Strategic Pricing - Getting Paid for the Value You Provide
I’ve worked with a number of people exploring how to maximize their pricing and margins. Their industrial customers have been increasing the pressure for price discounts at the same time that process improvements like Lean Manufacturing and additional outsourcing to low cost countries have become saturated. The key here is to provide genuine customer value that is also unique from the competition. This requires in-depth understanding of your customer’s business / processes so that you can assess opportunities and determine the impact of innovative products. The highest utility will result if you provide technical superiority that helps your customers differentiate their own products and services. Next would be something that reduces cost of ownership – generally based on higher throughput or reliability. Finally, you can simplify how the customer obtains and utilizes your product over the entire cycle of evaluation, purchase, delivery lead-time, installation, routine operation and eventual obsolescence.
By becoming an expert in your customer’s business, you are able to both develop competitive products that anticipate their needs and communicate this value in terms meaningful to them. This “value equation” provides a tool to shift the dialog from a defensive reaction when faced with discount demands to a logical discussion of how your product is used and where there are opportunities for cost reduction based on product features, volume, timing or other parameters. This transition won’t happen overnight – it requires that every customer discussion be disciplined to focus on applications, value and tradeoffs that can be made to optimize price/performance. For a more complete discussion of this topic, see the white paper on my website at:
Two excellent books on this topic are:
- “The Strategy and Tactics of Pricing” by Thomas Nagle and John Hogan, Pearson Prentice Hall, 2006.
- “Pricing with Confidence” by Reed K. Holden and Mark R. Burton, John Wiley & Sons, 2008.
