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Strategic Movements April 2017

April 2017 Pricing, Selling

Saving Accounts when Salespeople Leave

When a salesperson leaves the company, how should their accounts be covered? Research by Shi, Sridhar, Grewal, and Lilien show that B2B firms lose 13-18% of sales to those accounts when transferring them to a replacement salesperson.  This is a significant loss.  What can sales managers do to reduce the risk of account loss? According to their research, putting top salespeople on the account doesn’t do the trick at all.  Rather, putting a person familiar with the account’s industry on it, even if their past sales performance is average or even below average, can almost eliminate the risk of account loss.

Value-Based Pricing vs. Buyer Power vs. Shareholder Beliefs

Clinical trials demonstrated Amgen’s Repatha lowered the risk of deaths, heart attacks, and strokes by 20% compared to standard statin treatment, and lowered the risk of a wider array of heart-related events by 15%. For a $14,500 per year therapy regimen, is that enough to garner market attraction?  SVP Joshua Ofman believes so, shareholders didn’t seem to agree however. If the price agrees with the principles of value-based pricing then the shareholders are likely to be proven wrong.

Marathon Bails Under Pressure

Marathon Pharmaceuticals sold rights for its muscular-dystrophy drug to PTC Therapeutics after facing political pressure over its pricing practice. That bails Marathon out of the hot-seat, but it does nothing to alter the fundamental economics of creating a competitive drug market in the U.S.  Regulatory changes are still required, but I doubt the government is ready to tackle this underlying issue.

Pricing Psych

CA, CO, and NY restaurants are adding a 3%-4% labor surcharge to offset rising labor costs as minimum wages increase towards $15/hr. Why do customers accept this? Customers have pre-set expectations on the reference price of a meal so don’t want to see the price of a sandwich jump that fast. Meanwhile, blaming the price increase on a cost increase makes the price increase more palatable, especially when put in terms of “fairness” as the higher minimum wage is perceived. Clear pricing psychology—will it last? Seems transitory but lasting on the scale of quarters to years, and depends on what becomes the accepted new normal.  Note: the restaurant “labor surcharge” in pricing strategy would be new profit growth for restaurants—similar to a Ticketmaster “ordering processing fee.”

Understatement of the Month

Barnes & Noble expects same store sales to decline 7% this fiscal year, since Internet sellers are encroaching on their turf. In response, John Tinker states, “Retail is soft in general.”  Now that is an understatement.

Costco and Two-Part Tariffs

Costco is raising its U.S. and Canada membership fee by $5 to $60, along with hikes in its Executive memberships. Financials demonstrate that Costco makes most of its profits on the membership fee. In a typical two-part tariff, all profits come from the entrance fee (membership fee in Costco’s case) and the metered fee (price per item sold in Costco’s case) is set to the marginal cost.  When you raise the entrance fee, it drops down to the bottom line.  Expect a bumper profit next quarter at Costco as their membership proves sticky.

Customer Discounts or Cost of Production?

Labor on car manufacturing has been reduced to less than $2,500 per auto. Manufacturer sponsored buyer incentives have been $3,830 per auto according to JD Power, representing a 10% increase over last year.  At 10.5% of the sticker price according to Alix Partners, it is clear that discount management should be a high priority for GM, Ford, Chrysler-FiatPricing Done Right anyone?

 



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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