This photo doesn't really have anything to do with what follows...
A recent report
from PwC has found that 60% of survey respondents said their approach to
pricing included simple rules such as ‘cost mark-up’ or ‘matching the
competition’. The allure and simplicity
of cost-plus pricing can be infectious, but it can also be wrong and dangerous.
Over the last
couple of weeks, the experts on PricingProphets.com have been
helping a NSW business break the habit of cost-plus pricing. The company (who’s
name and products have been disguised) are both a manufacturer and an importer
of a high-end office fixture.
Like many
companies, there are three models in their product ladder, which for simplicity
purposes, I will the most unoriginal of names: Bronze, Silver and Gold. All
three models come in a variety of different sizes.
The Bronze
products are manufactured locally in Australia. Despite their position at the
bottom end of the product ladder, they are far superior to the alternatives.
The Silver and Gold products have additional features that not available in the
Bronze product, including value-adds, as well as customisation.
Until now, all
three of these products have been priced on a cost-plus basis, which is where
the problem lies. The Silver and Gold products are made in China and arrive in
Australia at a price cheaper than the locally manufactured smaller model.
The business
naturally thought therefore, that the Silver and Gold products should be
cheaper than the bronze, because production costs were cheaper. This is like
saying a Big Mac should be cheaper than a Cheeseburger, or a Lexus should be
cheaper than a Toyota. It’s wrong!
Customers don’t
care about costs, nor do they need to know what the costs to manufacture a
product are. In this case, they care about the value-adds, the customisation
and the beauty of the products relative to the alternatives available.
This company now
has a pricing structure that properly reflects value, and not costs. And based
on historical sales data at constant volumes, that pricing structure would
yield an11% revenue uplift. Creating that structure is the easy part. Its
success will depend on the execution.
Given that value
is always in the eyes of the customer, there’s no guarantee that the value
attached to the products is in line with the perceptions of the customers. But
all pricing is contextual, and those perceptions will be enhanced when the
prices first appear on the company’s new-look website.
And thanks to a
laser-guided missile approach to pricing, rather than carpet-bombing, the
majority of the price changes are small in magnitude. The one or two that are
slightly more significant changed in phases.
Is it time you
stopped selling Big Mac’s for the price of Cheeseburgers?
Posts
