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Analyze Your Price Structure Proposals

Jun 29, 2008
Have you ever tried something new, and later kicked yourself for not realizing that there were obvious flaws in what you were trying that should have been anticipated? Time is important to your success, and avoiding obvious mistakes also saves money.

You can save both time and money by first thinking through your proposals in a very critical way. Before you do any testing, you can probably identify many of the problems that tests will expose by simply thinking about these new price structures in the ways that customers and competitors would.

If you can anticipate a weakness in the structure that customers or competitors could exploit, you can be sure that those weaknesses will be employed against you. So begin making price structure changes by doing more analysis of the price structure proposals that you have.

First, look to find as many things that can go wrong in each proposal as possible. Although no list on this subject can ever be exhaustive, here are some things to be sure to consider:

-- Will the results provide reliable guidance for what to do for offerings and customers who were not part of the test?

-- Will competitors respond in ways that are harmful to your company?

-- Will customers and end users be upset by the test?

-- Can operations provide the needed support for the test?

-- Will those who have to implement the test do so happily and with the needed time and effort?

-- Can the company's or the offering's reputation be tarnished by the test?

-- Will suppliers or partners respond unfavorably?

-- Will the test or its results have any negative impact on the company's stock price?

Second, think about how likely it is that these faults can be overcome. In fact, you should immediately jot down your initial ideas about whether the faults can or cannot be eliminated, for potentially sharing these ideas with the teams which or individuals who proposed each price structure test.

Third, consider how the test could be revised in order to include either other proposed tests or elements of those tests. This evaluation is a tricky one to turn into a decision. If you combine many tests into one, and the results don't work, you may have a hard time telling whether the problem was with one element, some elements, or all of the elements tested. In thinking this problem though, imagine different types of test failures and how you would determine what the cause or causes were as you mentally combine these tests.

This test measurement difficulty can sometimes be overcome by gathering a lot of information about how those who were supposed to like the new structure actually respond and what they say about their responses.

Another method that works is to layer on additional elements to the test sequentially in time, following success with basic structures. For example, considering Disneyland's possible use of discounted multiple-day passes, Disney could have tested a two-day pass on a few quiet days before offering any other choices. When that two-day pass test was working, a three-day pass could have come next and been tested while the two-day test continued. Again, the new choice could be offered on just a few slow days.

After the testing of multiple-day passes was satisfactorily ended and was added as a permanent change, annual pass tests could be done just with people who lived in certain zip codes through direct mail. A measurement panel could be set up to see how the visits and spending patterns of those who took the annual passes changed versus those who did not buy the annual passes. Then the economic case for the change could be considered.

Fourth, look at how one new structure suggests other changes to test that have not been proposed. For example, most people come to Disneyland by car and there is a charge for parking. The logic of the annual pass suggests that you want visitors to think of each trip as being free during the year.

Perhaps you should also test annual parking passes. In fact, Disney offers these as well. If annual passes are a good deal, what about multiple-year passes? With these, you eliminate the risk that the person will not buy again in the subsequent year. You also have the money in advance, and can earn income from holding the funds in your investment account until expenses are incurred to serve that customer.

Disney does not yet offer these types of passes. Perhaps they have tested the idea, and found that it doesn't work well enough to pursue. The size of the payment required probably becomes a disincentive at some point, although magazine publishers have had great success in offering multiple year renewal options. But magazines are less expensive than annual passes, and those who buy magazine subscriptions tend to have higher incomes than frequent visitors to theme parks.

Fifth, evaluate the tests for how well each one is likely to work under a variety of future business environments. Beware of those structures that are tightly linked to one view of the future. For instance, only offering passes good for more than one theme park at a premium price could backfire if many people did not particularly like one or the other park. Why pay more money for the privilege of doing something you don't want to do?

Sixth, consider how likely competitors are to be able to confuse your test results. During the 1950s and 1960s, Procter & Gamble (P & G) was famous for extensively testing any change in the quality, packaging, or price of its offerings in limited geographic markets.

Competitors learned that they could profitably disrupt those tests with unsustainable levels of pricing, advertising, and promotion. Although the competitor lost money fighting in the test market, the amount lost was less than what it would cost to face a successful roll out of the new P & G offering. In fact, in some cases, P & G would give up on the idea if enough tests failed of the same idea.

Later the company realized that competitors could be more easily bested by taking good, low-risk ideas national in one fell swoop without any testing. For similar reasons, some suggested structures you receive probably should either be implemented or dropped, but not tested, because competitors could easily disrupt any tests and would probably do so. For those choices, you need to consider how you can decide whether or not to implement the new structures without testing.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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