Do You Have a Lazy Pricing Process?

May 28, 2010

I ran across a great article this week in the MIT Sloan Management Review, “Raise Your Prices!” with some helpful advice for companies that are not interested in competing based on price, but are more interested in competing on the basis of performance.

As the authors explain, “By competing on performance instead of price, you shift the battle to where your company’s strengths lie — in the ability to deliver unique benefits. So-called performance pricers are adept at three core activities: identifying where they can do a superior job of meeting customers’ needs and preferences; shaping their products and their business to dominate these segments; and managing cost and price in those areas to maximize profits.”

Here’s a quick self-test from the article:

  1. Does your company continuously focus on improving its products and services in ways that are important to customers and that allow you to raise prices and increase profits?
  2. Do you communicate regularly with customers to find out how you can improve your offerings, and to make sure they’re aware of any unique value you provide?
  3. Do your salespeople speak to the right decision makers and others who care about these value benefits in the customer’s organization?
  4. Does your company involve every department in discussions about product development and pricing strategy in order to maximize efficiency, quality and profits?
  5. Does your company consider pricing when it’s still developing a new service or product instead of when the product or service is introduced to the market?

Did you answer no to any of these? If so, then you probably aren’t doing enough to maximize profits in alignment with the value your customers are willing to pay.

The authors recommend a 4-step process to performance pricing that any company can replicate…even an expansion stage company with limited internal resources.

1. Identify Value Opportunities.  Examine every product, service and benefit you deliver to customers to better understand all of the ways in which it impacts the customer, and how the offering could be improved.

2. Set Priorities. Decide which products to develop further and how to allocate resources.  Usually these priorities are going to be based on impact to your company’s competitive positioning, benefit to the customer, and profitability.

3. Align Price & Value. Quantify the specific positive impacts to your customer, and understand the tangible value to your customer (acquisition cost, operating costs, added value to end user).

4. Get Cooperation. Engage your customers in this process. You need to thoroughly understand their needs and how to communicate the value and price of your offering to them.

Seven mistakes of poor pricers?
1. Nothing we do deserves a premium price.
2. Average pricing seems fair.
3. Cost-based pricing is easier to explain.
4. Everyone else prices it that way.
5. Our sales team’s incentives are driven by volume, not value.
6. Don’t step on anyone’s toes.
7. The customer tells us the price.

As the authors of this article explain, there is a distinction between price (what a customer is willing to pay) and pricing (which your company should set in a strategic and leveragable way). At OpenView Venture Partners, a venture capital firm that also provides strategic consulting services to expansion stage technology companies, too often we see companies at this stage selling to customers at whatever price the customer will pay or trying to compete based on price, rather than approaching this key lever of their economic model with more forethought.

Is your pricing process lazy?