The New York City area, with its millions of people, was the first fully developed consumer market in the country, and shoppers there made the most of it. Highly competitive, diverse and seemingly disorganized, it served a customer base that was, to put it gently, very aware of price and price differentials.
To the untrained eye, shopping in New York often resembled a bizarre, museum-sponsored re-enactment of barbarian invasions. Uncontrollable hordes of bargain hunters laid siege to Manhattan stores while foraging shoppers scoured the outlying boroughs in search of discounted merchandise. What was actually happening, though, was a kind of consumer revolution where information was shared and retailers found that the list price was only a number.
Not surprisingly under those conditions, New York shoppers were the source of the legendary first rule of consumer sovereignty: “Never pay retail.”
Once the market there changed, it changed everywhere in the country. Purchasers and businesses began the dance of the discounts that we still enjoy today. One major result of this was that product and service pricing went from being a simple process to a complex, yet crucial, one.
Pricing is one of the most important factors, perhaps the most important factor, in determining the revenue flow and profitability of a business. And for that reason, you would think that it would have been studied up, down and sideways. Yet that has not been the case.
Joseph Cote is a marketing professor and business program director at Washington State University’s Vancouver campus. He says, “There is some really good research being done by a few people, but pricing policies and pricing decisions have not been at the forefront of academic research. While economists and others have examined pricing theory, the practicalities of real-world pricing policy have been a largely neglected element of the business model.”
In this instance, there is a precise parallel between the academic and the business worlds. Given its importance, you would think that businesses would zero in on pricing policies and really think them through. But most businesses do not spend half enough time on product pricing. Not surprisingly, of course, they do end up spending lots of time cleaning up messes created by their pricing missteps.
Mark Baerwaldt, a Seattle-based entrepreneur and financier with broad business experience, says, “Many companies have trouble understanding just how important pricing policies are to both their profitability and their future. Mid-range companies, in particular, seem to have difficulties in controlling the prices they have set, and they experience margin and profit problems as a result.”
It is not an accident that both Cote and Baerwaldt use the term “pricing policies” rather than prices. For most companies, the price of a product or service embodies a lot of policies that contribute to operating costs and affect profit margins.
Some of these policies are more visible than others. Conditions for accepting returns, for example, are usually fairly specific — although not always, as we all know. There are other less visible elements, though, such as the amount of time that salespeople and customer service representatives will spend on a customer account. There are also less visible policies that establish a company’s market relationship with its competitors, its distributors and its customers.
And then there are discounts, some clearly visible, some not so much. Pricing policies include internal decisions on the size of discounts, what prompts them and who gets them. They also embody discounting decisions that are made by the market.
The most common discounts in use are based on volume, shelf-life, seasonality, store (or Web site) traffic, payment schedule and, of course, tradition. Rebates are a form of discount and have developed a life of their own in the marketplace.
Volume discounts are the easiest to defend, operationally, economically and legally, but they sometimes are difficult to negotiate and to sustain. The theory behind volume discounts is that larger sales transactions to a single customer cost your business less in overhead, marketing and operating costs.
The reality of volume discounts, though, is another matter. High-volume customers are fully aware of the cost savings and commonly view them as being as much theirs as yours. Moreover, these customers often attempt to shift their own operational and inventory costs back to you by demanding specific packaging, shipping and return acceptance agreements.
As a result, dealing with large customers can often really tax not only your negotiating skills but also your cost accounting abilities. It is not at all unusual for a business to find out, eventually, that its biggest customer is actually a loss-generator. To paraphrase the late Sen. Barry Goldwater, “Any customer big enough to give you everything you want is big enough to take away all the profit you’ve got.”
James McCusker, a Bothell economist, educator and small-business consultant, writes “Your Business” in The Herald each Sunday. He can be reached by sending e-mail to otisrep@aol.com.
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