being redeployed elsewhere in your company.
1. Pricing involvement with corporate planning and demand forecasting
Elementary economics teaches that price is the outcome of interacting supply
and demand. Whether or not pricing specialists should influence each of
these is an interesting question. Ranson Pricing recommends that although it
is always wise that your pricing specialists be involved with both the
organisation’s strategic requirements should be considered carefully when
deciding whether to internalise planning and/or forecasting in a single job
description with pricing. Here are three reasons why:
Are the skills necessary for success in your company’s pricing closely
aligned with those necessary for success in the planning and
forecasting? Tactical pricing initiatives and short term (< 1 year) demand
forecasting are quite closely aligned. The ability to respond to market changes
is a key skill for both pricers and forecasters and individuals who can do well
in one of these roles may well be able to do well in the other. On the other
hand, pricing strategy and long term planning are also closely aligned so
organisations with each qualified person doing a bit of these can also be
successful.
You need some pricing experts. It is likely that your business will need
pricing specialists to handle operational matters and strategy concerns.
Especially on the operational side, not everybody needs to be an expert. But it
is important to ensure that all pricing specialists are able to develop skills in
line with their expectations and ambitions. For individuals on the strategy side
or seeking to move there from operations it is likely that a demand forecasting
and planning component of their role could hinder their opportunities to add
value through purer strategic analysis.

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What is the risk of pricing specialists moving to other jobs? People
retire, resign or move to other places in an organisation. That is a fact of life
and a well-planned organisational structure should minimise the cost of these
changes. For this reason, it is unwise to have a large number of key skills
exclusively practiced to one particular individual and accordingly it is
worthwhile having pricing specialists, planners and forecasters at least
engaging with one another if not actually all doing similar jobs.
In businesses with an established revenue management practice it is likely
that pricing specialists are involved to some extent in demand forecasting
exercises. If this is the case, then organisational structures from the past may
heavily influence the way things are done today, even if new alternatives may
present better solutions to key issues currently at hand. If this is the case at
your business, it might be worth taking some time to think carefully about
whether or not your organisational structure is making the most of the human
capital you have available.
2. Pricing people and the sales process
Pricing as a discipline largely seeks to maximise revenue to a whole company
whilst sales teams, provided that the company is not small, tend to thrive at
the individual market or product level. This is an important distinction because
the two objectives are not necessarily closely aligned, especially when
capacity is constrained.
For example, an international airline’s sales team in Europe may find
themselves unable to sell seats at ‘normal’ fares in light of extremely high
demand from passengers buying high fare return tickets to Europe from
Africa. In this case a pricing specialist would normally seek to disregard the
European team’s sales target on the grounds that the traffic from Europe is
simply not worth having compared with the higher value flows from Africa.
For another example, a cinema group operating several multiplexes in London
might prefer to let one multiplex operate at lower profitability in order to avoid
revenue cannibalisation at the high profile west end screens. In this case the
pricing team would normally seek to maximise the revenue from all the
screens available rather than help specific teams meet their individual targets.
Accordingly Ranson Pricing does not recommend that pricing people
participate directly in the sales process. Pricing skills can however be
extremely valuable when seeking to direct colleagues in the sales force to
gaps in the market or new ways of packaging the same product. So indirect
participation in sales and advice to the teams in the field is likely to be a good
use of pricing specialists’ expertise.

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3. How to use pricing specialists as internal consultants
One of the key skills of the pricing specialist is an ability to distil underlying
stories how about customer archetypes are behaving from complex market
dynamics. At many businesses such insights are essential elements of
strategy in other areas. For example a data-driven approach to product
development requires extensive use of customer focus groups to establish
which product elements are valued and which are not. Pricing specialists
could in this case be used as internal consultants to help a development team
implement or refine this approach and others like it.
It is likely that a pricing specialist or two would make a helpful addition to any
strategy working groups or internal consulting teams that you already have in
place. If you do not currently use your human capital in such a way then
perhaps approaching an enterprising pricing specialist could be a good way of
getting it off the ground! Whether or not the pricing specialist should move
permanently to the internal consulting team or mix it with existing pricing
responsibilities would depend on the circumstances in question.
4. Accommodating data scientists & technology specialists
At Ranson Pricing we believe that it is essential that tariffs be set on the basis
of facts and analysis. Studying data and using it to tell compelling stories that
explain why stakeholders should support particular pricing initiatives is a
pricing specialist’s daily bread. Inevitably there must be a role for data
scientists and technology specialists in the pricing process.
But we caution against these experts being too closely involved as too much
intensive statistics may cause other stakeholders to ignore the pricing team’s
work because they feel it is ‘too hard’. It is also possible that a focus on data
science and IT could lead to key initiatives that emphasise the art of pricing
being missed.
Accordingly an organisation should think carefully about whether or not data
scientists and technology specialists fit right into the pricing team or whether
they should be positioned as internal consultants who can provide their
valuable insights into the pricing process when required and without disrupting
the art of pricing.
5. Sharing is caring
It is likely that your pricing specialists have a lot more to offer your business
than through pricing work alone. Ranson Pricing expects that companies
seeking to drive their revenue through analysis will operate increasingly with
teams of analysts acting as internal consultants. Whatever organisational
structure you eventually adopt we recommend that you be sure to incorporate
pricing into the process of setting group strategy and helping each part of the
organisation meet it’s individual objectives.

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HOW IS B2B PRICING DISTINCT FROM B2C?
When a business sells their products in a B2B environment the pricing
challenges may not be entirely the same as if a customer was buying single
units. Since a corporate Client might buy many more units than one single
customer there is scope for negotiation and Client procurement departments
who do not actually use your product themselves can influence the decision-
making.
But all too often this can lead to a worrying situation where pricing is simply
considered a tool to seal the deal and is not designed to either address the
Client’s actual needs over the medium to long term or facilitate revenue
growth at your business. We have identified three key issues and a five-step
process to help you price effectively for your B2B market segments.
1. Pricing decisions must still be made on the basis of analysis
Just as in the B2C environment, Ranson Pricing recommends that B2B
pricing be accomplished on the basis of analysing the facts. These can
include:
The competitive environment: Whether or not requests for your products
and services are formally tendered it is important to remember that you are
likely to have competitors for the contract. Being aware of precisely who your
competitors are and measuring how they change over time is just as
important in B2B pricing as in B2C. The exact balance of competition will
depend on the bundle of products and services that your Client actually
needs, so techniques of competitive benchmarking that are similar to what
you would use in B2C can also work well in B2B. Imagining your Client as a
group of single customers is a good way to facilitate the competitive
benchmarking process.
Your history dealing with similar contracts: It can be helpful referring to
past deals with similar and less-similar Clients when considering the right set
of prices in a B2B environment. Just as you might use historical data
regarding proclivity to buy under a B2C model, it makes sense to apply the
lessons of history to find the B2B tariffs that are both likely to be attractive
enough to the Client to win the contract and likely to support your own
objectives for revenue growth.
Existing deals with the Client: When you already have a contract with a
prospective B2B Client it makes sense to evaluate that contract’s
performance in respect of the bundle of services actually used over the life of
the agreement and compare that to expectations and points discussed in the
tendering or negotiations stage of that contract coming into effect.

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2. The key to success in B2B pricing is well-defined ownership of the
pricing process
Just as in the B2C environment, B2B pricing must not simply be considered a
lever to pull to win a deal. Accordingly it is important to ensure that the pricing
process is owned and operated by a team who have the interests of your
whole business at heart and not just business development within a particular
geographic region or product range.
3. B2B pricing offers unique opportunities to evaluate customer
willingness to pay
It might reasonably be argued that B2B pricing is a bit easier than B2C
pricing. This is because the Client’s nature as an entity larger than a single
customer means that your pricing and sales teams may have more insight into
their willingness to pay. These insights can come from several sources:
Company accounts: In many markets it is likely that your Client is required
by law to file accounts in the public domain – you can use these to see how
profitable they are and how their expenses are balanced across different
areas of the business, which might help you evaluate the extent to which your
products will boost the Client’s profitability. Ranson Pricing recommends
collecting and analysing the accounts of key Clients and prospective Clients
over many years.
Press reports: Specialist trade publications and the general press may
interview managers and executives from your Clients and prospects. Keeping
an eye on these news sources might give you that little bit of extra information
that gives the ammunition you need to know regarding the Client’s price
sensitivity.
Tailoring value added services. It is possible that a Client may find specific
services valuable even if they cost you only a small amount to provide. In
these cases, offering such services on a complimentary or good-deal basis to
support a higher price point for the core contract may be preferable to cutting
headline prices to achieve a quick win, especially when there is a prospect of
repeat business.
4. Ranson Pricing’s five-step process to pricing successfully in a B2B
environment
Step 1 – do your research: Understand everything you can about the
Client’s business, including their accounts and statements in the public
domain.
Step 2 – understand what you need to achieve: Evaluate the extent to
which each deal is really ‘essential’ for your business development and be
happy to lose some deals because if you sell everything then you are too
cheap.

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Step 3 – develop a valuable contract for a fair price: use your
understanding of the Client’s requirements and the competitive environment
to create a compelling contract that emphasises good overall value for the
Client rather than a low headline price.
Step 4 – negotiation on the basis of total value rather than price alone:
Take your contract to the Client with a view to being a dependable and high
quality vendor.
Step 5 – document your results and use the lessons from this
negotiation to inform the next: Write a simple, easy to understand report
about each negotiation, regardless of it’s success or failure, in such a way that
it can be analysed and reviewed over time to help meet your business’s
revenue objectives in the medium and long term.

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THE CASE AGAINST PROMOTING YOUR SALES
As customers we often see our favourite shops, airlines and entertainment
venues posting big red banners in their window or on their web site with
‘SALE’ prominently displayed in enormous letters. This practice is so often
seen that it might be easy to think that it is the obvious and only thing to do
when you are having a sale.
Surely telling your customers all about the sale will be the only way to make it
pay? At Ranson Pricing we say not necessarily! Although the big red banners
have their place, there are four good reasons not to put them up all the time.
Competitor response
It is well known that businesses often use software to monitor their
competitors’ prices. But the process in place can vary across operations.
Avoiding red banner-style promotion might stop competitors doing the same,
even if they lower their prices to match you. There might also be a little extra
time before the competitor response hits too, especially when software does
not monitor all price changes continuously. This matters because potential
customers might hear about competitor sales before they hear about yours,
eventually buying from the competitor without even walking through your door
or seeing your attractive prices at all. As a result, avoiding red banners can
improve market share during sale periods and help sell inventory that would
otherwise be spoiled.
Quality concerns
Customers, visitors or passengers valuing quality over price may be put off by
a sale. In a shop, they might think that the only products available will be of
lower quality than usual and so not come in at all. For venues, an event with
such obviously cheap ticket prices might not be very good and so not worth
attending. An extreme example would be airline passengers thinking that an
airline is so desperate for passengers that it will be going out of business
soon, leaving them without the flights they paid for.
Value for money
There might be some customers who feel that because they got a good deal
from you under apparently normal conditions, they will think that you offer
good value for money as a matter of course and be more likely to visit your
shop or site in the future. They might even tell all their friends and family
about how surprised they were to see your low prices, inspiring more people
to consider buying from you and driving revenue growth all year round.

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Measuring red banner value
Offering a sale without explicitly promoting the attractive prices offers an
opportunity to gauge just how effective red banner-style marketing really is
against lower prices themselves. This need not be an all-or-nothing decision
since some segments and markets may be more responsive than others.
Businesses who conduct trials of sales without promotion will come to
understand when and where (if at all) this type of pricing and marketing yields
a good return by itself and accordingly allocate budgets more effectively,
boosting profitability over the medium to long term.
Red banners still have their place, just not all the time
It is likely that some segments at some times of the year will be so responsive
to red banner marketing that it is worth doing some of the time. But avoiding
their use all the time will help you understand more about your customers
behave, strengthening the foundations for all your pricing and marketing
decisions.

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HOW A PLANE TICKET CAN ‘GO VIRAL’
On 8th
July 2015 British Airways filed business class fares from Germany to
Hong Kong for approximately EUR 1,400 (GBP 1,000, USD 1,600). With
heavy competition on this route from the middle-east-three (Emirates, Etihad
and Qatar Airways) this might not look like headline news. But as a good fare
it was widely reported across flying enthusiast groups on social media.
Lots of people appeared to be buying these tickets, including several
personally known to our Pricing Expert Oliver Ranson. If ever a plane ticket
can ‘go viral’ (as the technology people have it) this was that time. Five things
about this deal made it a little special and important for pricing strategy
professionals to know about.
Special ticket conditions acted to create a market where none existed
before
Free stopovers in London were permitted in both directions. This meant that
people based in the UK could buy a weekend break in Germany and then
‘stopover’ in London for days, weeks or months before taking the long, comfy
flight to Hong Kong. Essentially there were two or three trips involved for the
price of one.
The new market did not cannibalise revenue from existing markets
Passengers originating in Germany and buying the fare would have been
unlikely to take a stopover, taking a connecting flight at Heathrow immediately
after arriving. And passengers based in London and wanting to take a ‘normal’
trip to Hong Kong would be unlikely to bother flying to Germany and back
when they could take a one-stop flight on another carrier for only a few
hundred Pounds more.
The new market caused people to buy tickets when they would
otherwise not have flown at all
The comments on social media, together with the comments of Oliver’s own
personal friends who bought tickets, suggest that passengers buying a
weekend break in Germany and a flight to Hong Kong would not otherwise
have flown at all. Fares booked into the lowest inventory class and capacity
controls were no doubt in effect, so as a result BA sold seats that would
otherwise have been spoiled and every passenger buying the ticket was doing
so at close to 100% margins.
The new market caused people to buy other BA tickets at the same time
UK based passengers who wanted to take advantage of the ex-Germany
fares needed to get to Germany first. No doubt many of them booked tickets
on BA, either generating sales in this market at regular fares or reducing BA’s
Avios (airmiles) liability in the process. Quite possibly BA Holidays were able
to sell some hotel rooms in Germany too, earning some commission.

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Social media discussion was critical to success
Had it not been for social media, it is unlikely that the tickets would have been
sold in the volumes that they were. Social media facilitated the quick spread
of news about the fare product to the people who really wanted to hear about
it.
Were BA really smart or really lucky?
Only BA’s pricing and revenue management people will know whether or not
the lessons drawn in this article were in line with their intentions. But the case
does present some interesting ideas about the innovative use of social media
in pricing strategy, which will no doubt become an increasingly valuable sales
channel in years to come.
How is this relevant for me?
Essentially, BA used social media (intentionally or not) to create markets
where none existed before and sell inventory that would otherwise have been
wasted. With a little brainstorming, it is likely that similar initiatives can be
successful in your business. Finally, it is worth mentioning that initiatives like
this limit the ability of competitors to respond – initiatives where the abilities of
competitors to respond because non-price mechanisms are a key component
of the appeal to customers.

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UMBRELLAS AND RANDOMISED PRICING
When it is raining in London, Piccadilly’s shopkeepers make sure that they
have plenty of small umbrellas for sale. Anybody caught out will be inclined to
stop and buy one. Inspection reveals some interesting prices for although four
or five brolly models may be available, there can be ten or eleven prices!
This is because people in a hurry may simply grab the first umbrella they see
in the category they want rather than taking the time to look through what else
is available. They are clearly willing to pay for convenience – a perfect
example of second-degree price discrimination!
The shopkeepers on Piccadilly seem to practice their umbrella pricing by
adding a few Pounds to some units of each model while leaving the prices of
others as normal. Of course the higher priced units are positioned at eye level
and the rain encourages people to hurry. When it is not raining, customers
can be seen choosing carefully.
There are four reasons to investigate incorporating randomised pricing in your
business.
Competitors find it harder to respond
In markets where competitors continually monitor prices and react
accordingly, introducing a small random element that varies by customer can
make it much harder for them to implement their own pricing strategies and
direct more resources than they might otherwise to simply understanding how
your pricing operates, taking away some of their ability to compete with you
through other means.
Some customers voluntarily pay a small increment rather than incurring
search costs
Randomised pricing works well for umbrellas because people in a hurry want
to avoid the rain. Before the rain starts people can be seen spending time
looking through the brollies to find the lower priced ones. One group of
customers is incurring search costs and the other group is sometimes paying
a higher price in return for lower search costs. It is likely that in your industry
too some people will voluntarily pay a few Pounds or Dollars more to save
some time. Standard segmentation and trial-improvement techniques can
help show how to identify the different groups.
Enriched data sources facilitate analysis
Understanding whether or not a marginal Pound or Dollar actually impacts
demand will facilitate understanding about whether or not small price changes
will be profitable across all pricing analysis, whether or not randomised pricing
is involved.

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For industries with legacy distribution technology, randomised pricing
give an exciting new incentive to invest in alternative methods
Legacy distribution technology like the global distribution systems used so
frequently by airlines, hotels and other travel service providers are not likely to
be providing the facility to offer randomised pricing any time soon. When there
may be a business case to trial and implement the ideas outlined in this article
it will be necessary to incorporate them into alternative distribution channels,
which will no doubt frequently be based on mobile technology.

!
A BRAND NEW DISTRIBUTION CHANNEL – ARE YOU READY TO PRICE
IN AUGMENTED REALITY?
Augmented reality (“AR”) involves a customer pointing their smartphone at
your logo, shop, restaurant, cinema, advert, magazine, aircraft, web site or
any appropriate surface which you have configured appropriately and find
related content delivered directly to their screen.
Of course this does not happen automatically and you need to develop and
submit the content for web hosting first. But to all intents and purposes it is an
entirely new distribution channel, based on neither traditional shops or
traditional web sites. The pricing implications could be enormous.
People can buy products simply by seeing your advertising or logo
If you place an advertisement in the newspaper that is recognised by an AR
scanning app and the reader sees a logo indicating that AR content is
available, then that reader can potentially be taken immediately to a facility
where they can find out more or even purchase your products.
People buying in the AR environment may have different willingness to
pay
If a person is buying your product in such a manner, it is not clear whether or
not they have higher willingness to pay than people purchasing through
traditional retail or e-commerce outlets. As always, Ranson Pricing
recommends conducting a series of trial and improvement exercises to
determine exactly how the demand curve lies. With the technology currently in
it’s infancy and not widely adopted by retailers, offering discounts to people
buying through AR would be sure to distinguish your product in the market
place, especially among young, technically savvy customers.
Offering products through AR can help serve untapped markets
If you would like to increase your market penetration among early technology
adopters, using AR to offer products and services will be an innovative way to
do this. Another untapped market could be enthusiasts. For example,
distributing AR surfaces to social media groups and specialist websites may
help capture incremental revenue from these customers while regular, non-
enthusiast customers remain buying at the regular prices.
Distributors may be slow to respond
Large corporate distributors who inhibit pricing innovation, Global Distribution
Systems for example, are likely to lag behind companies investing in these
innovative opportunities. For airlines shackled under full content agreements
(as an example) pricing in AR could be an opportunity to break free and enter
a new world of limitless pricing opportunities.

!
RAPID REACTION PRICING – HANDLE WITH CARE
Pricing and data technology has made it possible for pricing professionals to
crunch large amounts of information and post the changes to pricing it
suggests almost instantaneously. Making a rapid reaction to market
developments is often seen as a compulsory element of pricing strategy and
seems to be highly prized in the commercial world generally, especially now
the so-called ‘big data’ has become fashionable.
But Ranson Pricing is cautious. Aggressive tactics using dynamic pricing have
their place, but there are three good reasons why it may not always be the
right thing to do. These will help pricing professionals who find themselves
under pressure to act but have a gut feeling that this would be the wrong thing
to do.
The data and analysis may not be perfect
It is likely that the data and analysis being applied is not perfect. Taking a little
extra time to get these right is often well worth the assurance that a business
will not be propagating a price war. When price changes are automatic the
risk of an error being extremely costly is even higher. A sound pricing strategy
will firstly act to minimise the risk of these events occurring and secondly seek
to implement damage limitation if and when things do go wrong.
Customers may react unfavourably
When consumers see prices go up as they complete their purchase or down
after it has been made there is a real risk that the business in question may
find it loses the trust of that customer and her friends, damaging future
revenue. It is also possible that consumers may make the effort to learn when
and where your prices are lower, resulting in them yielding a lower proportion
of their willingness to pay.
Limiting tension in the operational pricing team may facilitate other,
more profitable initiatives
Pricing strategy is not just limited to the day to day process of setting price
levels. Product mix, loyalty, CRM, market research and ancillary opportunities
are all part of the pricing toolbox and should be subject to due care and
attention. Conducting this work is likely to be much easier when the team do
not have to constantly monitor and react to competitor changes.

!
PRICING CHECKLIST FOR SME
SMEs and the largest corporations in the world have an important thing in
common – they both have revenue and they both have costs. The two
traditional paths to profitability are “saving money” and “growing sales” but
these both have their disadvantages. Optimising a cost base may have quality
of service implications and sales initiatives can be costly themselves at both
development and delivery stages.
But there is a third way to profitability – more effective pricing increases
revenue at almost zero cost. This paper outlines a practical checklist which
SMEs can use to keep an eye on their pricing and make sure that they are
capturing as much value as possible.
Understanding who your competitors really are
It is not always the case that the ‘obvious’ competitor is the one you need to
pay the most attention to and it common for businesses to find that the most
important competitor is the one they have been overlooking. It is worthwhile
finding a way to evaluate market conditions empirically and monitor how they
change over time.
Things to do
• List all the markets you serve by product type and geography and
indicate their importance to your business
• Evaluate which competitors are strong in each market, using as many
measurable indicators as you can think of
• Compare the evaluation to commonly held beliefs at your business – is
the match perfect?
• Document the results and record how the competitive environment
changes over time – communicate the findings to colleagues.
Studying what your customers value
Finding out what your customers actually value can help you price more
effectively through assigning higher prices to products and services that offer
higher value across different market segments.
Things to do
• Understand your historical sales, including where they came from, the
time of year and the length of time between purchase and delivery
• Conduct a survey to collect information about customer preferences –
these days surveying is cheap using online tools, but it is important to
make sure you are asking measurable and meaningful questions

!
• Break down your product into each of it’s constituent elements
including means of payment, time of purchase, means of delivery and
any other relevant element you can think of
• Use the historical sales and survey information to evaluate which types
of customers will be buying each product mix – these are your market
segments
• Document the results and communicate the findings to colleagues.
Building a diverse product portfolio
It is unlikely that each customer buys exactly the same service from you.
Understanding your product portfolio will show you how to translate what each
customer values into either higher revenue or incremental sales. The product
portfolio can include the products and services you sell as well as bundles of
different products and initiatives to encourage loyalty.
Things to do
• Create different bundles to appeal to different segments – if you have
some products or services in your portfolio that customers value but
are not costly to produce, consider bundling them with other products
to give marginal customers an incentive to buy
• Encourage people to give you repeat business through creating
incentives for loyalty – as a bonus, giving customers the chance to see
that you are you are a reliable and high quality supplier will encourage
them to tell their friends about you
• Document what you did and ensure that the revenue and cost impact
of changes to the product and service mix actually purchased are
incorporated into your management information.
Facilitating understanding among all staff
Building a consensus among all staff that pricing is the engine of revenue
growth is a critical component of a successful pricing strategy.
Things to do
• Regularly communicate the results of your pricing work to all your
colleagues so that they feel part of the process
• Encourage their feedback and take action where necessary,
communicating when the feedback resulted in a successful initiative
• Emphasise profitability rather than utilisation, cost or revenue alone –
make sure that your staff understand that sometimes making a sale is
just not worthwhile.

!
Understanding how successful your initiatives are
Using measurable and meaningful criteria to determine how successful your
pricing and other commercial initiatives are will help facilitate decision-making
in the future.
Things to do
• Set a profit-based criteria for success or failure when you try a new
pricing initiative
• Measure the pricing’s performance by evaluating the revenue uplift
from higher prices or revenue dilution from lower prices, the cost or
benefit of market share changes, and the revenue and cost impact of
any changes to the sold product mix.

!
PACKAGING, PACKING & PRICING
A trip to the supermarket is always exciting field work for the pricing strategy
specialist. The retailers have put up plenty of products for people to buy, all at
different price points. Ranson Pricing has commented before about unlocking
your inner retailer. But sometimes it is easy to overlook an important element
of the supermarket experience – product packaging and packing.
It is easy to imagine that packaging is all about branding, advertising and
attracting a customer’s attention to a particular point on a busy shelf. But this
is not necessarily all there is to it. Ranson Pricing has identified three ways in
which product packaging and packing can be used to achieve pricing
objectives.
Packaging can communicate price promotions directly
If you manufacture a product and would like to promote it through price
means, there may be a good chance to put relevant information on the
packaging for consumers to see. Real-world examples that we have seen
include ‘25% extra free’ on a crisp packet or ‘3 for £4’ on a carton of fruit juice.
This type of message can also facilitate promotion analysis if you can control
where stock with bannered packaging is distributed. In particular, you can
compare the sales performance at outlets that historically seem similar in
cases with and without the special message on the packaging.
Packaging can boost consumption without changing the size of the
contents
Once upon a time, Sainsbury’s fruit juice cartons had five little windows in the
side, each corresponding to approximately one glass. But a few months ago
the supermarket reduced the number of windows to four and positioned the
highest one slightly further down. This is interesting because it is likely that as
a result at least some customers will fill their glass that little bit more and only
take four glasses from a carton. These individuals may then buy more apple
juice than they did before, boosting the supermarket’s revenue.
Effective packing can control access to the most popular varieties
When our Pricing Expert Oliver Ranson enjoys a box of ‘Celebrations’
chocolates his favourite is the Malteser. Funnily enough there are only
normally two or three of these in the packet. Other chocolate types have five,
six or even seven pieces. Oliver strongly suspects that market research has
shown Malteser to be the most popular piece and that the manufacturers
deliberately limit the numbers in one packet so that some consumers will need
to buy more than one box to have enough Malteser pieces to go around their
group.

!
WHY ARE THERE NO JOKES ABOUT PRICING?
A Google search for jokes about accountants, doctors or lawyers yields pages
and pages of entertaining results (caution: reading too many of these can be
hazardous to your other activities). But beyond a few points about the price of
petrol and a few Dilbert strips (examples here http://dilbert.com/strip/2009-09-
14 and here http://dilbert.com/strip/2010-11-21) from some years ago there
seems to be little about pricing.
Which is surprising, because every company in the world has to set prices. It
cannot be because pricing is perceived to be complex or dull, because if that
were the case there would be no jokes about actuaries or economists, of
which there are plenty. So Ranson Pricing has identified three reasons why
pricing may not attract attention from the humourists.
Topics for humour in pricing are ‘in jokes’
Many of the accountant, doctor or lawyer jokes are funny because they are
about how people have used these services or common perceptions
(stereotypes, even) about these professions. Perhaps the world of pricing has
plenty of source material but people who are not in the practice are not aware
of them.
Material ripe for jokes might include pricing analysts never actually buying the
product they evaluate at the published price, such as analysts at an airline
pricing a first or business class seat. It might also include topics that are quite
subtle, such as the discrepancy between a pricing professional’s tendency to
emphasise yield and a sales professional’s tendency to emphasise volume.
And surely there would be great potential for somebody to write jokes about a
company that seeks to control some relatively small costs (pricing analyst pay
for example, which is a whole new topic for another time) and as a result
foregoes a much larger amount of revenue.
(Note: I do not claim that the above are funny in themselves, just that a
humourist could probably make some good jokes about them!)
To all intents and purposes, these are ‘in jokes’ which people outside pricing
would not be aware of and perhaps that is why they do not attract attention
from the funny people.
People do not find pricing funny because they do not understand it
Pricing can be difficult for consumers to understand at times, and to some
extent it is surprising that there are not many jokes about this. There can also
be a large amount of quantitative analysis, and perhaps jokes about this tend
to be written with other industries in mind as there do seem to be plenty of
jokes about data and statistics in general.

!
But it may be possible that if pricing’s complexity causes people not to
understand it, humourists may find that their markets prefer jokes about other
topics instead.
People attach pricing issues to specific industries rather than as a
discipline itself
Petrol prices have been high for some years now and everybody feels this in
the wallet, so perhaps it is not surprising that cartoonists have published
pictures of petrol station boards quoting unleaded at a price of ‘arm’ and
diesel at ‘leg’. But petrol prices tend to be set by taxation and international
affairs rather than mechanisms familiar to pricing professionals.
In travel, for another example cartoonists do seem to have latched on to the
idea of passengers needing to pay for ancillary services, getting off the plane
for example (boom, tish!).
Perhaps the pricing profession can learn from the absence of jokes
Increasing emphasis on the role pricing plays in your organisation, both to
internal employees and in external announcements, will cause more people to
understand how it is a field they should be directing their attention to. Perhaps
when humourists start creating more jokes about pricing that will be a sign
that the industry is maturing.

Insight and analysis 2015

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