Storytelling around pricing…

1. Storytelling around pricing… with Isla Haddow-Flood & Elske Henderson

2. The plan for tonight… Visiting speakers tell their pricing stories… • Julia Teale – Professional Artist & Teacher • Spencer Street Studio • www.spencerstreetstudio.com • Mobile: +27 83 410 3460 • David Trip – Art Dealer • Everard Read Gallery, Cape Town3 Portswood Road, Victoria & Alfred Waterfront, Cape Town, South Africa 8002 • www.everard-read-capetown.co.za • Tel: +27 21 418 4527 • Erica Glyn-Jones – Brain Bank organiser for PANSA • PANSA Brain Bank • www.brainbank.co.za • Tel: +27 83 567 8989

3. What is in a price…? What is price • Price is a function of supply and demand. • People want things. People need things. If that is a public demand for something, there will always be a need for that thing. • There are several ways to establish what the value to supplying the demand. • But if there is no demand, how do you create it? • Following are the traditional pricing methods that will allow you to form the optimal pricing strategy which will make all the difference between success and failure

4. Various pricing models… • Flat fee for product/service delivery • Commissioned book, illustration, etc. • Cost + profit • Cost based pricing • Value-perception pricing • Subscription options • Royalty free • Assignment or ceded rights • Right ready/multiple usage • Microstock method • Open source • Creative commons licence • Open pricing model • “Try before you buy” • Monopolies or controlled pricing • govt. control; de Beers

5. Cost-based pricing • How to determine the costs of a creative piece? • What are the factors?: • Tangibles: • materials • electricity/space rental/telephone/research • staff • transport • admin/communications • marketing (time and materials) • living expenses/accommodation/food • opportunity costs • yime spent compiling quotes/proposals • inflation/interest rages • What the market is prepared to pay

6. Cost-based pricing /cont… • What are the factors? /cont…: • Intangibles: • rarity of the product (one-off’s vs. mass produced) • reputation • education • experience • enthusiasm/energy • Intellect • talent • market trends All of these factors have to considered when pricing your product or talent.

7. Cost-based model • The price a company charges is a fixed mark-up on the cost of the goods it is selling. This is easiest to measure when the seller is simply reselling a product manufactured by another company. • The supply is endless and elastic – other suppliers can cut corners, and costs and then offer the same goods at lower prices. • Cost-based pricing only works well when there are predictable costs and clear differentiation among competitors and almost always are commodities-based. They also tend towards low-margins. • One way to avoid the low-margin track is to have sustainable competitive differentiation, for example patent protection or regional exclusivity.

9. Value-based pricing • How to determine the value of a creative piece? • Value-based pricing is when the value delivered by the seller, in terms that make sense to the buyer, is what determines the price. • A clear example is the art market.

10. Value-based model • People do not buy art based on how much it costs the artist to produce; they buy it because it has value to them. And in the case of high-value art, to others as well. • The supply is fixed as the artist can only produce so much in his or her lifetime. • Another value-based model is law, where the lawyer gets paid a percentage of any judgment or settlement… if there is none, then the lawyer get paid nothing. The fee is directly related to the value of the services.

11. Value-based model continued… • To establish a value-based pricing models you require a full understanding of the value chain of the market you are selling into. • Researching the dynamics of your market is essential. You must be able to identify the value that your product or service provides in terms of their customers’ businesses. • Model your product according to the financial benefit of a product in the customers’ terms • This is as important as forecasting the sales

12. Pricing strategies • In addition to the two pricing models mentioned earlier, there are many ways to price a product • First, let’s look at the pricing strategies matrix:

13. The four main pricing strategies • Premium Pricing – a high price is applied when a product or service is unique (creative, art and luxury items fall into this category). This approach is used where a a substantial competitive advantage exists. • Penetration Pricing – a price set artificially low in order to gain market share (i.e. hook the customer). Once this is achieved, the price is then increased. • Economy Pricing – no frills low price. Marketing and manufacture are kept to a minimum. • Price Skimming – if you have a substantial competitive advantage you can charge a high price, but not for long. The high price attracts new competitors into the market, and the price falls due to increased supply.

14. Other pricing strategies • Psychological Pricing – used when the marketer wants the consumer to respond to an emotional, rather than rational level. • Product Line Pricing – reflects the benefits of parts of the range; e.g. a basic car wash could be R20, wash and wax R40, and the whole package R601. • Optional Product Pricing – the customer ends up paying more then they expected (i.e. buying optional 'extras‘). • Captive Product Pricing – When a product is the hook for a secondary, more expensive income i.e. companies charge a minimal price for a printer, but make their money by charging a premium price on the print cartridges.

15. Continuing other pricing strategies • Product Bundle Pricing – sellers combine several products in the same package (sometimes to move old stock) • Promotional Pricing – specifically pricing a product to promote another product is a very common application. There are many examples of promotional pricing including approaches, e.g. Buy One Get One Free • Geographical Pricing – this shows up where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price. i.e. the difference of a Japanese car in Japan vs. one imported into South Africa. • Value Pricing –used where external factors (recession or increased competition) force companies to provide 'value' products and services to retain sales, e.g. value lines at Pick ‘n Pay; value meals at MacDonalds.

16. Pricing & payment strategies in your business… • It makes business sense to balance your cash flow betweenguaranteed income and variable revenue streams • Guaranteed income can come from: • Traditional flat fees • Subscriptions • Prepaid (e.g. cell phones, microstock) • Risk increases with variable revenue, which is only generated when the transaction is made. • Variable revenue results in: • Variable costs • Non-budgetable cash flow • Exchange at transaction • Direct billing

17. custom stock Subscription Rights managed Large customer discounts COST Royalty free Microstock Microstock subscription Free – Creative common license Assignment COMPLEXITY Royalty and royalty free models • The purchaser weighs up the complexity & cost of a royalty offer • Customers find less complex royalty models more attractive • Variations of the Royalty model from the photographic stills and image industry… • Free • Royalty free (e.g. Microstock subscription; Microstock) • Subscriptions • Custom stock • Rights managed royalties • Assignment

18. Music Industry • Online fees • Free downloads • ‘Try before you buy’ • Cost per track or per album • Cost per digital box set (iTunes 2004) • Cost per usage • Royalties on cd sales • Other…?

19. Other industries… • Which of the previous examples can be used in other industries?... • Music • Authorship • Illustrations • Clothing design • Jewellery • Movies, videos, documentaries • Theatre & Performance art • Crafts • Installations • Consider whether you provide a service vs product • Your pricing strategy is integral to your marketing strategy • The price will position your product in the mind of the purchaser

20. Payment methods The method of payment available to the customer will also have an impact on the decision to purchase, and may influence the customer’s perception of the price • Examples of payment methods • Cash • Electronic transfer • Cheques (cost of bank charges) • Credit card (cost of bank’s commission) • Barter exchange • Pay-before-use • Credit account and Payment terms – 30/60/90 days • Subscription based payments • Payment on invoice • Considerations affecting the costs of the transaction: • Discounts & bulk discounts • Rebates • Commissions • Bank, admin & interest charges

21. SWOT Group exercise… • Do a SWOT analysis of each of the following payment and pricing methods, if applied to your industry • Payment on transaction • Royalty based payment • Barter based payment A SWOT analysis would require listing the strengths, weaknesses, opportunities and threats represented by each model in your industry • Which model would be most applicable in your business?

22. Elske HendersonBPharm . MBA (UCT) Strategic Business . Strategic Marketing email . elske@adept.co.za mobile . (+27) 082 337 1003 fax . (+27) 086 511 0122