Design for Survival Thomas Mann
Thinking about things like "marketing" and "pricing strategies" seems, for most of us in
the art or crafts world to be odd in the extreme. For the most part we chose these art professions
with the basic intent of avoiding participation in these "real world" activities. We associated them
with the Machiavellian tactics of big business. We naturally eschewed these practices as
antithetical to our aesthetic approach to life and work at best, or evil and corrupting at worst. But
the fact is, that regardless of whether we acknowledge it or not, every artist has a strategic pricing
policy. Every one of does, in fact, have a marketing plan. It may well be that our plan is so
subliminal and ill defined that we might honestly say we don¹t have one or even care to, but the
fact remains that everyone of us must exercise some effort in this area to survive as artists.
The intent of this article is to provide you with the theory and techniques of the "real world" of
marketing so that you might formulate your own strategy. I have filtered this information through
the strainer of my 25 years of experience in the crafts field with the hope that the basic
information is not a repulsive as it might be when delivered to MBA students in a business school
setting, but the fact remains that all of these issues are pertinent to our growth and survival as
artists.
A very clear revelation has occurred to me during the past six years of conducting these Design
for Survival workshops around the country. We are, by and large, disinclined to see such things
as pricing and marketing as an integral part of our businesses. But when we do pay attention to
these issues, some very interesting information surfaces. I have found that this pricing model can
be employed as a tool to analyze every aspect of ones intent to be an artist. It has the potential
for being the mechanism of meaning for each of us as we decide how it is we¹ll go about this task
of being an artist, why it is we want to do this and what we expect to get from it.
To do this we must, conscientiously develop a pricing strategy. We must make visible that
interior conversation we have been having with ourselves and face the fact that being an artist is
not an escape from the "real world", but a challenging journey into it.
If you are an ARTIST you are by definition an ENTREPRENEUR
and all entrepreneurs must have a PLAN
The following information is derived from an article, "Strategic Pricing" by Colleen Green which
appeared in Small Business Reports, August 1989.
DEFINING YOUR PRICING GOALS.
Each of you will have your own unique mix of circumstances, relative to how you market your
work, when you consider how to set your prices. But, for all artist owned businesses, pricing
strategies should be geared toward achieving your overall business and personal objectives.
Your first step, therefore, is to identify precisely what the pricing strategy is supposed to
accomplish. An effective pricing strategy might depend on any one or combination of the
following goals:
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Maintain or create a certain image which will
Improve customer relations...in order to,
Increase sales volume and market share, so that you can,
Ensure an adequate cash flow in order to,
Achieve a specific return on investment that will,
Meet or beat the competition¹s prices and gain market share, in order to,
Maximize profits, because your continuing survival is dependent on having capital to
reinvest in yourself. Self Generated capital comes from profit.
Design for Survival Thomas Mann
When setting pricing goals, make sure they are realistic in light of current market conditions. For
example, it would be extremely difficult to maximize profit margins during periods of weakening
demand or increasing competition. Therefore, interim marketing plans and pricing goals may be
necessary to sustain you through a down period. For example, consider using a short-term
pricing strategy to stabilize cash flow or to hang on to accounts, say through a summer or post
Christmas season, while developing a long-term pricing strategy to increase both market share
and profits over a five year period.
DEVELOPING A PRICING STRATEGY.
Generally, pricing goals will determine which strategy is most appropriate for you and your work.
Here are some of the basic pricing theories that I have adapted to the field of art and craft.
* Indicates pricing theories particularly applicable to the art and craft markets.
* Cost-plus pricing. The purpose of this strategy is to recover operating expenses plus a specified
markup; for example, cost plus 50 percent. With cost-plus pricing, cost must first be assigned to
products. This is fairly simple for direct material and labor costs, but becomes increasingly difficult
for indirect overhead costs further removed from actual production. One solution is to establish an
overall figure for overhead costs. Each product then absorbs a percentage of the total cost. With
cost-plus pricing, a choice must be made between using current costs or estimates of future
costs. In either case, the lag time between cost increases and price adjustments must be
minimized.
* Price lining. This involves maintaining a consistent pricing philosophy for all products. For
example, by pricing each product at the bottom end of the industry¹s price range, a company can
concentrate its marketing efforts on cost-conscious customers. By the same token, prices for all
products can be consistently aimed at the high-end or middle segments of the market.
Specializing in price lines that the competition neglects allows you to dominate that segment of
the market for all products.
Consumer pricing. The determinant of this pricing strategy is the consumer. When customers
believe the product is not worth the price, they will not buy - regardless of your company¹s
expenditures to produce it. Conversely, when consumers perceive a high value, the company
can charge a substantial markup (as is the case with personal computer software). With
consumer pricing, you must determine what customers are willing to pay by understanding the
perceived value, considering the benefits the product provides, and taking into account the price
of alternative products.
Competitive pricing. This strategy is based on the belief that the price charged by competitors
necessarily affects the price a company can charge for its own product. However, this strategy
has several flaws. For example, competitors may base their price structure on a set of entirely
different criteria from your goals. Thus, when a competitor raises or lowers prices, first consider
the possible motives before following suit. For example, a price reduction may signal an
aggressive competitor seeking a long-term increase in market share; or it may simply be an
emergency action to generate immediate cash. In either case, maintaining the price of the
product may boost your product¹s image of quality and secure a profitable market niche. By the
same token, when competitors raise prices, they may simply be reacting to their own financial
pressures. The price increase, for example, may be a strategy to increase diminishing profit
margins rather than a competitive strategy to increase perceived value. When your company
does not face the same cost pressures and there are no other low-price substitutes available to
the consumer, you will probably gain market share by simply maintaining your prices.
Design for Survival Thomas Mann
* Price skimming. A "skimming" strategy deliberately sets a high price on products to maximize
short-term profits. Price skimming is most successful when a product is in the early stages of its
life cycle, is still a distinctive item, and has not been challenged by the competition. This strategy
often is used in introducing a new product to recover the initial investment quickly. Price skimming
has a built-in safety factor. When the price is set too high, it can be lowered, which is much easier
to do than raising the price of a product. An additional bonus with price skimming is that, since
high price often implies high quality, the product may gain prestige. An image of quality may help
increase market share, even as prices are gradually decreased.
* Penetration pricing. In an attempt to gain market share, aggressive companies often set prices
at such a low level that products are sold at a loss. Once market share is won, prices are
gradually raised to maintain an adequate profit margin. This strategy discourages competition,
because other companies may have difficulty offering a product at a similarly low price while still
securing enough of the market to make sufficient long term profit. The success or failure of this
strategy depends on the speed with which economies of scale can be achieved. Therefore,
factors such as labor productivity, materials costs, inventory control,
and plant and equipment utilization must be carefully considered. Inflation further complicates
penetration pricing by driving up costs.
Although the rewards of penetration pricing can be high, so too is the risk: Devastating losses can
occur. When prices are set too low, the company may not be able to increase prices fast enough
to produce an acceptable return. Higher-than-expected production costs or less-than-anticipated
sales volumes can also undermine this strategy. Successful penetration pricing depends on four
conditions: 1) a large untapped potential market; 2) stable production costs; 3) high volume
production capacity; 4) minimum competition from other manufacturers within the industry.
* Opportunistic pricing. During shortages, customers are often willing to pay more for the products
they need. Therefore, you may be able to maximize short-term profits by raising prices of goods
in short supply. Such a sup ply-and-demand strategy can, however, have a negative effect. For
example, it could diminish the company¹s image in the minds of consumers if they perceive the
company to be taking unfair advantage of market conditions. In such cases, consumers may
substitute another product when one becomes available.
* Psychological pricing. This technique involves making the price "sound right" to the customer.
Sometimes the price difference is incidental. For example, a "discount" retail outlet might use a
price of $5.98 to suggest a bargain price, while stores that present an elite image are likely to use
on-the-dollar figures, i.e., $6.00.
Loss leader pricing. With this strategy, companies price some products below cost in an attempt
to attract customers to their other products. Companies frequently employ this strategy with
success when expanding product lines. The objective of such a strategy is to attract customers to
the company¹s most profitable products in the hope of achieving overall profitability for the entire
line.
Defensive pricing. Fear of losing market share, especially on the part of established firms, can
lead companies to temporarily lower prices. The objective of this strategy is to defend market
position by discouraging new competitors from entering the market. This strategy is also used by
mature companies to fight off current competitors attempting to increase market share. Demandoriented pricing. With this flexible strategy, companies base pricing decisions on the level of
consumer demand for their products. Prices are set low when demand is weak or falling off,
raised when demand is strong, and consequently increased to even higher levels as demand
continues to intensify. This strategy is often used by firms that sell raw materials.
Design for Survival Thomas Mann
FINE-TUNING PRICING POLICIES.
Prices are not fixed business decisions to be implemented and then forgotten. Sales must be
constantly monitored, prices must be periodically tested, and pricing strategies ³fine-tuned² to
ensure that overall marketing goals are achieved. The fine tuning process helps ensure the
continued effectiveness of pricing decisions. Fine-tuning methods include:
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Cash discounts. Cash discounts during tight-money periods can attract new customers
and build goodwill among current accounts. However, care should be taken to prevent
price "shading" (varying prices significantly from customer to customer). Set a single
discount policy, rather than leaving pricing negotiations up to salespeople.
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Delayed price quotations. With this approach, an estimated price is given at the time of
sale, and a final price is set only after finished goods have been produced. Delaying price
quotations reduces the possibility of under pricing, especially when there is a combination
of a long production lead time, and fluctuating or escalating costs.
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Discount clauses. In this case, price lists are printed with elevated prices, but all buyers
receive discounts. As costs increase, discounts are reduced. This lessens the number of
actual list price increases, thus helping preserve positive customer relations.
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Escalation clauses. When a company adopts escalation clauses, price increases are
automatically implemented as necessary. The rate of escalation can be based on
increases in the wholesale price index, industry-specific indexes, or suppliers¹ list prices.
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Price increases on accessories or services. If product costs increase, but the market will
not support a direct price increase, lost revenue can be recovered by increasing the price
of accessories, services, replacement parts, or other related costs.
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Sales incentives. Offering incentives to salespeople can help the company meet
production, cash flow, and margin goals without raising prices. Incentives also motivate
the sales force to generate accurate sales forecasts.
Design for Survival Thomas Mann
CONCLUSION. How much should we charge?
When faced with this pivotal question, the temptation is to price by intuition. Pricing, however, is a
strategic process based on a wide range of economic and market factors, and must be tied to
both short-and long-term corporate objectives. As such, pricing strategies, like all good business
decisions, require the time and attention of the CEO and other top managers. When the decision
is a good one, pricing will make all the other marketing efforts easier and more successful.
Customer demand and sales volume will vary with each stage of a product¹s life cycle, as will
production, distribution, and marketing costs. It is imperative, then, that pricing be based on the
product¹s current position in its life cycle, as follows:
Introductory Stage. When pricing a new product, first determine whether the product is unique in
either design or application. When the product is truly one-of-a-kind, both in function and identity,
a "skimming" pricing strategy should be followed. The initial price can be set elatively high to:
1) establish a quality image,
2) restrict demand to initial production capacity,
3) provide capital to offset development costs, and
4) allow future price reductions to increase market share and discourage competition. For new
products that are not unique (i.e., there are readily identifiable competitors), a "penetration"
strategy might be the best option. This strategy allows quick gains in market share by setting the
price below that of competitors. "Consumer" pricing, based on the perceived value of the product,
is an alternative that may produce similar results. However, it often requires extensive promotion
to convince the customers of the product¹s value.
Growth Stage. During the growth period, the pricing strategy should be directed to ward gaining
market share. At this stage, pricing depends on three factors:
I) the number of potential competitors;
2) the size of the total market;
3) the distribution of the market. The goal during the growth stage should be to price for market
share, generally by taking a combined competitive and penetration pricing strategy.
Maturity Stage. This is the stage when the rate of sales growth declines and sales volume levels
off. At this point, pricing alternatives are restricted by the price elasticity of the product. Often,
prices cannot be raised without a substantial loss of market share. Customers are price-sensitive
during the maturity stage, and a high price can send a loyal customer packing.
Decline Stage. Products in the decline stage possess little or no attraction to the customer. Such
products are often priced as loss leaders to fill out a product line.