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Editor's Notes

• #11: What is a target price?Price administrators use the concept of a target price to provide a goal or benchmark for sellers to achieve on salesIn this way, the price target acts a positive influence, much like a magnet, on the price of each deal. This positive influence provides guidance to sales managers which can drive consistency with the pricing strategy.
• #12: Anchoring, as studies by notable psychologists Daniel Kahneman and Amos Tversky have shown, is tendency to bias decision making based on information obtained first early in the process. That is to say, the information I learn first has greater weight in my reasoning than information gained later. And, the decisions I make will be shaded by that information. That early information acts like an anchor to effect the choice I make. Providing an analytically informed Target Price as an anchor is supportive of maximizing the opportunity of each deal.
• #13: A simple example of price anchoring we might encounter on an ‘everyday’ basis is a price tag at a department store which shows a comparison price, in this example Compare at $700, and an actual price, your price, which is lower. In this example an amazing $279.99. The reference price of $700 serves provides an anchor for decision-making. A logical conclusion is that $279.00 is an excellent bargain on a designer label piece of woman’s wear. At a 58% discount it practically screams “buy me.”
• #14: In a business to business setting, an example of effective anchoring is - a sale rep requesting pricing for a customer is provided a Target Price.Here the Target Price provides an benchmark for the seller and acts to influence their decision-making.There are a number of ways that Target Prices are derived.  Examples span from those simply derived to others based on sophisticated modeling. A short list includes target prices based on discounts from a list price, a percentile based on historical price points, average selling price, or the outputs of price optimization engines.  Regardless of how the target price is derived the intent is the same – provide a benchmark price as an anchor. Lets look at an example for a B2B company. Our chart depicts sales volume (depicted on the vertical axis as Quantity in units by the height of each bar) and the price per unit (depicted by moving left to right on the horizontal axis as prices ranging from low to high). In the chart we see prices ranging from $6.00 to $13.50. A target price provided to Sales of $10.50 creates a benchmark to influence higher prices. Is a target price 100% effective? Not in and of itself. The rationale for the target price is an important factor. In this example nearly 22% of sales volume is priced at or above the $10.50 target. And, greater than 44% of sales volume is within +/-$1 or 10% of the target. The message in the data is $10.50 is a very achievable price.
• #15: Another important concept for the price administrators is the Price Floor. When used in conjunction with Target Prices the Price Floor establishes a corridor of appropriate pricing in which, as the name implies, the Price Floor establishes the lowest acceptable price. In the example on the screen the Price Floor is $7.50. Sales below the Price Floor are not accepted. In many cases, these sales produce un-acceptable Pocket Margins, are often unwarranted, and should not be approved”Often, a portion of this sales volume will migrate to higher prices. And, for the volume that does not, it will be passed over by the supplier in favor of sales that deliver acceptable returns.
• #16: Using the Vendavo Price Manager solution - Targets and Floors can be set at different levels for different products, customer types, regions, channels, or any other business dimension.  In the example on screen, our initial corridor has a Target Price of $10.50 and a Floor of $7.50. Which we’ll now call segment A. We will introduce a second Segment, called B, with a Target Price of $36 and a Floor of $32. The notion of establishing differentiated corridors is the essence of a differentiated pricing strategy, which is sometimes called “value pricing strategy.” Implementing Value Based Pricing with segment specific anchors in the form of target prices and floors can be highly beneficial in maximizing sales.”
• #17: Another important concept for the price administrators is the Price Floor. When used in conjunction with Target Prices the Price Floor establishes a corridor of appropriate pricing in which, as the name implies, the Price Floor establishes the lowest acceptable price. In the example on the screen the Price Floor is $7.50. Sales below the Price Floor are not accepted. In many cases, these sales produce un-acceptable Pocket Margins, are often unwarranted, and should not be approved”Often, a portion of this sales volume will migrate to higher prices. And, for the volume that does not, it will be passed over by the supplier in favor of sales that deliver acceptable returns.
• #18: What is price guidance?Price guidance are the guidelines that provide direction to sales people and to price approvers In a previous Pricing Minute we covered Target Pricing. Target pricing is a form of price guidance. It sets a benchmark for a seller, and a deal approver. It provides a positive influence on decision making and drives consistency with the pricing strategy.
• #19: Guidelines for target price, approval levels, and floors can be calculated a number of ways. Effective methods can be based on historical price average, price band percentiles, or deviation from a regression line. Any of these methods is viable. More advanced methods leveraging pricing science are available. These methods produce higher levels of optimization in guidance using sophisticated algorithms. Regardless of the method employed, a key is to conduct the analysis for each peer group.