Bad pricing is a great way to destroy your company's value, revenue, and profits. With ten simple rules, this book shows you how to deliver both. talk about with customers is price, there is no price that is going to be low We are confident in the value we provide and, therefore, the prices we charge. Read Pricing with Confidence by Reed Holden, Mark Burton for free with a 30 day free trial. Read unlimited* books and audiobooks on the web, iPad, iPhone.
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Ten Rules to Achieve Pricing Confidence. By Reed Holden and Mark Burton. In reality, pricing is far from simple. Setting the bes tprice for products and services. Dr. Reed K. Holden is founder of Holden Advisors, a pricing consulting firm that specializes in working across product, marketing, pricing, and selling functions to . The following excerpt is a summary of Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table. From the publisher: Bad pricing.
The repetition manipulation proce- tition condition. Thus, these results offer additional support for the you would be willing to pay? Not only were participants in the repetition Results condition more confident, but they also took less time to report their price expectation. Fur- should judge price increases less unfavorably. That is, before judging the offer prices, participants assigned to Price Judgments the repetition condition in the previous experiments saw a Prior research on the effects of confidence in stimulus series of prices around the induced price expectation, discrimination tasks suggests that measuring confidence whereas those in the no-repetition condition were deprived can alter the task itself Baranski and Petrusic ; Petru- of this information.
Could it be that participants in the repe- sic and Baranski Building on this insight, we tition condition were aware of the distribution of prices and recruited a separate group of participants for testing the therefore were able to discriminate on both sides of their effects of the repetition manipulation on price judgments.
To address these issues, instead of induc- The procedure for repetition manipulation was identical to ing a price expectation in the laboratory, we asked the par- that in the preceding study. The procedure for the price ticipants to submit their spontaneous price expectation at judgment task was similar to that in Experiment 1, with the the beginning of the experiment.
Sixty-one students from a large northeastern university Analyses of binary magnitude judgments and response separate from those who participated in previous experi- latency corroborated the findings from Experiment 1. These results imply that the internal reference price in retailer was considering for that product.
A judgment can be considered those assigned to the low-confidence condition were pre- erroneous if a participant categorized a price that is higher sented with the confidence manipulation information.
Par- than the expectation he or she articulated at the beginning ticipants in the low-confidence condition were instructed to of the task as low or if he or she categorized a price that is wait for 30 seconds while the computer compared their lower than the expectation he or she articulated as high. At price estimate with the actual market price, after which time an aggregate level, The For participants assigned to the low-confidence condition, actual price is quite different from the price that you This finding supports mately five minutes.
These brand evaluation questions were the notion that under conditions of uncertainty, the internal inserted to separate the binary magnitude judgment task reference price i. On the following psychological scale used for price judgments is higher than screen, all participants read the instructions for the price the articulated expectation.
In contrast, for participants in evaluation task. Then, they saw 12 prices, one price at a the control condition, the error patterns were symmetric time, on the computer screen and judged whether the shown around their articulated price expectation Mbelow price was high or low. Strikingly similar findings Price expectation.
One-way ANOVAs revealed that nei- about asymmetric errors have been reported by researchers ther the preevaluation measure of price expectation examining the effects of anchorages on judgments. Price judgments. We analyzed the binary judgments using a conditional logit model with offer price magnitude 3The overall pattern of error distribution was similar even when the and confidence as the two independent variables.
The main postevaluation price expectation was considered the judgment standard. The errors in the control condition were more sym-. Internal Reference Prices and Price Expectations results from an experiment in which the task was to esti- confidence conditions. The preevaluation price expectation mate the number of dots in the pattern. The greater the uncertainty, the factor. The significant main effect of the offer price level larger is the shift in the internal reference point.
A series of the articulated standards reported after the judgment task. Thus, manipulating confidence not only affects binary reference point. In Experiment 4, we investigate the effects judgments of magnitude but also influences subjective per- of confidence on continuous price evaluations by measuring ceptions of the attractiveness of offer prices. Sixty-three students from a large northeast- The notion that experience leads to the internalization of ern university participated for partial course credit; they a judgment scale has received empirical support in the con- were randomly assigned to either the low-confidence condi- text of several psychophysical stimuli, such as pitch, tion or the control condition.
None of these students partici- weight, and inclination. Sherif and Hovland , p. First, instead of high—low internalized. For each stimulus price, partici- cal scale used for price judgments.
Second, instead of 12 offer normal prices charged by the retailer e. Again, the com- Obermiller ; Kalwani and Yim ; Urbany and Dick- puter generated these 6 prices for each participant on the son Others have suggested that the recalled magni- basis of their articulated price expectation submitted at the tude of the previous observed prices might serve as the beginning of the experiment.
In this article, we suggest that the internal Results and Discussion reference price used in price judgments is much more mal- One-way ANOVAs confirmed that the articulated price leable than these articulated expectations.
The proposition that phenomenological experiences and Fitzsimons, Gavan J. Wesley Hutchinson, Patti Williams, price expectations can independently influence the internal Joseph W.
Alba, Tanya L. Chartrand, Joel Huber, Frank R. For the rest of your markets, you need something more to differentiate yourself from the competition. In addition to high-value products, much of this differentiation will come from services. To create high-impact offerings, set out some basic objectives.
Results show there is a pot of gold out there for those firms that can execute a multilevel offering strategy that includes products, services, and software or data and analytics. An easy way to start is to put your services into one of two categories.
The first category is enabling services such as maintenance and support, postdelivery training, or predelivery design support. These types of services are often expected to be available and that expectation is often misinterpreted as an unwillingness to pay for them. They force a definition of the boundaries between the expected and value-added levels for services, and they enable identification of your customers who are seeking high and low value.
The second category of services are high-value adds and are often components of solutions to specific customer business problems. Companies such as Deluxe and John Harland that sell checks to banks and consumers have come up with an interesting way to drive new revenues as their core check printing business continues to decline.
They offer outsourced order management. Each provides a special call-in number to help new banking customers select and order their checks and accompanying accessories. Consider General Electric and its design of the GE90 aircraft engine.
Using new, exotic materials and engineering advances, the GE90 was a technological marvel. In its early days, it was also a commercial failure. What happened? GE finally got around to asking the right questions. What it found was that customers were reluctant to take the risk of change. The GE90 had no track record, and its application of advanced technology and materials, the very attributes GE managers saw as benefits, were what many customers regarded as financial risks.
How did GE respond? Furthermore, they could elect to pay GE by aircraft operating hour. In this way, GE aligned the way customers pay for value with how they accumulate value. Customers, of course, could do business the traditional way by downloading engines. Can your customers see this logic in your offerings? If not, you are eroding their trust.
You are also encouraging them to play poker with your sales teams and negotiate more vigorously. Think about it.
Any measure that you choose to look at—net promoter score, customer longevity, lifetime value, net price realization, average order size—every one of them will suffer because of poor fences. The Final Piece: Bundling A central goal of this rule was to recognize the power of tightening up your offering structure to improve the ability of your sales teams to manage tricky price negotiations. There are two challenges that still need to be addressed.
The first is the recognition that most businesses sell offerings to different customer segments that place different value on these offerings.
The second challenge is the recognition that, within segments, individual customers also value the same offerings differently. To be sure, accepting this downward drift is one way to ensure a business is covering its entire market.
But it certainly is not the most profitable approach, as it leaves money on the table with those customers that value and are willing to pay more for your offerings. The way to solve this problem is to use bundles.
The logic of bundling is straightforward. The idea is to package two or more products, services, or attributes to create fixed-price variable-value packages.
This is done in order to: 1. Get customers to download more than they ordinarily would by offering a financial incentive—a bundled price—that is lower than the sum of the component prices. The key here is to make the savings on the bundle attractive enough that customers will download the bundle. Create opportunities to earn more for your value when you have groups of customers that place different levels of value on the individual components of a potential bundle.
Pricing to reach the whole market often means setting prices low enough that even those customers that value your offering the least would be willing to download it. Bundling provides a means of getting more revenues from individual elements of the offering than if they were priced to reach the whole market.
It allows you to serve those customers while still getting paid more from those customers that place a higher value on your offerings. Imagine that you are a product manager for a software company providing solutions for tracking customer usage and predicting future behaviors. You are currently focused on two markets. The first is intercity rail and bus travel. The second is casinos. Casinos place a higher value on the ability to track usage patterns of high rollers because it allows them to set triggers to provide complimentary services comps real time, while the high rollers are still on the floor of the casino.
The goal, of course, is to keep these high-value customers gambling. The casinos value the ability to predict future spending behaviors of these high rollers so they can cultivate relationships with them. On the other hand, passenger rail companies are interested in encouraging more people to take the train.
With this focus, these companies place more value on use tracking as a means to coordinate simple promotional campaigns. They place some value on trend analysis, but only for some simple collaborative promotions that they perform for local hotels. Figure 6. One question Figure 6. When reviewing your own bundles, ask a simple question. Are these items bundled together because they logically go together in the minds of your salespeople and customers, or because you hope that by putting them together you can create some sort of black magic alchemy that will miraculously make customers want to spend large sums of money with you?
If it is the latter, customers will not be fooled by bundling offerings that are not relevant to their needs. If Intuit went head-to-head with Microsoft, it would lose. The goal is to keep Microsoft in catch-up mode. And they do it not with price but with relentless innovations of their products and services. Think about ways to get them to react to you instead.
When action is taken, make sure it is not a reaction but a well thought through game plan that will focus not on beating competitors but on getting them off your back. The only way to make money playing the game is to have both competitors keep their prices high. That takes determination, patience, and a willingness to avoid short-term opportunistic gains in order to achieve long-term market stability. That should be the real objective in a mature market: market stability.
The bottom line in mature markets is that price competition really makes no sense. Customers who came to you for low prices are now going to be the first to leave when a competitor offers lower prices.
Low prices provide the least sustainable competitive advantage. Protecting share fails to deal with the real objective: a stable competitive environment. This sends a more balanced message. Anyone who expects the system to be perfect at the start is in for a rude awakening. In the end, selling is a tactical job. Salespeople are in the trenches trying to land every deal they can. The job of managers is to tell salespeople who the desirable customers are and to warn the pricing people away from customers who cannot be served at a profit.
They just cannot be served at a profit. At least not by your company. If such customers can be served at a profit by someone else, then everyone is better off. In order to price with confidence, companies need to know they are targeting the right customers and the right segments.
Strategy is required to do that. Strategy is required to help people meet their objectives. Successful companies have a good understanding of who their competitors are, what they are good at, and what they are bad at.
When those insights and actions are turned into effective competitive information systems, they provide long-term competitive advantage that stops leaving money on the table in ineffective price battles with competitors.
Customers want you to focus on how you are the same as your competitors to level the playing field on price. But you have to focus on how you are different, and feel confident about the services you provide to make your solution better. Understand how that difference provides a better solution to customers and start acting like you are a solution.
Stop acting like a commodity vendor. Make your customers respect you and want to do business with you. Put some backbone into your selling process.
Drill down on how your offerings drive financial value for your customer. Ask them how important services like delivery and technical support are to them. Ask what keeps them up at night and ask how you might be able to help. downloading in most organizations is not an event; it is a process. The final step is to determine the walk-away price. This is the price that assures you some level of reasonable profit.
Everyone on the team must agree, or at least respect, the number prior to the negotiations. There can be no senior people panicking at the last moment and dropping the price. downloaders know this. Yes, it does take courage. We know of one services company that adopted this approach in a dramatic way. So, at a signal from the lead negotiator, the entire team got up and, without a word, left the meeting and the building.
The team got in their vehicle and drove to the airport. They were at the gate, waiting to board their plane back to the home office, when the call came. The prospective customer caved.
Fear and money
It sent a limo to pick up the negotiating team and inked the deal on favorable terms to both parties. Sometimes confidence calls for a little brinksmanship. An RFP is often a sign that a customer is not a relationship downloader and is likely not going to be a value downloader, either. That means that RFPs come, for the most part, from price downloaders or poker players. What percentage of your RFPs do you win? The next question is How much time do your people spend on responding to each RFP?
The worst thing that a dominant incumbent can do is to respond to the RFP. When they do, they are either going to have to drop their price significantly to win the business or they are going to have to lose the bid to a low-value vendor. If you are going to lose the business anyway to price, you might as well do everything you can to maintain your credibility too. Any time a seller responds to a bid or an RFP, they need to stop, ask questions, and get answers to a number of quite basic questions.
They need to assess whether or not this is going to be a fair bid among equals or whether a potential customer is just conducting a fishing expedition. We recommend that companies get answers from prospects to a number of basic questions before they agree to participate in the process: 1.
What specific business problem are you trying to solve?
What is the likely return if you fix the problem? What are the criteria for selecting a vendor to help? What is the process for selecting a vendor to help?
What is the final process for approval of the project? Is there a budget approved? What is it? If there is no budget, what is your sense of what this should cost?
Talk about all the things you do to help them that add value to the things they do. Talk about the things your company does to improve the quality of your products and services to them.
Talk about the things your company does for the industry. Value-based pricing is an ideal. It requires sophisticated internal skills and systems. The trick to value-based pricing is to evolve pricing as the discipline and skills of your people improve. Start gradually. There is nothing wrong with cost-plus pricing as long as it does a good job of leveraging the financial value you create for customers. Here are some of the advantages of cost-plus pricing: 1.
Easy to calculate. Simple to administer. Requires minimal information. Tends to stabilize markets. Protects supplier from unexpected cost increases. Believable to salespeople and customers. But there are also significant disadvantages to cost-plus pricing: 1. Ignores demand, image, and market positioning. Favors historical accounting costs rather than replacement value.
Applies standard output level to allocate fixed costs. Offers few incentives for efficiency, as costs are passed off to customers.
Ignores the role of customers and the value they derive. Creates a competitive disadvantage using average costs as discussed in Rule 5. If you try to move too quickly to a value-based approach to pricing, more than likely your efforts will backfire.
Customers will rightly be confused and concerned. As a consequence, they will negotiate even harder or, worse, abandon you. Competitors may see your efforts to price differently as an opening to take market share.
Failure to anticipate and manage these forces before they become problems invariably causes pricing initiatives to fail. Your journey will be over before you even get the car out of the driveway. Small steps forward can produce big results. Successful initiatives to improve pricing are rarely pricing-driven. Our client understood that their vision of improving pricing was going to be enabled by better offering definition, cost management, sales skills, and data.
The next step in better cost-plus pricing is to start using data on your capacity and bottlenecks to drive decisions on when to raise or lower prices to control utilization of key resources.
She started indexing prices according to available plant capacity. During times of constrained capacity, the pricing manager fully allocated all costs and took a further markup to set prices. During off-peak times, she looked at incremental costs only and added a markup to this lower cost basis. If customers absolutely needed their products during times of peak demand, they paid the highest prices. If they shifted their delivery to off-peak times, their costs and prices were much lower.
By better understanding incremental costs, the manager used differential pricing to effectively optimize the utilization of plant capacity.
Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table
It recently upgraded its pricing model. Parker abandoned its old cost-based pricing model. What did Parker replace it with? Another model that is also cost-based.
But Parker Hannifin adjusted its pricing formulas based on the incremental value of the products based on their degree of commoditization. There is nothing surprising about this. Customers are typically more accepting of higher prices as the level of specialization or customization increases. The difficulty, when you have 20, products, is distinguishing them in terms of differentiated margin opportunity. The trickiest types are the poker players, who love to play the pricing game and have learned that if they focus on price, they can get vendors to leave money on the table but continue to provide high-value features and services.
Knowing the strength of your own hand--the value you offer--gives salespeople confidence to resist the temptation to close at any price.
Price to increase profits. It's a myth that if you discount price to increase sales, you will see increased profits. Profits result when an organization does many things right, including simplifying costing approaches so they permit more effective use of your company's resources, be they people or machines.
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Efficiency, controlling costs, better profit metrics--all are required for pricing success. Add new products and services that give you negotiating flexibility and growth. When your products are regarded as commodities, add services to differentiate products and prop up prices.
An effective strategy is to develop a dual offering that covers both the high- and low-end customer needs. If customers want a lower price, subtract features and services. Force your competitor to react to your pricing.
Don't participate in a competitive pricing death spiral. Map your markets. Define where you do and do not have a value advantage over your competitors.
Know where and how to compete on price--and where and how not to. Build your selling backbone. To have confidence in negotiation, salespeople and managers need confidence in pricing. This comes from knowing the value of your products or services. It also comes from knowing your customer.
Backbone comes from knowing the tricks your customers use to get you to drop price and how to deal with them.We hear about this strategy a lot and on the surface it sounds good. Start your free 30 days. Provide phenomenal results and get paid phenomenally well to do so! All it takes is asking the right questions and being willing to listen.
Thirdly, unfamiliar prices do not have well established reference prices unlike familiar prices. When entering the growth phase of the market, if you grow but not as fast as the competition.