Rafi Mohammed

Value Pricing is Good...But These Two Ideas Will Make Your Pricing Strategy Great

Posted on May 15th, 2007 (0 Comments)

My friend Eric Mitchell recently phoned to invite me to speak at his upcoming Professional Pricing Society (PPS) conference. I enjoy speaking at Eric’s conferences and strive to do my best for him (my speech at last year’s PPS conference was rated #1 out of the 10+ speakers). The dilemma I faced is that I’m working on a new idea for manufacturers to set prices in their negotiations with big box stores like Wal-Mart and Home Depot. Because these manufacturers often have large plants to keep running, most HAVE to sell through big box stores. They can’t afford to walk away from a pricing negotiation without a signed deal...no matter how many Alka-Seltzer tablets they have to pop. As you can imagine, these ideas will be of considerable interest to the pricing community. The problem is these ideas are “in progress” and I can’t guarantee they’ll be road tested by the Fall PPS conference. Eric’s counsel was to reveal lessons I’ve learned since publishing The Art of Pricing close to two years ago. After a few weeks of contemplation, I believe these “lessons learned” are actually more powerful to companies’ bottom lines than my Wal-Mart negotiation ideas.

Over the years, the ideas in The Art of Pricing have only become clearer to me. I’m truly convinced the ideas in my book set the right path for companies to price for profits and growth. We all know that setting prices to capture value is important. But most strategists don’t realize there are two key steps to undertake before setting value-based prices.

The strategy of pricing involves devising tactics to profitably serve as many customers as possible. Pricing strategists need to realize that just like our society, the potential customer base for any product or service is widely diverse - both in terms of what prices customers are willing to pay and what pricing structures will entice them to take out their credit cards. The first step of pricing is to create a series of differential and versioning pricing tactics to serve customers with different valuations for your product (e.g., senior, coupon, government, volume, flagship vs. outlet, good-better-best prices, etc.). The second step is to create new pricing tactics to convert potential to actual customers – I call this “activating dormant customers” through segment-based pricing. For example, your customers may want to purchase, lease, rent, use during high demand periods, use during low demand periods, own an interval share, or pay one price for “all you can eat.”

The results of these two steps are a bevy of pricing tactics for your product. Now…you have to set prices for each of these tactics (e.g., what price should be set for rental, outright purchases, interval ownership, “all you can eat,” etc.). It’s only at this point that value pricing comes into play. Value-based prices must be set for each differential, versioning, and segment pricing tactic being used to sell your product. Thus, my big revelation for Eric’s conference is there are two important steps to undertake before implementing value-based pricing.

I know that many of you are thinking “so many prices, so tedious.” I never claimed that pricing is going to be exciting ALL of the time! That said, my bet is there is tremendous upside to plowing through this tedium. For example, a client recently started to moan about the paperwork associated with my consulting advice to occasionally revaluate his value-based pricing. Responding to his concern, we calculated that it would take less than 2 hours to revisit each value-based price. We then determined that on average, the upside of revisiting each price was approximately $100,000 of extra profit…all of a sudden pricing didn’t seem so tedious to either of us!

Hope to see you in Orlando for the Fall PPS Conference.

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