Neil Thackray’s Business Media Blog

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Its February and Time to Think About the Price of Ads and Everything Else

A thought on the subject of pricing.  When I first started in the business I joined from being a professional campaign fundraiser  for a national charity.  Everything was accountable.  When I submitted my mileage claim someone checked to see if I had used the shortest route.  I had targets for everything; number of appointments made,  conversion of appointments to fundraising visits, number of people attending a fundraising talk, the number of people participating in the fundraising event I was running, the money raised per head spoken to etc.  If I missed any one of the targets my pay was reduced.

Imagine my shock when I disovered that media sales people can set any price they like.  Within days of starting in media I was discounting 60% off the rate card; thousands of pounds given away and n0body seemed to mind at all.

There are only three methods of setting a price.  The first, and the most common in media, is to make it up.  The second is to take a cost+ markup approach.  The third is to price things on the basis of their value to the customer.  Only the third way will maximise profit.

I can also tell you that discounting in a downturn is almost certain to lead to ruin.  I am indebted to the price guru John Winkler for this example.  Imagine you are running a media business with a 10% margin.  The turnover is 100 and the profit is therefore 10.  Let’s pretend that 60% of yor costs are fixed (people, offices, finance department and so on) and 40% of your costs are variable.  Let us now imagine a downturn.  In media they are rarely modest.  Hands up all those who think a 10% decline would not be overly pessimistic.  Yes I thought so!

As this downturn bites the sales director comes to see you and says, “Hey boss, its getting really rough out there.  Everyone is cutting their budgets and our rival is cutting prices and winning market share.  I know you don’t like it, but you have to let me cut our prices a bit otherwise we are going to get crucified on market share.”  You think about it for a while and reluctantly agree to allow the sales director to soften his yield by a modest 5%.

What happens?  Well, the market fall wipes 10 from your revenue, leaving you with 90. Your fixed costs stay the same and your variable costs drop by 10%.  So total revenue is now 90 and costs are 60+(30-10%)=87 leaving you with a profit of 90-87=3.   Now watch your sales director lop five percent off the price.  He is doing this, remember to hang on to his market share.  So lets assume the strategy works and sales volumes stay the same.  Revenue will fall from 90 to 85.5.  Fixed and variable costs stay the same so profit is now (Revenue 85.5)- (costs 87)= -1.5!

So in one small pricing decision you have turned a profitable business with a 10% margin in a modest downturn into one where you are losing money. And that’s the effect when the strategy works!

This is not of course unique to media.  Its just Grade 1 maths.  However what it shows is that if your strategy for dealing with the downturn is to prop up your business with discounting then it is almost certainly doomed to failure.  There are a couple of strategic circumstances when this isn’t the case, but they are rare and not likely to be relevant to our current malaise.

Well that’s all well and good, I hear you cry, but you can’t seriously be suggesting that in a recession I should increase my rate card are you?  My answer is, not necessarily. And it isn’t as simple as that.  What if I could show you how to get an increase in yield without increasing any prices at all?  That would be cool wouldn’t it?  It can be done with magazines, events, online, information sales.

To succeed in doing this requires some effort and some work.  Firstly there is relearning to be done about how pricing works in driving profit.  Secondly rafts of people in your organisation need to be involved in the plan because the answer is not one panacea but a plethora of intitiatives which can change your business for ever.

I can’t do justice to this theme in a blog post but I will leave this post with two of many experiments you could try to get you thinking.  Pull off the accounting system all sales orders for the last week.  Look at how many of those orders have final agreed prices that end in a zero, or two zeros or really scary, three zeros. What does this tell you?  If you haven’t got many that end in zeros do the maths another way.  Look at how many agreed prices are round percentage discounts from the rate card price (i.e. 20%, 50%, 60%.) .

I can still remember that back in 1983 the price of a 1/4 page in Computer weekly was £1470 and that a 60% discount left us with a net price of £588.  We did it so often and habitually I still remember the numbers. I promise you I didn’t have to look it up or work it out.  What could you do about all this?

Try this second piece of investigation.  This works for mags and online.  Take a look at your forward advertising orders for February.  Calculate the current page yield for February if it’s a magazine or the agreed CPM if it’s online. Now compare that number to your budget.  Are you surprised by how much higher it is than budget? Today is the second of the month, so we have lots of time.  Are you happy that your sales teams, or you if you are a sales person, are going to spend the rest of the month destroying the profitability of the business so you can get down to your budget yield? What could you do about this?

Low yields are institutionalised in  the budget process.  When we write the budget we too often take the average yield for last year (which is not high enough) and add 3% to it (or some such number).  Sales people will exceed or miss almost any target you give them, but they somehow always come close to hitting the yield target.  Why?  Because all they have to do is discount to get there.

I am not pretending that tackling pricing is an easy fix. It involves a lot of work but the impact is huge.  Without boring you with the maths, and again I am indebted to John Winkler for this gloriously simple observation (if you are feeling keen you can try and prove it for yourself) would you be surprised to learn that in a business with a 10% margin if you cut your costs by 1%, improve your sales productivity by 1% and increase your yield by 1% your profits would grow by 25%?  Oh and the biggest effect is from price and yield.

One other job for the day.  Go and find the person responsible for event sponsorship sales and ask him or her for the price of the most expensive sponsorship they sell.  I will bet you a small brown beer that the price will end in at least two zeros.  I will bet you another brown beer that when you ask them why the price is what it is the answer will not be based anything rational.

Enjoy the snow.  It’s free.

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February 2, 2009 - Posted by | Uncategorized |

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