Answers to Pricing Strategy Questions

This is an interesting problem. Following Steve Marsh’s suggestion, Pro-Audio has essentially set up a Fixed Price system throughout the country – where the sellers and buyers have to transact whatever quantity makes sense at a pre-set price of $12,000. This is akin to a commodity market, where the “retail agents” work as a pseudo cartel – we understand that their designation as retail agents avoids violating the Robinson-Patman Act, but for all practical purposes, the network of agents is acting like members of a recognized cartel like OPEC, unable to set prices but free to sell whatever volume they can negotiate and sell to their customers.

An alternative model to consider is where the parent company is acting as a price leader, with every retail agent following to sell the PSX-360 unit at the pre-set price of $12,000.

Let’s examine the three questions one by one:

1. Should Pro-Audio abandon the program now, after only 18 months?

Pro-Audio should at least seriously consider modifying or scrapping the current fixed price program, maybe after an additional trial period during which data on sales is tracked and analyzed strategically.

The reasons in favor of the change are simple. The current program is the opposite of a situation where ad hoc prices are being set at the retail level – there is no flexibility locally whatsoever. While this may have seemed like a good idea, it does not seem to be working.

First, since there are no discernible improvements in sales, it seems likely that the parent company has only succeeding in removing one of the main sales tools that the individual retail agent can provide a customer, namely, a discount. Second, its highly likely that the disadvantage is being felt more acutely by the smaller retail agents – as opposed to the New York and LA based agents who have a market reputation and an established customer base, perhaps even a larger distribution area.

The third issue is that in a competitive market (which this is) where a price leader-follower model is in vogue, there is a real danger that if one of the followers keeps offering a lower price (as is apparently happening based on feedback Pro-Audio is getting), there is a very real chance of undermining the $12,000 price set in the market. Once customers become aware that they can still cut deals and get a discount, everyone would theoretically run to the retail agent(s) offering that lower price. This defeats the purpose of bolstering the marginal agents, since the larger retail agents are more likely to be able to operate with a lower revenue (their costs are spread over a higher sales base, so they might be fine making half of the available $4,000 margin per PSX-360 unit). There is also the possibility that certain agents with a larger customer base may create some kind of a “bundled” discount with regular customers who are buying other products from them. So, something needs to change.

Lastly, if the issue is to provide more services at the same price, shouldn’t there be more focus on customer service and after-market support?

As we suggest, perhaps the program could be continued for a short period of time to track specific data and suggest next steps, but a change may need to be made.

2. What would be the implications of such a change?

If a change is made, Pro-Audio cannot go back to the on the ground ad hoc pricing model. Instead, it has to choose a balance between totally centralized price setting and totally ad hoc pricing. One option would be to choose the type of franchisee model seen in the market for cellular devices and services, currently, but with certain recommendations that allow for flexibility in prices charged in a particular area.

Another option is to create a Collaborative Pricing model, based on certain key characteristics of each sales territory, Pro-Audio should perform an audit of sales data, by retail agent, by territory, volume and destination of sales to deduce where most of the units are being sold and who is generating the sales. This may guide Pro-Audio to a better, more sustainable, model.

The next section highlights actions that might be recommended and followed.

3. What would Steve Marsh recommend at the nest Executive Committee meeting?

Here are some choices that Steve Marsh could recommend based on a simple mapping of where the retail agents are located and what type of prices they can sell at (see previous question), and which may provide a better strategy:

1. Limited and Incentive Based Capability to Conduct “Price Auctions”: Pro-Audio could allow local agents certain leeway to price within certain bands (given that they have a $4,000 margin to play with). These discount programs should be signed off on by the central office and should be tied to certain key metrics such as improved sales, reduced churn and new business generation. This may be the best combination of top-down and bottom-up pricing that works.

2. Incentives and Customer Loyalty Programs: If the after-market support and long-term customer base development is a critical factor, then Pro-Audio can partner with local retail agents to create incentive and customer loyalty programs, plus customized marketing programs aimed at enhanced satisfaction levels for new and existing customers. These costs could be born on a pro-rata or shared basis between the parent company and local retail agents.

3. Set Specific Sales Territories: One other strategy would be to completely separate sales territories (assign territories to each identified retail agent) and impose a “penalty” for selling outside the territory. For example, if the New York based agent delivers a PSX-360 unit to a customer in Texas, and there is a retail agent who was in charge, then NY pays the TX retail agent a hefty sum (say $2,000 – something that actually pinches without draining all their profits). This would naturally dampen the incentive for certain retail agents to poach sales contracts across territories, since they will make substantially less profits after the discount (to the customer) and penalty (to the local retail agent).

4. Improve After-Markets Support: This may be a critical part of sales enhancement and sustenance and may need to be borne in concert with the local agents.

Conclusion

Pro-Audio’s current thinking needs to change based on market feedback. Thinking creatively along the lines articulated above may get Pro-Audio further towards their goal of enhancing customer loyalty, acquiring new customers and expanding sales.

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