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Annual Price Increases? A new approach to leveraging stronger profits

December 1, 2011
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Annual price increases - sophistication can leverage greater returns for publishers

December is often the time for publishers to address the issue of annual price increases; this is particularly so in book publishers where margins are uber-tight but the “January price rises” are not exclusive to books. Enter the “across the board” price rise – a technique now viewed as highly flawed for many reasons.

Typically, an across the board price increase will either apply a price increase to all publications or there may be a few bands: 5%; 10%; 15% etc. Yet price bands do not reflect the value offered by the publications sold. If stock isn’t moving at the current price, price is unlikely to affect stock movement at any price (hence why many a good book ends up in the remainder shelves and specialist resellers).

It is well known, of course, that a 1% increase in price delivers an 11% increase in profits if all other things remain the same. So it can be argued that if sales volumes don’t change then products of any quality can have their price increased. This is of course logical – except that in many cases a price increase may not actually reflect the real value offered by a publication and may well end up leaving valuable profits un-leveraged.

Sales volume is directly related to the value offered by a product. Assets drive purchasing decisions (brand, quality, content) and price is then seen as an indicator by the customer as to whether what is on offer represent an attractive exchange: money for value.

But many publishers have not succeeded in understanding that their products and services may indeed be worth far more than they are charging (or, conversely, far less). It is for this reason that pricing consultants are now viewing across the board price rises as an antediluvian device for leveraging company revenues.

As a way of describing the issue, Paul Hunt, president of global pricing consultancy Pricing Solutions, describes how, in the US property market, many properties are priced on a cost-plus basis, irrespective of their location on a plot. “Lake front” properties will always outsell street side properties – the former are under-priced and the latter are over-priced in terms of the perceived value for the price.

Standardised pricing here has created a system where properties perceived to be of high value are in high demand yet priced cheaply. Conversely, properties in lower demand are priced at a point where the value (a home of just the same size and quality) is seen as being not worth the investment.

But Hunt has a caveat, which is very significant.  “A certain amount of confidence needs to be applied in pricing — you must believe in your lakefront property”, he argues.After all, if you don’t believe in it, why should the customer?”

Cynical price increases which bear no relationship to perceived value are a recipe for disaster. All the more reason, as we have said before on A Brand Day Out, for companies to have a much more sophisticated approach to their customers than they currently do. Value is critical in attracting new customers and – especially with subscriptions, digital services and magazines – retaining existing ones.

For publishers, of course, value is difficult to assess in many cases and, equally, it can be difficult to predict what will be a good seller. Without access to complex and often expensive tools like conjoint analysis software, a publisher must turn to its instincts: reviewing sales trends to see which products are selling ahead of their predicted curve.

If people are buying a product in large numbers at £16.99 and demand is ongoing (or even increasing) then a higher price can be charged. Retailers can then price to your price reference point – Amazon, for example, will use their complex algorithms to price down when sales increase – but the advantage remains in that, whether selling via a retailer or selling direct, the higher “reference price” is now the driver of stronger profits.

What this means of course is that the annual price round is more difficult because across the board price increases are easier to implement systematically: simply select the products and apply a universal price increase. But more sophisticated players are now examining each and every product in their portfolio, assessing sales volumes, deciding on risk, and implementing price rises which reflect the real value the products offer to customers.

At a time when every purchase made is being assessed for value, publishers ignore the potential real value of their products at their peril.

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