"Valuations are constructed and not revealed - like architecture, not archaeology. To name a price is to build a valuation" ~ taken from Priceless - The Myth of Fair Value and How to Take Advantage of It, by William Poundstone
What Determines Value?
Look around your organization. There’s a very good chance that the folks in charge of product and pricing at your company are hyper-aware of the viable price point for new products that your company introduces into the marketplace.
There’s a good reason for this: perception.
If the price is too high relative to comparable products, it may be tough to build the perception that the new product is worth the price. Too low and would-be consumers might pass the product by, assuming that it must be flawed in some way. In this realm of thought, presumably outside the jurisdiction of the conscious and rational mind, lies the hidden psychology of value. Much like the notion of getting “a good deal,” value for consumer goods tends to be less of a science or formula and more of an abstraction or cultural agreement.
Consider further examples:
Not long ago, the music business looked like it might actually fold up and be wiped from the face of the Earth. As more and more people had access to high-speed Internet connections and powerful computers, many people got used to “acquiring” their new music for the price of $0. A massive turning point came when Apple and Steve Jobs were able to help the record companies re-establish value for their wares. Apple’s value proposition of “1000 songs in your pocket,” however difficult to measure and assign a scientific value to, resonated with hundreds of millions of people who opted back in to paying for the same files they were otherwise accessing via less scrupulous means.
The marketplace for designer handbags is another great example – what is the rationale for purses that sell for five figures prices or greater? The answer of course is not based on rationale – it is based on perception and other soft factors.
How This Applies To Your Channel Marketing
You would never do a $9.99 spiff because you know that just like in examples above, perception and not sound relevant process is going to rule the day. In the mind of the person receiving the incentive the penny makes a major difference, however irrational the path to this conclusion might be. $9.99 in their mind is $9 and may not therefore spur them to action. A $10 spiff is going to be the way to go because it has a higher perceived value.
It is a long-standing practice of industry to determine marketing budgets as a percentage of gross on an item, but I suggest it is worth re-examining this practice. For example, let’s look at two items from the same product line: One model the company’s mid-market price point and retails for $599.99 while the other is more upmarket at $799.99. Let’s say that the manufacturer is planning to offer a sales incentive on these items and uses the standard percent-based practices to determine what value of spiff to offer.
- $599.99 item gets a $18 spiff
- $799.99 item get a $24 spiff
Both are 3% of the item’s value as determined by the above reasoning but neither one are optimal amounts in the psychology of numbers and value. Maybe it should be $15 and $25 for the spiff amounts? Maybe $20 is enough to get the $799.99 item moving? What makes these questions so worth answering? Consider the bottom line impact of reducing your overall incentive spend by making data-based decisions on these matters and having the flexibility to assign amounts at the model level.
My point is this: ask yourself how you currently determine the impact of incentive spend and allocation? Assigning a blanket percentage is an idea that once scaled very well, but now we have computing power and data to help us to better work. We can now have a closer look at how different factors affect our sales and the amounts we need to offer. Unlock the secrets of your incentive program data and you will begin to see many opportunities to optimize your offerings that will drive both sales and savings for your brand.
A lifelong technology entrepreneur, Jason Atkins is the founder and CEO of 360insights. 360insights is the world’s first Channel Success Platform, allowing brands to run spiffs, rebates, co-op/MDF, and sell-through allowances all processed and paid with 100% audit and powerful analytics to predict what to do next. For more information, visit: http://www.360insights.com.
What issue concerns you most heading into 2019?
|The threat of more tariffs.||
27% (27 votes)
|The new Congress in Washington.||
35% (35 votes)
|Price fluctuations for the products we sell.||
10% (10 votes)
|More disruptions across the industry.||
29% (29 votes)
|Total votes: 101|