While the natural inclination for many is to benchmark pricing decisions solely against the backdrop of their competitors, it’s imperative to broaden the lens of scrutiny. Competitors constitute just one facet of the multifaceted pricing equation. For a comprehensive evaluation, it is essential to cast a discerning eye on not only competitors but also on suppliers, clientele, alternative solutions, and the potential infusion of new players. These 5 pivotal components collectively sculpt the intricate landscape of your industry.

1. Supplier Leverage

In situations where suppliers wield considerable influence, their power can exert constraints on your profit margins. A prime example lies in the realm of the PC and laptop market, where formidable suppliers like Microsoft and Intel reign supreme. Manufacturers such as HP, Dell, and IBM find themselves ensnared in a web of dependency on these industry giants, inevitably leading to the squeezing of profit margins. When such circumstances prevail, one feasible strategy could involve vertical integration, where you assume the role of your own supplier.

In such a predicament, what strategic recourse can be taken? A viable approach is vertical integration, wherein an entity opts to become its own supplier. This approach has been effectively employed by industry trailblazers like Netflix, who have opted not to solely rely on external content providers but instead ventured into producing their own original content, exemplified by hits such as ‘Squid Game’ and ‘The Irishman.’ By doing so, they not only gain a foothold in the realm of content production but also acquire a distinct bargaining power that translates into increased pricing flexibility. Netflix’s recent fee hikes are a testament to the advantage of such a strategy.

The practice of in-house production and branding isn’t exclusive to the digital streaming giant; other entities, such as NTUC FairPrice, have similarly adopted this approach. A glance at their product offerings reveals the presence of in-house brands as opposed to an exclusive reliance on third-party brands. For instance, when perusing their assortment of snacks, one can readily spot ‘Camel Nuts’ and ‘FairPrice Nuts’ alongside ‘FairPrice Potato Chips.’ This strategic choice empowers these companies to shape their product offerings, control quality, and, most importantly, maintain a competitive edge within their respective markets.

By opting for vertical integration and in-house production, these enterprises exert greater control over their supply chain, thereby reducing dependency on external suppliers. This shift not only bolsters their ability to maintain profit margins but also affords them a heightened level of autonomy in shaping their product or content offerings. As a result, they are better positioned to navigate the complex landscape of pricing dynamics and, when necessary, implement strategic price adjustments that align with their broader business objectives.”

2. Customer Influence

The extent of customer bargaining power plays a pivotal role in shaping your pricing strategy. For instance, when a multinational client represents a substantial chunk of your revenue and your business hinges heavily on their patronage, contemplating price hikes can prove to be a challenging endeavor. Likewise, in the absence of product differentiation vis-à-vis competitors, customers can easily orchestrate a tug-of-war among vendors, applying downward pressure on prices. Nonetheless, in industries where the offered solution holds the potential to pay for itself by enhancing performance, quality often eclipses price as the paramount consideration. Such dynamics are notably prevalent in sectors like digital marketing, where performance metrics reign supreme.

Customer dynamics wield substantial influence over pricing strategies, and it’s essential to navigate this intricate terrain with finesse. The extent of bargaining power customers hold can significantly impact your pricing decisions. Here, we delve into the multifaceted aspects of customer influence that transcend the mere question of high or low pricing.

• Customer Bargaining Power: When customers possess formidable bargaining power, maintaining lower prices becomes imperative. Consider the scenario where a multinational corporation (MNC) constitutes a substantial portion, say more than 25%, of your revenue stream, effectively making you heavily reliant on their patronage. In such cases, hiking prices can be a precarious proposition, as it may jeopardize this vital revenue source.
• Product Differentiation: The degree of differentiation your product offers relative to competitors plays a pivotal role in customer negotiations. If your product lacks distinctiveness and falls into the undifferentiated category, customers can readily pit one vendor against another, compelling price concessions. This competitive dynamic underscores the importance of setting prices judiciously in a crowded marketplace.
• Impact on Customer Bottom Line: An essential factor to consider is whether your product or service directly influences your customer’s bottom line. If your solution has the potential to offset its cost by enhancing performance or generating quantifiable benefits, customers become more inclined to prioritize quality over pricing considerations. This is particularly pertinent in industries like digital marketing, where the efficacy and quality of the solution can profoundly impact a client’s profitability. A wise investment in a proficient vendor can result in substantial returns, rendering price a secondary concern.

In essence, the interplay between customer dynamics and pricing strategy is a multifaceted puzzle that transcends the binary choice of high or low pricing. It necessitates a nuanced understanding of your clientele, product differentiation, and the tangible impact your offering has on their bottom line. Crafting a successful pricing strategy in this context hinges on striking a delicate balance that aligns with the unique dynamics of your industry and customer base.

3. Alternatives and Substitutes

The presence of substitutes – products or services that fulfill analogous needs through alternative means – merits careful scrutiny. The advent of innovative technologies can usher in disruptive substitutes that reshape industry dynamics. Consider the transformative impact Netflix had on the movie industry with its streaming service, rendering traditional movie tickets less appealing. Conversely, some industries stand to benefit from technological advancements; for instance, the TV retail sector witnessed heightened demand as consumers upgraded their home entertainment setups to accommodate streaming. Exploring other sectors can unearth both opportunities and threats stemming from the emergence of substitute products or services.

4. Competitive Landscape

While competitors often take center stage in pricing deliberations, it is crucial not to sideline the other formidable forces at play. Engaging in price wars can spell trouble for an entire industry, eroding profit margins across the board. Collaborative efforts with competitors, in certain scenarios, can stave off the leakage of profits to suppliers, customers, or substitutes. Take, for instance, the digital marketing sphere, where agencies specializing in paid advertising may collaboratively refer clients to other agencies for complementary services like web design or SEO, fostering a cooperative approach that secures a more substantial slice of the market pie.

5. New Market Entrants

The threat posed by newcomers to the industry is a common concern, but maintaining equilibrium is vital. In some cases, cooperation with competitors can bolster the overall health of the industry. Additionally, implementing loyalty programs, akin to Singapore Airlines’ involvement in the Star Alliance network, can incentivize customer loyalty, even when faced with alternative options.

To deepen your understanding of these influential competitive dynamics, you may wish to delve into Michael Porter’s article featured in the Harvard Business Review. The overarching message is that adopting a holistic perspective and conducting an in-depth analysis of the five forces are indispensable prerequisites for formulating a strategic pricing blueprint that aligns seamlessly with the intricate dynamics of your industry.

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The more I run Facebook ads, the more I find that it is like investing in the stock market. You must control your emotions and stay calm when things go up and down.

1st Lesson – Do Not Be Reactive

Some marketers asked me- “hey Ted, I optimise my campaign every hour; why is it my results are still so bad?” Then I tell them this is precisely the reason why! One beginner mistake is touching the campaign too much and over-optimising. These advertisers launched their campaign, found that the results were not good, and then they made more changes to the campaign, and the results got even worse, and they made even more changes, and the vicious cycle continued. That was what happened to me early on. I thought that if I did more, then I would get more results. But it doesn’t work that way. Here’s the thing: once you launch your campaign or make changes to your ads, you must wait at least 48 hours before making any more changes. You have got to let the machine do its thing. Machine learning needs time to take effect. When you interfere, you are meddling with machine learning. And the machine learning is the most crucial part of Facebook ads.

Let’s say things are going well, and suddenly results drop. Once again, as advertisers, we need to keep our cool. We should not panic and have a knee-jerk reaction. There is something called fluctuation. In the stock market, there is fluctuation. In advertising, there is also fluctuation. Why? The common denominator between these two activities is human beings. The other side of the table is human beings, not robots. Human beings have emotions and do not behave in a fixed pattern.

It is only when you aggregate data then you will see patterns. Some marketers see the results drop, panic, and ask me, “Ted, this whole morning has no leads, I think the campaign is dying, or Facebook is dead?” I tell them, “no, this is fluctuation.” Some statistics 101, you can only draw conclusion after gathering enough data. One morning is not enough unless you spend a big budget, 10k per day or more. Rule of thumb, assuming a 2% average conversion rate, you need at least 100 clicks to achieve statistical significance and be able to conclude if it works.

2nd Lesson- Facebook Ads Have No Place for Ego

I can’t tell you the number of times I have been surprised by FB ads. There are many times I presumed something would work based on past data, but it doesn’t, and vice versa. E.g., We made a recent free giveaway offer for a renovation campaign, and it was supposed to work but didn’t. In another case, we ran a campaign to promote a defibrillator as a Father’s Day present, and it worked well even though I didn’t think much of it. The problem with FB ads is not the unpredictability; the problem is when we get emotionally attached to our ads or campaign.

This is the biggest mistake I made early on, which was to become too attached to my ads. There’s this thing that all marketers are prone to, which is the Ikea effect. When you build a piece of furniture with your hands, you tend to like it more. You are invested in it. You don’t want to throw it away, even if it is broken or ugly.

Likewise, we all had the experience whereby we favour a particular ad and swear by the advertisement to the end. Even when the results show that this ad is not working, we hold on to it. We don’t want to cut off the ad because we think it will work eventually. We become emotionally attached to the ad.

However, like investing in the stock market, you must be logical. As marketers, we have to be rational and make decisions based on numbers. If it doesn’t work and is statistically significant, we must cut off the ad. Advertising legend David Ogilvy said that a good marketer is a poet and a killer. On the one hand, you have to take pride in your work, but you also have to ruthlessly kill it and replace it if it is not working. Don’t let ego be your stumbling block.

Running Facebook ads is a humbling experience. You are proven wrong whenever you think you have become an expert. Personally, even though I have seen at least one thousand ads across more than 20 industries that we are helping, I cannot predict which ad works and which ad doesn’t work with more than 60% accuracy.

We cannot predict because many factors exist in a Facebook ad campaign. As marketers, when we create or analyse ads, we always look at them through our lens. We bring our notions, assumptions, and perspective, which is different from that of the target audience.

This is also what I like about modern marketing vs traditional marketing. In conventional marketing, everything is subjective. You have to assume and guess. However, in modern marketing, we have data for everything. So, we can tell objectively if an ad is effective or not. We use numbers to make decisions, not expert opinions.

The Final Lesson – More Technical Rather than Mindset Driven—The Importance of Messaging

Facebook is removing a lot of their interest targeting this year. Many advertisers are panicking and going nuts. But for us, we saw it coming. Facebook has been building up on its machine capabilities over the years. In several of our campaigns, we targeted broad, like 1 to 2 million people or even the whole of the country, and the campaign worked better than when we used specific targeting.

Why? This is because when you set targeting manually, you restrict the machine from doing its work. When you remove all targeting, you are giving the machine free play. Here’s the thing: the machine is smarter and is doing a better job finding the target audience than us, as long as it has enough data. So, I am not surprised Facebook is removing several targeting options. They are confident in their AI and machine learning targeting.

What I learnt is to focus on the messaging. When you get your messaging right, you are doing the targeting. The right group of people clicks on your ad, and Facebook collects data so they will find more people who are similar to the initial sample group. That is how you scale the campaign. This year and the following year, you should continue to get good at messaging.

So, there you go, the 3 lessons of Facebook advertising comes from our experience of spending a lot of money on Facebook ads. Don’t be reactive, don’t be egotistical, and focus on messaging. You will do very well if you follow these 3 lessons.

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