I recently had a conversation with an executive of a B2B company who said they want to price more strategically. The company currently sets prices using a cost plus methodology, and they have heard repeatedly there is a better way. When we discussed some of the implications of pricing strategically, including pricing to value rather than cost, and setting different prices for different segments and customers, the executive worried aloud that he might make matters worse rather than better. I explained that when developing more strategic prices, he would identify the customers, products, and situations in which the probability of successfully selling a higher price would be greater. However, I also reminded the executive that in order to be successful, he would need to have the courage to actually charge the higher prices.
Unfortunately we often run into companies who determine where they could price more strategically, but then lack the courage of their convictions. These companies do the work to identify underpriced customers and products, but then refrain from properly increasing those prices. “I can’t raise that price 10% in an environment where inflation is less than 2%.” “I can’t charge small customers more.” Well why not? If you have really done the work to determine that the value to a customer or segment is much higher than you have been charging, or you have identified the customers who are less price-sensitive and more service-sensitive, why can’t you charge them appropriately? If your work is accurate, the customers will not leave you for making reasonable corrections. As Reed Holden has said, you have to Negotiate with Backbone.
In my last blog post, When Size Matters, I described recent moves by Coke and Pepsi to create new offerings in smaller portions, but at higher prices per ounce. In their case, the traditional fear was that since market volume was down, they would have to lower prices to try to stimulate demand. Instead, Coke and Pepsi relied on their work that identified a segment of customers who still want a soda, just in smaller quantities; and the bottlers offered those customers something of value at a higher price point.
Since I love sports, I often use sports analogies. Professional race car drivers make more money when they win races. They know that to win races, they must go fast when exiting the corners. Unfortunately the risk of losing traction and crashing is greatest in the corners. So the drivers and their teams try to identify the setup of tire pressures, wing height, downforce, etc. that will give them the greatest opportunity to go fast in the corners. When a driver is lagging behind or the car feels a bit loose, the teams adjust the setups. But to catch up and win the race, the driver must have the courage to apply more throttle in the corner and find out whether the car can maintain traction at the higher speed.
Football is another area where risks must be calculated. Certain defenses make it more difficult for the quarterback to throw deep and may be more suited for runs and short passes. However, sometimes the defense is more prepared for a short pass or run and leaves a speedy receiver with single coverage. When that happens and the quarterback recognizes it, he needs to have the courage to switch to a play that sends the speedy receiver deep and provides himself with enough time to throw deep. The risks of sacks and interceptions may be higher on deep pass routes, but in the right circumstances the higher probability of success makes it worth taking the risk.
Some companies and teams are naturally more risk averse than others. If they want to win and if they want to price more strategically, those risk-averse companies can develop their courage over time. If they have identified the areas with high probabilities of success with higher prices, they can run pilots on random subsets of the opportunities. They can validate their price-differentiation work with small tests that don’t bet the farm. With each success they will gain confidence and courage. And if any of the tests fail, they can learn how to adjust them in a controlled process.
Although I think it is very difficult to deliver shareholder value by always playing it safe, I am not advocating a caution-to-the-wind approach. I am advocating rigorously analyzing the market, customers, products, and transactions to identify where and when prices can be higher and where and when prices should be lower. I am also advocating having the courage to differentiate prices and charge more in those situations that call for it.
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