Another Reason Pricing Matters Now More Than Ever

Came across this quote in Jack and Suzy Welch’s weekly column in BusinessWeek.

“Sure, not that long ago, you could still take a competitor’s service or product, tweak it or slap on a new feature or two, and persuade customers to buy it at a premium. But with everyone in hunker-down mode, the days of marginal up-selling are gone, and could be for some time to come.”

Think about this for a minute.  If the days of the  marginal upsell are gone, then firms have to get smart about how they are going to extract the most value from their existing offerings – particularly those at the lower end of the line where price-sensitive customers are going to focus.

This is one of those things that is easy to say but often difficult to do.  Conceptually it is simple.  You only need a couple of things in place.  First, you need to have viable lower-value, lower-price options.  This is second nature in areas like consumer electronics where the concept of “good, better, best” rules.  For a great example just check out Apple’s iPod line.  Second you need to have strong fences that prevent poker playing negotiators from getting the high-value offering for the price of the low-value one.

So what makes this challenging?  As with many simple to articulate but challenging to implement ideas it usually comes down to a couple of things: organizational beliefs and capabilites and measurement systems.

It is not uncommon for many to worry that introducing low-value flanking products will cannabilize sales of existing offerings.  This is a valid concern but when done correctly flanking offerings substantially increase revenues and profits by protecting prices of existing offerings through reduced discount and by bringing in new customers that might not otherwise buy from you.  Cost measurement systems may also get in the way.  If your product costing systems include averaging then the chances are that many ideas for flanking offerings will appear to produce margins that may be below standard.  The trick is to look at the costs that are incremental and avoidable and measure that margin dollars that are generated over and above those marginal costs.  The results are often surprising.  Finally, your sales team may need to learn how to sell differently moving from negotiating price to negotiating price-value trade-offs.

Soon, the press will be trumpeting even more loundly about the coming “value decade” and the talk about how customers control pricing will begin.  Here’s the truth, they will control your pricing if you let them.  One of the best ways out is to make sure that you have a full line with multiple price-value landing points.