Paul Charlton, Owner & Founder of The Pricing Factory

For those who missed the first article, here it is: It was thirty years ago today ….

Re-cap from previous episode. Compaq had the perfect pricing trifecta which is to:

• beat the competition in delivering demonstrably superior value for money both at list price and end-user price level;
• provide increased channel discounts for improved channel profitability with clear vendor-channel demarcation;
• and more co-marketing dollars and support to squeeze the competition out of the channel’s marketing efforts.

The second lesson was that you need to be able to update your pricing strategy and that pricing strategy update should strongly influence – and if necessary change -  your product strategy. Pricing before product.

If you haven’t read Rod Canion’s book “Open – How Compaq ended IBM’s PC domination and helped invent modern computing‹. I highly recommend it. It was enjoyable and enlightening.

What other pricing lessons are there from Compaq’s early history?

Lesson #3 – Maintain a level playing field for the channel: keep pricing flat across the board. Don’t favor the big or – even worse – noisy players with extra discounts and/or disproportionately more of your resources. A good example of this is the Businessland case outlined in Rod’s book (p152-6)¹

Lesson #4 – Cover as many price points in your growth markets as possible, but at the same time, don’t neglect customer value and the competitiveness of your product costs. And don’t conflate having a low product cost with best customer value.

Lesson #5 – Get away from speeds and feeds, and articulate a more economically-driven value proposition, one which resonates with customers. Ensure that the value proposition is memorable and snappy enough for the CEO to (want to) cite it.

Lesson #6 – Don’t react to the competition using pricing alone; make pricing the last lever used – and use it sparingly. A large part of pricing is making sure that pricing is the last lever that’s being pulled, not the first. This is why Pricing – as a cross-functional process – uncovers lots of non-pricing issues. Good Pricers check to see if everything that can be done has been done before that expensive pricing lever is pulled.

Lesson #7 – When you do need to be aggressive on pricing, be aggressive. If you are going to get aggressive on price, make sure you know what the end-game looks like before you start. A simple first step is to understand how you would expect the competition to react to your aggressive pricing. Are you trying to provoke a response or not? And if they do respond, what will you then do? You need to think this through before you start.

Pricing is referred to only 12 times in Rod’s book. This reflects an approach in which pricing was used sparingly partly because Compaq could choose to do so. Its price positioning – as described in what I called the perfect pricing trifecta – was well-thought out and robust such that it didn’t wasn’t overly reliant on pricing to succeed.

So here is, without further ado, the Compaq UK price list for portable units from June 1987. Remember that these are list prices in £’s but as luck would have it, a remarkably similar number to what you would have paid as an end-user in US$:

It’s worth noting that it appears that the original Compaq Portable was still on sale in June 1987, 4 years and 3 months after it was first announced, albeit it in small numbers. Very different from today’s brutally brief product cycles.

From a pricing perspective though, the basic Compaq Portable did give the list price the overall perception of a lower starting-at-price (SAP) (£1,895) than it would have done without it (£2,295). Arguably the Compaq Portable II Model 2 also helps lower pricing perceptions because the first portable with meaningful storage capacity – which in 1987 meant a 20MB fixed disc drive – was the Portable II Model 4 at £3,150.

People often ask me if prices should end in a -9 or a -5, and I tell them not to worry about the last digit, but worry about the first. Focus on the digits from left to right. That’s Lesson #8.

Of course, the SAP isn’t what people buy, but it is the tag-line that the sales person will use, be shown in the ad, be in the first – or perhaps even better, the last – paragraph in that press review, be in that headline on the internet, etc. So it is very important in driving perceptions. That’s what takes place in the first quarter of the game. The real game though takes place in the final quarter: how far and how easily can you move customers up the solution stack …..

And here are the portable options:

So I still have my Compaq leather carrying case – albeit from a slightly later era – which I still use to today.

Any there any more pricing lessons to be learnt from Compaq’s early years? The products may be old and technologically obsolete now but the pricing ideas behind them are not. Here are a few more.

Lesson #9 – Plan your price moves. You can, and should, plan your business around your pricing roadmap. Your pricing roadmap should also be integrated and into all your integrated, synchronized, functional planning cycles: product planning, demand planning, cost planning, supply planning, financial planning, opex planning, etc.

It’s also worth noting that up until 1990 Compaq rarely gave any additional discounts to customers. Let me repeat, no end-user discounting. In the UK, only two customers got additional end-user discounts. One was Compaq’s largest customer worldwide. From 1987-1991, we only had one product promotion that I can recall. All other pricing was managed through changing the list price. That also made life simpler and easier for Sales and the channel: don’t worry about asking for a discount because you won’t get one: focus on selling the value. Which was great while it lasted! So Lesson #10 – Make your list price do as much of the heavy lifting as possible, then use limited, customer-specific discounting to do the rest.

Competitive price pressure did build-up during 1990 which was partially self-inflicted because of the pricing and margin umbrella that Compaq was providing to new entrants to the market. We were finally forced to offer more and more end-user discounts. The storm clouds were looming.

I hired a high-school leaver to develop a bid-tool application for … well, me. It integrated the Excel-based UK price list and the monthly Lotus 1-2-3 corporate cost file and allowed me to quickly create a customer-specific portfolio of configured solutions so I could then play around with the discounts and X-rates, analyze the product mix and identify deal opportunities. In short, we started to crank out lots of deals. If we were going to go down – and at the time it did feel like that was a distinct possibility – then we weren’t going to go down without a fight.

Paul Charlton is the owner of The Pricing Factory®, a pricing consultancy. He can be can be reached at paul.charlton@thepricingfactory.com

¹ “Open – How Compaq ended IBM’s PC domination and helped invent modern computing†by Rod Canion, Benbella Books Inc, Dallas, Texas, USA. 2013