Setting prices has
never been easy, but with emerging technologies, new market entrants, fickle
customers, instant web comparisons, falling prices and rising costs, the
challenges seems greater than ever. Pricing can be a powerful tactical response to an uncertain environment but getting it right demands a new process. How can companies ensure that items or services are correctly priced? However, Prof. Tony Cram proposes five rules to inform such decisions.
First of all, begin with the value, not the cost price: Assess customer perceptions, calibrate the value they obtain and help them recognize it. For example, an iPod is worth much more than the sum of its component costs because it provides emotional benefits of achievement, affiliation, exhibition, play, distraction, convenience, independence and more. Caterpillar, the heavy equipment manufacturer, confronts lower price competitors with promises of reliability and service back-up to give peace of mind and confidence in achieving a contract deadline.
challenges seems greater than ever. Pricing can be a powerful tactical response to an uncertain environment but getting it right demands a new process. How can companies ensure that items or services are correctly priced? However, Prof. Tony Cram proposes five rules to inform such decisions.
First of all, begin with the value, not the cost price: Assess customer perceptions, calibrate the value they obtain and help them recognize it. For example, an iPod is worth much more than the sum of its component costs because it provides emotional benefits of achievement, affiliation, exhibition, play, distraction, convenience, independence and more. Caterpillar, the heavy equipment manufacturer, confronts lower price competitors with promises of reliability and service back-up to give peace of mind and confidence in achieving a contract deadline.
Second of all, beat
competitors on benefits, not price: Brand leaders expect challenger
brands to compete at a lower price, but today, deep discounters and disruptive
innovators are opening massive price gaps. However, competitors can fight back.
Companies should neither cede nor attack on price. Instead, it is better to
identify critical benefits that customers forego with the value player and to
build a proposition based on these. For other brands, innovation and novelty
are the differentiating benefits. The key is to focus on crafting superior
packages of benefits and meeting customer needs like variety, innovation,
responsiveness or reassurance.
Third, use
customer behavior as a predictor rather than pricing research:
Customers seem unable to answer honestly the question: how much would you pay
for this? Therefore, observation is better than asking. Charles Fishman has
described research conducted for the leading global logistics company, by
pricing consultancy Zilliant. Rather than trying to calculate the price mathematically,
Zilliant looked for the right price. Specifically, their software measured
customers who called, asked for a price and then did not ship – ‘failed
prices’. These failed prices revealed the price ceiling. The results showed
that the leading global logistics company, with its strong international
reputation, did not need to match lower-priced rivals. Some prices were lowered
slightly, still maintaining a premium over competitors while gaining volume,
revenue and profit. Allow customers to demonstrate what they are prepared to
pay rather than asking them.
Fourth, design
a pricing structure to move your customers up price stairways: in
price-sensitive markets with high elasticity, competitive entry prices are
crucial to win the attention of customers. This enables companies to offer a
menu of extras and upgrades to match needs for additional services. When
customers believe they buy only when prices are compelling, attract them with a
low offer price and allow them to take their own steps up the price stairway.
Fifth, manage
price increases with confidence: In uncertain times, companies are
reluctant to announce price increases for three reasons: customers may protest
or reduce purchases; staff may be apprehensive in communicating and
negotiating; and the news may receive unfavorable media coverage. Sometimes, it
may be possible to increase what customers pay without a formal price increase,
through revisions to the discount structure, introducing charges for minimum
orders, purchases or supplies. However, many companies will hold back or hope
that quietly slipping in an increase with an anonymous press release will
minimize resistance. Though it may seem counterintuitive, there is a benefit to
openly asserting that price must rise, giving ample notice and a valid
rationale. It is important to be able to demonstrate that you have taken costs
out of internal systems before seeking increases. What’s more, bringing in new
benefits to customers at the time of the price rise can reduce resistance.
Finally, transparent behavior can also encourage competitors to respect the
upward price movement and respond with their own increases.
In conclusion,
uncertainty besets all players in business. Remember that your customers may
fear the unknown as much as you do. With confident pricing based on
understanding the value they obtain, competitor differentiation and simple
price ladders, you can offer a degree of certainty that your customer will
appreciate. And that certainty may outweigh the risks and potential threats of
competitive offers and make it easier for your customers to buy from you.
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