Tag Archive: pricing

Value Based Pricing

October 21st, 2019

calm leadershipAn overarching theme from our pricing and profits presentation relates to value based pricing. It was unanimous – every CEO believed that value based pricing was the best direction to go.  Yet, it became muddier in figuring out how to move towards value based pricing in his/her particular situation.

Let’s start by defining value based pricing. Simply stated: prices are based on the value the customer receives.

Everyone wins. The customer gains more value and you gain a higher price. Of course, that higher price should carry a higher margin.  It isn’t set up so that you win at the expense of your customer. Instead, both parties win with extra value and margin. So, if everyone wins, why don’t more of us utilize value based pricing? According to the CEOs, it isn’t simple. Yet we all agreed it is worth it.

Perhaps we’ll be talking about this for months and years to come as it can do something far more important than increase margins. It enhances customer value which can lead to customer engagement and loyalty. There are lots of statistics.  Suffice it to say, we will be much happier and are willing to spend more to do business with companies that deliver excellent customer service. And, more engaged and happy customers are dramatically more profitable.

After all, it can be 2 to 25 times more expensive to acquire a new customer than to keep a current one.

Start by figuring out the value of your product or service. Don’t listen solely to your R&D department, sales resources or anyone else while trying to understand value. Don’t even listen to your customers. Instead, think about your target customers and probe the value to these customers. Ask. Listen. Observe. When you ask questions, listen to what else they say. What would improve your customers’ situation? The value will emerge.

 



Why Southwest Customers Wouldn’t Buy a Bentley

July 24th, 2019

After giving 10 speeches on pricing and profits to groups of CEOs, it is certainly top of mind. Yet, it should always be top of mind for executive teams. One unanimous finding from the informal research of executives is that pricing is a strategic topic.  So, we must find time! When is the last time you focused on pricing?

Whether you consider pricing a strategic topic or not, it will directly impact your business. Let’s start with three typical options from a branding point-of-view.

  1. Low price leader – Southwest and Walmart are great examples of this. No one flies Southwest to have a first class experience. Instead, they are accessible to the general public and fun to fly. Their prices have to match their brand, and low prices do NOT equate to lower profits. Southwest has been consistently profitable when the higher priced airlines weren’t!
  2. Luxury brands – Similar to the low price leader, a Bentley or Gucci denotes the luxury image. If you found a low price on a Bentley, you would definitely think it was a lemon. In the B2B world, the same holds true. We work with a high quality lawn and garden equipment and tools supplier.  Their prices have to remain higher than the low cost brands to maintain their image and customer base. Of course, they need to provide more education and value for their customers as it is what they expect.
  3. Customer focused – In this case, the brand is all about the customer.  These companies are known for going the extra mile and providing superior value for their target customers. If it is all about value in the eyes of your customer, don’t you think your price better align to this value? Of course! If not, it is the epitome of the opposite of the brand.

Have you thought about your strategy and whether it relates to your pricing? It is easy to get caught up in competitive pricing situations and start to lower your price.  However, it might be the time to take a step back and see whether what you are doing matches your branding and strategy.

For example, one CEO provided an example of when she was a VP of Sales at a significant company. They had a niche product with unique value and higher prices. The sales teams were starting to see competition and thought they had to reduce pricing slightly to maintain their position.  The CEO said ‘no’. They were the leader and had value their competitors didn’t. It was a really hard process for the sales team to go back and talk value instead of giving in on price but they managed it. Fast forward to the next year. They were successful in maintaining their prices and didn’t lose business. Instead of falling into price war thinking, they talked about value.

What Do We Need to Think About Related to Strategic Pricing?

From an 80/20 perspective:

  • Who is your target customer? Think about your answer. Hopefully, it isn’t anyone willing to pay for your product or service! Yet that is an easy trap to fall into. Instead, take a step back and think about your target customer. What is their profile? How many current customers are target customers?
  • What do your target customers value? Although we tend to spend 80% of our time on 20% of our customers, the key question is whether these are the target customers. Do we know what our target customers value? Don’t think about your customer base and your daily interactions to answer this question. Instead, think only about your target customers. If you don’t know, find out! Being clear on this alone will yield dramatic results.
  • Is your pricing aligned with your target customers and their expectations of value? This is a tricky one. In our experience, 80%+ of our clients have room for improvement when we get to this point. It also changes over time.  If you last put thought into this even a year or two ago, you are acting on old information!

There is vast opportunity to keep pricing top of mind as it relates to your strategy. Why do this? It is a top strategy to ensure customer value (to grow your business) and increase bottom line profits simultaneously. If you are interested in a pricing & profits assessment, contact us.

Did you like this article?  Continue reading on this topic:
Pricing & Profits: It’s Not All About Revenue
Gaining New Ideas to Increase Business Value



Strategic Pricing

October 31st, 2016

supply chain

I’ve been working with a new client recently on digging into costs; however, we aren’t taking the traditional cost-cutting approach. Of course, the more efficient and less costs required to run a manufacturing operation, the better, assuming customer service, cash and other metrics remain intact. However, if you take the big picture, cross-functional view of costs and process improvements, you are bound to find opportunities.

In this case, if we can find opportunities, we can go from being a small player in a new market with significant potential to being a going concern. If we are losing deals because of pricing, there might be an opportunity to think differently and design a new formula for success. Lower prices across-the-board is rarely better. Instead, think strategically about pricing.

For example, we followed a strategic pricing strategy when I was a VP of Operations for a mid-market manufacturer. In that case, we knew that if we covered variable costs and strategically priced while considering the break-even point and contribution margin, we could cover key costs, grow the business and increase profitability. We followed the plan and results followed. If we had kept going down the current path, we would never have sold the business for a significant profit because results would have been “too slow”. In today’s Amazon-paced world, you can miss your opportunity in a blink of an eye.

One tip to implement this week:

For this week, depending on your position and expertise on pricing, my suggestion is to learn about pricing. How significant a variation does your company provide in pricing? Why? Are there certain volumes, combinations of items or special circumstances that reduce costs so that you can pass on some of the savings to your customers? Do you know what market pricing dictates

If you are already on top of pricing, take a step back and think about pricing from a strategic standpoint. How important is pricing as a reason your customers buy from you instead of the competition? What is most important to them? Are there certain customers or products where an increased level of sales would make your company more attractive to investors, customers and other stakeholders? What are your trade-off’s with profitability? Have you thought about pricing differently based on ABC customers and/or products? Gather your team and discuss. Golden nuggets might just arise.

Looking for more ideas to keep your supply chain connected? Access more tips and resources on my blog. And keep connected by subscribing to my newsletter and email feed of “I’ve Been Thinking…”