Pricing for Value
When a one cent swing in pricing can change company profits by hundreds of thousands and even millions of dollars, the results can be incredibly rewarding or utterly devastating. Yet, research has shown that the majority of CEOs rarely engage in detailed pricing discussions and most organizations lack an understanding of the value that the customer ascribes to the product — and ultimately, what the customer is willing to pay. This leaves a critical component of revenue generation to a process of “guess-timation” with little involvement from executive management.
Setting a price that creates advantage for the business and value for the customer has three main components: identifying customers’ perception of product value and their buying preferences by market segment; assessing all cost components, including identifying hidden costs and forecasting the risk of supplier price changes; and, establishing and communicating target pricing that creates organizational discipline and accountabilities to maintain profit thresholds.
In a constrained, slow-growth economy, businesses have a tendency to use promotions and incentives as a means to increase revenue and volume. The net effect: the customer becomes conditioned to not necessarily buy more, but to purchase only when discounts are offered.
Instead, the bold strategy is to recognize that buyers can and will pay a premium above and beyond the value of the product. If the organization can position the product in such a way that the offer presents an unforeseen opportunity for the buyer, then price increases or premium positions can be successfully implemented with outstanding gains to both top and bottom-line results.
The cost of not doing this is striking. At AT&T during the early 1990s, for example, some of the brightest leaders in technology were charting the course for market dominance. At the same time, long distance service was AT&T’s cash cow with corporate business rates above 10 cents per minute. While the service quality was second to none, the competition from MCI, Sprint and upstart, Cable & Wireless, was intense and pressuring calling rates to 8 cents or less.
Instead of communicating the value of AT&T’s technology future, the sales organization was selling in the silo of long distance services. The strategic vision that the business had designed (Internet connectivity, virtual data solutions, wireless and a myriad of other advances) was not understood nor communicated to the teams that mattered most — those interacting directly with customers. Instead, front line sales teams were hunkered down in the trenches responding to long distance pricing versus positioning the broader abilities of the businesses and the meaningful advantages that new technology solutions could bring to the customer.