Product and Pricing
It’s all about the customer and what they want. NOT you and what you think they want.
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.
And if you have to have a prayer session before raising the price by ten percent, then you’ve got a terrible business.”
– Warren Buffett, CEO of Berkshire Hathaway Inc.
Introduction and Overview
In this post we explore your product strategy to attract your target audience,
and the pricing strategy to optimise your profitability
In summary, these are the steps you will need to take:
So, lets get into the detail:
- Product Strategy
Step 1. Have you adequately researched your niche or new product category before launching it?
Is there a market for your niche an do you have “Proof of Concept” i.e. that your product offer
and marketing message will result in sales?
Before launching any new business. or a new product or service, you need to research your chosen
niche to confirm that there is a market and that people are willing to pay to learn more.
Once you are satisfied that there is a market and that people are willing to pay to learn more, the next step
is to establish a “Proof of Concept” by taking your specific Niche Offer and your sales letter or message to the market and prove it to be true, with a real-world application that will result in sales.
Firstly, ask yourself “do you have a rational offering”? Businesses that can’t even articulate the
basic benefits of what they sell are destined for failure.
Then your next step is to do your research to establish that there is, in fact, a market for your
niche product or service.
To do that you will need to be very clear:
- Exactly who is your ideal target customer (your “Customer Avatar”)?
- What problem are you solving for them, and
- Why will they be willing to pay for your solution?
How you go about these 3 crucial steps will depend on the type of business and niche
you are targetting:
Is the business online? and if so, is it an eCommerce business i.e. selling a physical product online,
or a business selling a software product that can simply be downloaded by the buyer immediately
after they make payment.
If the business is not online, i.e. it’s a “Bricks and Mortar” business (has one or more physical
locations which could be manufacturing or warehouse facilities, service centres or retail outlets).
Is the business selling business to business (b2b), or business to consumer (b2c i.e. buyer is the
end customer for the product)?
This is important because the selling process and pricing strategy for b2b and b2c will usually be
totally different.
Is the business selling to a defined local area (usually a City or Region), or a National business,
possibly even International as well?
For instance, Harvey Norman has around 280 large homemaker stores in 8 countries, of which 194 are in Australia. As you can imagine, selling to these different types of business and local versus national businesses will be totally different, which is why research and getting proof of your concept is crucial if you are to succeed.
As you can imagine, selling to these different types of business and local versus national and International
businesses will be totally different, which is why research and getting proof of your concept is
crucial if you are to succeed.
- “Google Search” – enter your target niche then the keywords (words or phrases people
would enter into the Google search bar if they were searching for your niche, product
or service). If you see 3 or 4 ads at the top of page 1, chances are there are people who
potentially could be interested in your offer, otherwise people would not be using paid ads
to attract people (Unless their offer is targetting a similar audience but with a totally
different type of offer-so just take a look at what they are offering).
- Amazon Books and Magazines – do the same thing. If there are books and magazines for
your niche, there must be customers.
- “Google Local” is a great way to find potential customers in a local area.
Finally: Take your Niche Offer and your sales letter or message to the market and prove it to
be true, with real world application and results (sales). I.e. establish “Proof of Concept” for your
offer and Marketing message. Again, how you do that will be dependent on the type of business
and geographic location (s) you are targetting.
P.S. you must be consistent. Don’t be surprised if you need to make contact with 100 prospects
to get 1 or 2 sales. But even a small number of sales does provide evidence that your offer and
sales and marketing message do work.
Who are your main competitors, their strengths and weaknesses, any trends (positive or negative)
that could have an impact on your business or product: technology, interest rates, economic
environment (recession or boom)?
(For instance, “maybe I don’t employ this person”, or “I have to let some people go, or I don’t expand”,
or “I don’t go and borrow some money because I might not be able to afford the interest”).
Every decision you make around product and pricing has to start with the marketplace.
If your product is scalable, once you have established a firm customer base, and systems and processes that are scalable, you can scale up. Depending on the nature of your product, you can do that either by increasing your marketing budget, having an online store, or if you are in retail, “increasing your geographic coverage”.Pricing Strategy to Maximise Sustainable Profits
Pricing Strategies The 3 C’s Comparison Chart (To be added)
In many businesses, Product pricing is the biggest opportunity available to optimise your profitability.
A comprehensive Real-Life Study (Hinterhuber 2004) examined the effect of implementing a 5% Value-based price increases on a sample of Fortune 500 companies.
It found that typically a five percent increase in selling price, increased operating profit by an average of 22 percent – far more than any other tool available to management.
Whilst th\ere is general agreement that Customer Value Based pricing is conceptually likely to
achieve the highest level of profitability, not all businesses are able to apply value-based pricing,
and the complexity and timescale for implementation is higher in B2B than B2C.
Given the high impact of pricing on profitability, understanding the cost to produce and distribute
your product or service and all aspects of value you are able to offer to your customer are crucial
in developing and explaining your pricing strategy and the value you are able to offer your customers.
If your products serve multiple markets, you must consider the sensitivity of each market as well as the product. In some markets, movement by an industry price leader can impact prices for all market players.
Your customers care about value – and nothing else
Value-based-pricing means setting a price your customers will be willing to pay based on the
perceived value to them of your product or service – not on the cost of providing it.
So, in creating your value-based pricing strategy you will need to ask yourself the following questions:
- Do you have real uniqueness?
What’s the thing that makes your product stand-out from your competitors? What is it that you’re
doing better, smarter, faster?
- Do you have perceived uniqueness?
Businesses that promote a difference in quality, great service speed or other intangible perceived
benefits in the minds of your customers can expect more loyalty from them.
- Doyou stir emotion?
Can you connect with your customers in a way that goes beyond mere products? If you can, you
will be able to price your products higher than any of your competitors that can’t.
Now you need to think about how to delivery, and then how are you going to price that product for your market?
Simplistically, you need to set a price that’s high enough to make you a decent profit, but low
enough to entice the customer. But how do you know if your price correctly reflects its value and demand?
Price too low and you leave money on the table; price too high and you risk losing sales.
The optimal price will always depend on the product, the customer, and the market. Successful
B2B companies tailor their pricing strategies to maximize profit per customer and product.
Pricing your product based on value to your customer is no simple matter.
You need to evaluate your unique situation. Whether it‘s really worth the time, cost and energy required to achieve and sustain in markets that these days seem
to have been brainwashed by a mentality of paying less to get more.
This might help you to decide:
For most companies, having an effective pricing strategy is undoubtedly the most beneficial way to increase profit compared to other tools of operational management.
Value Based Pricing Strategies in B2B Industrial Marketing
There are different market-specific challenges when comparing B2B and B2C transactions.
In B2B transactions companies face high competition from competing suppliers and price resistance
from their customers supply team who are frequently judged by their managers and senior
executives based on their ability to get price reductions from their suppliers.
So, creating your strategy and selling price increases to them based on your unique value
propositions is challenging.
You need to understand from the outset that that will take time to build closer relationships
and a high level of trust with your biggest customers
Based on customer- value being dynamic, a framework for customer value now being used in
calculating value-based pricing in a B2B contex is shown in the diagram below:
Stage 5: Advanced Cost- Based Pricing:
This fifth stage of cost-based pricing maturity combines the dynamic aspect of cost-based
pricing supported by legacy and in¬tuitive pricing knowledge and pricing analytics.
This is where you can find companies delivering high EBIT results by embrac¬ing integrative and
advanced cost-based pricing.
So, where do you stand now? If you’re mostly doing cost-based pricing in your company today,
where do you think you stand along the maturity curve?
Depending on where you stand today, is it more worthwhile to improve on this maturity curve
or to jump straight into beginning a value-based pricing transformation? You have to walk before
you can run.
Value based pricing in B2C.
At this stage there is no accepted strategy for the Customer Value Based Model in the B2C
sector, but companies in some niches are creating successful strategies, which are far less
structured and more intuitive than the B2B model.
Clearly getting buy-in from individuals who are considering buying your product, or continuing to
buy when you increase your price, is a completely different scenarioto getting buy-in from your
B2B customers purchasing department.
Many factors contribute to a consumer’s final choice: brand power, purchase occasion, perceived
product value, merchandising, and price. For pricing research to be effective and produce
accurate results, all these factors must be taken into consideration.
Stage 5: Advanced Cost- Based Pricing:
This fifth stage of cost-based pricing maturity combines the dynamic aspect of cost-based
pricing supported by legacy and in¬tuitive pricing knowledge and pricing analytics.
This is where you can find companies delivering high EBIT results by embrac¬ing integrative and
advanced cost-based pricing.
So, where do you stand now? If you’re mostly doing cost-based pricing in your company today,
where do you think you stand along the maturity curve?
Depending on where you stand today, is it more worthwhile to improve on this maturity curve
or to jump straight into beginning a value-based pricing transformation? You have to walk before
you can run.
Value based pricing in B2C.
At this stage there is no accepted strategy for the Customer Value Based Model in the B2C
sector, but companies in some niches are creating successful strategies, which are far less
structured and more intuitive than the B2B model.
Clearly getting buy-in from individuals who are considering buying your product, or continuing to
buy when you increase your price, is a completely different scenarioto getting buy-in from your
B2B customers purchasing department.
Many factors contribute to a consumer’s final choice: brand power, purchase occasion, perceived
product value, merchandising, and price. For pricing research to be effective and produce
accurate results, all these factors must be taken into consideration.
Stage 5: Advanced Cost- Based Pricing:
This fifth stage of cost-based pricing maturity combines the dynamic aspect of cost-based
pricing supported by legacy and in¬tuitive pricing knowledge and pricing analytics.
This is where you can find companies delivering high EBIT results by embrac¬ing integrative and
advanced cost-based pricing.
So, where do you stand now? If you’re mostly doing cost-based pricing in your company today,
where do you think you stand along the maturity curve?
Depending on where you stand today, is it more worthwhile to improve on this maturity curve
or to jump straight into beginning a value-based pricing transformation? You have to walk before
you can run.
Value based pricing in B2C.
At this stage there is no accepted strategy for the Customer Value Based Model in the B2C
sector, but companies in some niches are creating successful strategies, which are far less
structured and more intuitive than the B2B model.
Clearly getting buy-in from individuals who are considering buying your product, or continuing to
buy when you increase your price, is a completely different scenarioto getting buy-in from your
B2B customers purchasing department.
Many factors contribute to a consumer’s final choice: brand power, purchase occasion, perceived
product value, merchandising, and price. For pricing research to be effective and produce
accurate results, all these factors must be taken into consideration.
Chart to be added
Source: Understanding Value-based Pricing: in a B2B Industrial Context By Julian Wroblewski & Sven Erik Loss May 2018
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