Wednesday, 13 June 2018 04:14

Use Price to Improve How You Drive Your Business

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Can you use price as both a cost based calculation and a tool to define your market? Do you need to discount to get a deal? Let’s step back and think about how to use price as a tool to define and then create a new market.

This is not about market disruption (for more on that, please see http://www.meyergrp.com/index.php/articles/growing-your-revenue/86-building-a-disruptive-business). This is about market creation. Sometimes the best way to compete is not to compete. Instead it is to create a new space, one where you are the only supplier and your customers are very focused on getting a solution that only you offer.

Your price is always part of positioning your product. Sometimes you want the sense of value to be high, where you get the image and get increased margin. The question is: Can you get both of those without losing sales?

 

Yes, you can raise prices and still gain sales. The key is to solve the right problem.

The answer is: Yes, you can raise prices and still gain sales. The key is to solve the right problem. The good news is that the right problem to solve is not your price.

Choosing the right problem sets up your success in twists and turns in business. You set yourself up to choose the right view and then hold that line. It is like driving into turns when you cannot know where the turn comes out. If you want to succeed, you can either slow down (and how likely is that in this market?) or you can set yourself up for success before you enter the chicanery. How you set up the turn defines how well you can come into and out of the unknown.

 

Pricing Internal and External Views

Fundamentally you have two price views to consider -- one internal, the other external. In the internal view of pricing, you price to cover fixed and variable costs with a bit of profit. This process is internally focused, defined by the needs of your business and your strategies.

In the external view, your price is a tool to define your market and position yourself around your competitors (if you have any.) When you price in one range, you may find that you will compete in the existing market. However, if you set your price at a significantly higher or lower level you may create a market where none existed before. As paradoxical as it may seem, pricing higher may increase your volumes and your margins.

Looking internally when you decide to compete in an existing market you may need operational excellence to keep costs low and margins acceptable. For example, if you choose to enter the market for over-the-counter painkillers, your ability to stay within a certain price range is important. The good news is that you know the price point before you start. The downside is that so does everyone else and this usually leads to thin margins.

If you choose to sell into a space where there is little competition, margins may be easier to maintain. If you choose to sell into a space where there is no competition, then your price and margin can be set by how important your solution is to a customer. In other words, you get rewarded for the quality of your solution even more than the quantity of your operational excellence.

 

When you choose the right external problem, you don’t need to be excellent to get rewarded with high margins.

Put more starkly, when you choose the right external problem, you don’t need to be excellent to get rewarded with high margins. You can still get growth by sloppily solving the right problem. In the external pricing view, you price according to the value of your solution as the customer sees it. And how the customer sees that is going to be dependent on her view of the problem instead of how you might wish she sees another problem

 

The Problem Isn’t Yours

In the internal view, all the problems are yours. If things go well, your customers will buy according to how well you help them sense the problem. Your price should reflect the intersection of where you make money and customers still buy.

In the external view, you find the right problem. What is right? The critical problem that your customer will pay to solve. The problem isn’t yours, it is theirs. And if they feel that it is a highly pressing problem they will pay extra to solve it. Your job is not to make it seem urgent, it is to uncover what is truly urgent.

We all have more than one problem on our desk. If I turn to you and offer to fix problems 11, 12, and 13, you may pay attention. If I offer to fix just one problem, but it is one of your top three, you may pay much more attention. And you will probably be willing to pay more to have it fixed.

 

When the problem is the customer’s and it’s truly pressing they will invest to solve it.

To be clear, the payment for fixing a top problem isn’t just about money. If the problem seems very real to the customer, they will pay in time and people as well as money. The key is that when the problem is the customer’s and that it’s truly pressing they will invest to solve it. That is when you want to be right there with a good solution

What problems tend to be truly pressing? When my firm asks they are problems about time (as in time to market or time to production) or people (as in “I need to clone my best people.”) The third level problem is cost. Cost is always in last place.

However every customer says that they want to save money. As you know they do not act that way. Most of us invest in gaining competitive advantage. Time and people are key to that.

 

Inside the Curve

When you drive well you set your turn up before a curve. The right starting line for a turn makes a faster and safer turn. The same is true here. How you set up your pricing around a strongly held problem defines how you will enter and exit a difficult and perhaps invisible turn in business.

What is the best set up for the turn? The one that gets you closest to the problem as the customer sees it.

How does this affect your price? You don’t enter the turn (set your price) until you know that your customer agrees on a value on the solution. If the problem feels very real to the customer, she will invest time and people for this.

If the problem is one of the top few for your customer she will assign a value that is much higher than if it is number 10. Your assignment is to price to that value.

Then drive your solution to match her sense of value. The worst case is that you will have to bleed some speed (price) because of an issue that you didn’t expect. The most likely case is a smooth turn and a strong exit to set up the next turn. And more sales at high margin.

If you set your price based on internal costs and spreadsheets, it is like entering the turn while looking at spreadsheets on your phone. You know what is going on in your own world but you do not know what is going on in the turn.

If you set your prices based on the customer’s sense of value of their most important problems you will be using external views. This does not guarantee your success, but it certainly improves the likelihood of exiting that turn at full speed with a smile on your face.

 

Driving the Price

What drives the price that you will charge? How well you understand a key customer problem, and then how well you set up your solution. If you do both well before you enter the turn you will give yourself a chance to command a price that feels fair to your customer and that rewards you. And you can keep up your speed and your success.

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Peter Meyer

Owner/Founder of TMG

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