Pricing

Volume 5 Letter 10

Experience is what you get when you don’t get what you want… Anon

As his stomach twisted into a knot the corporate manager slammed his fist on the desk in frustration. He had sworn that he would get prices up if it killed him. He had pushed through a price increase several months ago and now, with sales slumping it looked like the price increase was going to kill his company. As the largest player in the market, he assumed competition would follow suit. They hadn’t and now they were eating his company’s lunch. It was obvious that he was going to have to drop prices back to their original levels and possibly lower to avoid any further loss of market share. With materials and labor costs increasing he shook his head in frustration.

Getting a price increase in a tough competitive environment is difficult. By raising prices you’re challenging the relationship between the money asked for and the value provided. In order to raise prices one needs a solid understanding of the value one’s product or service brings to the customer. In some cases this value can be different for each customer.

The easiest time to get the right price is when the product is introduced. A poor product launch often means the launch team had a weak understanding of the product’s value. Pricing too low has the effect of transferring potential profits directly to the customer’s bottom line.

Once a product is in the market and the value established, raising price is, at best, difficult as demonstrated in the story above. Opportunities to increase price are when a significant update is launched or when a new market is entered.

In an article called “Effective Ways to Raise Price,”1 the four authors suggest there were six ways to increase prices:

  • Brute force: simply insist on a higher price. The risk is that you may alienate your customer. A price hike without an explanation can send the customer looking for alternatives. If the customer has choices this is not a good tactic.
  • Change the value: Bringing more value to the customer allows one to increase the price. However, like beauty, value is in the eyes of the beholder. Customers rarely figure out the increase in value for themselves. Do it for them! Show them why the new product is a better value.
  • Price completely: Charge for previously free services. Sophisticated customers want the product and expect to pay the lowest price while others expect service to accompany the product. Segment the market and offer the product at price points for different segments with different service needs.
  • Change Roles: Some customers just want the job done. They don’t want to purchase products. Sell them the completed job rather than just the product.
  • Leverage your price structure: Some customers (especially in bid situations) focus heavily on the initial price. Knowing that they will need additional services to complete the purchase, bid low and price the add-ons at a premium.
  • Manage the price: Allowing local offices to charge what they may can work for established products, but is often a disaster for new products. Territories determining their own pricing won’t work in today’s transparent world. Establish a team to manage new products. Pricing takes great discipline which few territorial managers can exercise.

If experience is what you get when you don’t get what you want – then many of us have lots of experience in pricing.

1. “Effective Ways to Raise Price” by Robert G. Docters, Michael Reopel, Dr. Jeanne-Mey Sun, and Prof. Steve Tanny.

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