Led by e4e partner Dale Furtwengler, the "Contrarian Panel" explored this question: "What does it mean to 'Play by the rules.'" The panel and audience had a lively discussion, captured in this video...
During a recent episode of Shark Tank, all of the sharks told a budding entrepreneur that his idea wouldn’t work. The sharks went on to explain why the idea wasn’t viable.
Reasons to listen
There are a number of reasons why this entrepreneur should listen to the sharks.
- They’re incredibly successful business people.
- They have experience in a lot of different industries with a lot of different markets.
- They don’t hide their mistakes; indeed, they readily admit their failures hoping to help others avoid making the same mistakes.
- Their mission is to promote innovation and entrepreneurship, not quash them.
I have to admit I shared the shark’s opinion of the idea, although I‘ve been wrong before. This raises some interesting questions “When do you listen to naysayers? When do you ignore their advice? Is this an either/or decision?”
One of the things I’ve learned over the years is that just because someone says “It can’t be done” doesn’t mean I should abandon the idea.
A few years back I pitched a book idea to my literary agent. She responded saying “You’re not known for that topic so it’ll be a nearly impossible sale.” And she was right. One of the things publishers want to see are credentials that lend credibility to the book’s message. I didn’t possess those credentials. I set the idea aside and didn’t do anything with it for over a year.
During that year my mind was continuously drawn back to that topic through conversations with friends, through questions I got from people who were suffering a crisis of confidence or some personal pain. Eventually it became obvious to me I needed to write this book and I did. The title is “Lead a Life of CONFIDENCE...Free yourself of fear, anxiety and frustration.”
While it hasn’t yet (note the yet) become a best seller, it has laid the foundation for me to become known for this topic. Indeed, within the past few weeks a whole new market has opened for me to promote the book, and more importantly, the message.
A follow-on book will be released this month, “Stand Out From The Crowd...Without having people point and laugh,” and I’ve just completed the outline for the third book in the series. I’ve decided to self-publish all three as a way to build the credibility that may or may not lead to a future book deal with a major publishing house.
My point in sharing this story with you is that when you’re told “it won’t work” by naysayers, listen to what they have to say, then figure out a way to overcome the obstacles they see.
When to listen
It pays to listen to people with more experience than we have. It’s counterintuitive, but it doesn’t mean we have to abandon our idea.
Typically when experienced people say “That won’t work” what they mean is that it won’t work as you outlined it. It’s your job to ask “Why won’t it work and how do I overcome the obstacles you’re seeing?” Let them help you find solutions, they have more experience than you do. But don’t give up on the dream. You may have to make major adjustments to make the idea work, but if you want that dream badly enough, you will make it work - simply not in the form you originally envisioned.
When not to listen
Don’t listen to people who have little or no experience in what you’re trying to accomplish. Many of them become naysayers simply because they can’t dream as big as you are dreaming. I learned this lesson from having seen an interview of the Williams sisters.
They said that when they told their friends their dreams of being tennis champions, they were told they couldn’t do it. The sisters said that at some point you have to leave old friends behind because they aren’t dreaming as big as you are. They went on to say you have to develop friendships with people who believe in you and encourage you during the inevitable dark hours that accompany the pursuit of any significant dream.
My mastermind group encouraged me to go forward with the confidence book despite the fact that my agent said I wasn’t known for the topic. Their advice? “You’re not known yet.”
By all means, pay attention to what people are saying. There’s almost certainly some sage advice to be found in their comments. Don’t, however, let them dissuade you from your dream. There’s a reason why you’re being drawn in that direction. You may have to make course corrections and the ultimate form your dream takes may be dramatically different than the one you currently envision, but if you’re dreaming it - it is possible.
Dale Furtwengler is the author of the internationally acclaimed book, Pricing for Profit as well as six other books
- Lead a Life of Confidence: Free yourself of fear, anxiety and frustration
- Making the Exceptional Normal
- The Uniqueness Myth and other misconceptions that derail businesses,
- Become a Maverick: Grow your business using the unconventional strategies of world-class companies
- 10-Minute Guide to Performance Appraisals and
- Stand Out From the Crowd: Without having people point and laugh.
Dale's company, Furtwengler & Associates, Inc., helps companies get higher prices regardless of what their competitors or the economy are doing.
Pricing expert, author and contrarian Dale Furtwengler raises awareness concerning the importance of communicating your brand promises in a straightforward, clear and responsible manner. He opens his presentation reminding viewers that prospects and customers don’t care what you are doing and how you are doing it. They care about what benefits you are providing to them. They want to know what results they are going to get from you to help them to improve their life and work. Unfortunately, many taglines don’t reflect these results.
Dale describes the difference between an ineffective vs. effective, results-oriented taglines. He takes four examples of taglines and shows why they are effective because they meet the following key criteria:
- The tagline communicates the result succinctly
- The tagline begs the question, “how do you do that?” and
- The tagline lays the foundation for speaking to the benefits prospects and clients will receive and creates a compelling value proposition
When your tagline meets these criteria fully, your customers and prospects are much more likely to confidently engage you as a service provider. A good tagline allows you to answer questions in such a manner that your credibility increases during each stage of the conversation. Dale’s use of real-time stories and examples allow the viewers to quickly re-structure their tagline so that everyone wins. Both customers and providers are able to easily determine when there is alignment and a good fit for entering a business relationship. The stage is set to command prices that reflect your promises and ability to fulfill on them.
Dale Furtwengler is an internally acclaimed author. His company, Furtwengler & Associates, Inc., helps companies get higher prices regardless of what their competitors or the economy are doing. For more pricing/branding/marketing/sales tips visit Dale’s website, PricingForProfitBook.com
Dale Furtwengler, expert pricing and business strategist helps companies get higher prices regardless of what their competitors or the economy are doing. In this presentation, he begins by exploring why most people are skeptical and afraid to ask for good prices and make decisions based on long-standing but faulty assumptions. He discusses the concept of pricing elasticity in which it is believed that lower prices net greater sales. He provides valuable insights about:
- Questions business owners’ should focus on: Instead of asking, “how low must we set our prices to get high volume sales”, ask, “how do we make price irrelevant to our clients?”
- Consider what’s really happening: Using a case study on two high pricing companies and two low pricing companies during the worst economic times, Dale debunks the notion that higher prices lead to lower sales and shows instead that raising prices (along with perceived and real value) lead to higher sales.
- What to do to get greater sales: Dale guides the viewer to next steps and how to tilt the business playing field in one’s favor so they can get premium prices for their products and services.
Dale Furtwengler is the author of the internationally acclaimed books, Pricing for Profit, Become a Maverick, Grow Your Business Using the Unconventional Strategies of World Class Companies, Lead a Life of Confidence and The Uniqueness Myth. His company, Furtwengler & Associates, Inc., helps companies get higher prices regardless of what their competitors or the economy are doing. For more pricing/branding/marketing/sales tips visit his website, PricingForProfitBook.com
Dale Furtwengler is an innovative and insightful thinker who delights in discovering buried treasure at every turn, simply because he refuses to be limited by conventional ways of thinking that often blind many to opportunities right in front of them. The focus of his presentation is on how to use a contrarian mindset to think innovative thoughts in order to attract customers rather than continue chasing after them.
Dale establishes the importance of positioning yourself as a person who regularly offers a fresh, new perspective so you are perceived as an expert and are credited with wisdom, which then brings opportunities your way. He stresses contrarian mental disciplines such as:
- Understanding and addressing contributory negligence – Dale presents the concept that each person benefits by looking for their contribution to every problem they face. When we admit our mistakes, we see a lot more opportunity for solving problems. This means I acknowledge my mistakes or my part.
- Realizing that persuasion is a myth - We can’t persuade people. We can shine a light on new information and use a context they can relate to, and validate their own information so they can persuade themselves. We do this by avoiding rigid statements because they only build defenses.
- Suspending judgment - bias limits potential opportunities and solutions. Practice avoiding the creation of resistance.
- Looking for and finding similarities - 95% of people see differences and only 5% see similarities. When you do this, you become valuable to others because you can meet their bids to be accepted and understood. Our subconscious has the ability to solve problems. When your subconscious recognizes relevance, similarities, you more quickly know how to get to the next solution.
- Adopting a contrarian mindset - you help people see the other side of group think. You offer another perspective. By questioning thinking, you open up greater realms of possibility otherwise not found.
- Developing an eclectic education - When you are able to learn to think broadly, you make more connections, can relate to more perspectives and gain greater credibility
- Evaluating opportunities – By staying open, opportunities come to you at a rate you never envisioned. Questions can be, “What’s really involved in the process? Am I committed to do this? What impact will this have on my family? How do I recover?” As you are working with clients, what type of feedback and challenges do you face?
Dale Furtwengler is author of the internationally acclaimed book, Pricing for Profit. His company, Furtwengler & Associates, Inc., helps companies get higher prices regardless of what their competitors or the economy are doing. For more pricing/branding/marketing/sales tips visit his website, PricingForProfitBook.com
Author, pricing and sales strategist Dale Furtwengler opens this presentation describing success stories when using psychographics, a process of identifying who shares your values and is most likely to welcome you as a service provider. In this video presentation, Dale shares the importance of:
- Understanding your ideal psychographic customer profile
- Communicating effectively in your marketing messages to attract ideal prospects
- Qualifying (and disqualifying) prospects using psychographic questions in your marketing and sales processes
- Recognizing why some people are your ideal customers and how to find more of them
- Identifying what it is about some prospects that provides you the greatest joy and profits
Dale Furtwengler is author of the internationally acclaimed book, Pricing for Profit. His company, Furtwengler & Associates, Inc., helps companies get higher prices regardless of what their competitors or the economy are doing. For more pricing/branding/marketing/sales tips visit his website, PricingForProfitBook.com. You can also find his eBook, “Psychographic Profiling: How to sell more, more quickly with less effort”
Imagine two companies. One touts results customers can expect and charges premium prices; the other touts low prices. Which one wins?
The two companies are Verizon and Sprint. Verizon’s premium prices allowed it to build one of the broadest, most reliable networks in telecommunications history. In addition to its customer-centric network, Verizon continues to show solid growth in revenues, profits, cash flow and shareholder value.
Contrast that with Sprint, which, despite rising revenues, has seen its net loss almost double in the past four years, its debt increased by 20% and its cash from operations dropped by 40%. Other than spikes in stock price associated with potential mergers, Sprint’s shareholders have seen little, if any, growth in the stock’s value.
Troubling times in the kingdom
What’s troubling to me is that:
- Over the years I’ve offered countless examples of companies who enjoy great success with premium price strategies.
- It takes me less than 5 minutes to identify and compare results of Verizon and Sprint or the myriad other companies I’ve cited in my blog posts.
Yet business ‘leaders’ continue to pursue low-price strategies.
Behaviors that fly in the face of evidence to the contrary beg the questions:
- Are they simply not paying attention to what’s going on in the business world?
- Are they so lost in the microcosm of their industry they can’t see what’s working for others?
- Is their intellectual arrogance so great they won’t consider alternatives?
- Is their fear so great they’re hobbled by it?
- Do they perceive it to be easier to compete on price than to find new, exciting ways to serve their customers?
- Do they view others’ success as something unavailable to them?
Whatever the rationale, effects are devastating. Not just for the company itself, but for the economy as a whole. I’ve gone into greater detail about this in my white paper, Low Price Strategies Subvert Growth and Employment , but for now it’s sufficient to know low-price strategies being employed today are based more on cost shifting, than innovation.
When a large organization declares it is going to pay its vendors in 120 days, it shifted its financing costs to vendors who have a more difficult time obtaining financing and, consequently, will pay higher prices for that financing. This results in a less efficient use of resources in the economy and hampers economic growth, which limits employment.
Stop ignoring evidence. Reposition your offerings for premium prices and you too, can enjoy the success of companies like Verizon. If you’re not sure how to go about it, give me a call and, together, we’ll make it happen.
Dale Furtwengler is author of the internationally acclaimed book, Pricing for Profit. His company, Furtwengler & Associates, Inc., helps companies get higher prices regardless of what their competitors or the economy are doing. For more pricing/branding/marketing/sales tips visit his website, PricingForProfitBook.com.
If you feel tempted to drive one of your competitors out of the market using low prices, you’ll quickly discover you’re the loser.
In a June 3, 2011 article in Booz & Co.’s strategy + business entitled A Sweet Victory, Reed Holden and Mark Burton highlight Hershey’s victory over Nestle in the Krackel vs. Crunch war.
Using an aggressive pricing strategy, “...a 30 percent trade discount on Krackel where other brands hovered in the 5 to 10 percent range,” Hershey drove Nestle from the vending machine market “...boosting the brand’s [Krackel’s] revenue by an incremental $25 million.”
Let me see if I have this right. Hershey is shifting production capacity to produce an additional $25 million dollars of candy bars at a margin that’s 20% to 25% lower than the industry average and they think they won. It’s 8:30 on a Friday morning and I feel like I need a drink already.
The thing that amazes me about strategies like this is they always focus on the additional revenues generated, not the profits. In other words, they’re looking at market share instead of profitability. I guess if that’s your measure of success, you did win.
But for those of us who measure success in terms of profits generated, Nestle is the hands down winner in this one. I’m sure Nestle didn’t sit around bemoaning this loss. It merely shifted its resources to markets and products that produce higher margins. The best and brightest simply don’t play the fool’s game of following a ‘competitor’ down a path of rapidly decreasing prices.
So what’s the message here? If you feel an inclination to drive one of your competitors out of the market using low prices, do the math and you’ll quickly discover who the loser will really be. And it won’t be your competitor.
Dale Furtwengler is the author of the internationally acclaimed book, Pricing for Profit. His company, Furtwengler & Associates, Inc., helps companies get higher prices regardless of what their competitors or the economy are doing. For more pricing/branding/marketing/sales tips visit his website, PricingForProfitBook.com.
Higher prices affirm customers’ beliefs in value and attract even more buyers. This approach works for any business, of any size, in any industry.
A November 2, 2011 Barron’s article reports that Kraft Foods’ third quarter net revenues grew 11.5% in part due to a 7% price increase.
That means Kraft’s revenues grew a whopping 64% more than the price increase. For many business leaders this seems impossible. After all, conventional wisdom says buyers tend to find alternatives when prices go up, right? In reality customers have greater confidence in a product or service when its price reflects the value they’ll receive.
What does this mean for you? That you too can enjoy the results Kraft experienced. Here are the keys:
- A reputation for quality.
- Knowing who values that quality.
- Pricing that reflects high value.
Let’s continue with the Kraft example to see how these apply.
Kraft has a reputation for quality that’s spanned more than a century. The good news is you don’t have to be around that long to develop a reputation for quality. But consistent delivery of quality, however you and your customers define it, is essential to having revenues that grow faster than your price increases.
Knowing Your Customer
Kraft knows its customers have discerning tastes and are willing to pay a premium to get that taste. Their customers also value consistency in the product. In addition, their customers have an intuitive sense Kraft has their best interests at heart - that Kraft wouldn’t take risks in the manufacturing of their products that might cause the consumer problems.
Kraft’s premium pricing adds further assurance of the quality, consistency and concern for their customers. Higher prices affirm customers’ beliefs and attract even more buyers to Kraft’s products. That’s how Kraft can enjoy 11.5% revenue growth with a 7% price increase.
As you can see, there’s nothing magical about what Kraft has done. This approach works for any business, of any size, in any industry. It’s up to you to employ these keys so you too can enjoy a similar level of success.
Dale Furtwengler is the author of the internationally acclaimed book, Pricing for Profit. His company, Furtwengler & Associates, Inc., helps companies get higher prices regardless of what their competitors or the economy are doing. For more pricing/branding/marketing/sales tips visit his website, PricingForProfitBook.com
Pricing expert Dale Furtwengler offers insights and strategies based on real-world case studies, demonstrating pricing models that have bombed or show consistent benefit.
Some days, despite your best intentions, you fumble the ball. Such was the case at the Retail Customer Experience Executive Summit when I was asked, “Who [among retailers] does a good job of pricing?” My response was “most companies.” What I should have said was ‘most companies initially.’
Most companies have a pretty good sense where they fit on the spectrum versus competitors. Using the image spectrum:
- Walmart is the low-price provider.
- Target is viewed as more hip and can command higher prices to reflect that image.
- JCPenney used to be (who knows where they’re headed today) known for dependable, but not readily recognizable brands and their pricing was 3 to 5 times the Walmart alternative.
- Macy’s carried very recognizable brands, with strong image appeal and able to command prices 6 to 8 times the Walmart alternative.
- Nordstrom is the most upscale of these five companies and commands premiums of 12 to 14 times the Walmart alternative.
Using image as the focal point for each of these companies, their initial price positioning makes a lot of sense. Unfortunately it’s all down hill from there.
The first mistake they make is to price ‘competitively’. That typically means at, or below, industry pricing for their segment of the spectrum. They choose to price this way despite the fact they claim to offer ‘more’ or ‘better’ of whatever they deem their value to be.
The second mistake most retailers, indeed companies in every industry, make stems from the extremely poor job they do communicating value. You don’t have to trust me on this. All you have to do is look at the ads the companies cited above offer, then answer this question “Does the ad emphasize their position on the image scale?”
Of course not. With the possible exception of Nordstrom, most ads are about their latest sale. If their marketing messages did a better job of helping their customers experience their stores without being there, they’d be able to command higher prices than is typical for the area of the spectrum they occupy.
The third mistake is sales these retailers regularly offer. Fluctuating prices confuse consumers about the real image value of their offerings. These sales take many forms including discounts, rewards programs, coupons and loyalty programs, to name a few.
These sales muddy the water for customers. The concept of value, whether that value is image, innovation or time-savings get lost in the myriad of sales offered. In the process we train customers to wait until we offer a discount to buy.
That means the customer is postponing the satisfaction of owning your products/services. For you it means lower profit margins and additional marketing costs to acquire enough new customers to not only replace those lost profits, but to grow them.
Now back to the original question, “Who [among retailers] does a good job of pricing?” Companies I think do a good job are:
They repeatedly raised their prices throughout the recession and experienced sales growth in excess of the price increase.
The only criticism I have of Panera’s pricing is their rewards program. Reward programs are effectively discounts. Rewards programs do not increase my desire for their offerings. I’m not going to visit any more frequently or buy larger quantities because of the reward. That means that they’re offering me a discount to buy what I’d have bought at a higher price. Rewards programs increase retailers costs in two ways – establishing and maintaining the reward program and providing a discount to customers who are willing to pay higher prices. Ouch!
The key word with Apple is consistency. They consistently charge premium prices on all new offerings and tend to hold those premiums throughout the product life cycle.
The one faux pas I recall was reducing the price of the original iPhone by $100 within 60 days of its release. The hue and cry of the early adopters resulted in a refund of roughly $100 million to those early customers. That’s what happens when you move away from your value proposition in an attempt to garner market share which is what I believe the motivation was for the price reduction.
Apple may be on the verge of making another pricing mistake. Rumor has it that they’re coming out with a new tablet to compete with Google’s Nexus 7. If they do, it’ll be interesting to see how they launch that offering. If they offer a better product and price it accordingly, the market will continue to view them as an industry leader who is entitled to premium prices.
If, however, they price the new tablet to compete with the Nexus 7, they’ll appear to have relinquished their industry lead and be reduced to ‘commonplace’ in the eyes of the consumer.
I don’t recall Kraft having raised prices during the recession, but as soon as it appeared the recovery was under way they immediately began raising prices and continue to do so with some frequency. Like Panera, they’ve experienced sales growth in excess of their price increases. Indeed, their sales growth was 50% higher than their price increase in the 3rd quarter of 2011. The keys to these companies’ success in pricing are:
- Consistency in their customers’ experience.
- Charging prices that reflect that consistency and support their value claims.
- Raising prices in good times and bad, further reinforcing the perception of value in their customers’ minds.
- Continuously finding new ways to serve their customers in ways those customers want to be served.
- Initiating change in their markets instead of mimicking others changes.
The pricing mistakes that companies like these are most likely to make are:
- Focusing on market share growth instead of customers’ needs/interests.
- Discounting in any form (sales, rewards programs, loyalty programs) confuses the customer. It’s hard to tell what something is really worth when the price fluctuates for no apparent reason. Can anyone tell me what a gallon of gasoline is worth?
- Failing to raise prices in good times and bad.
- Losing sight of who its ideal customer is. Think JCPenney.
Basically, any company that:
- Charges a premium to the market.
- Continues to raise prices regardless of what the economy is doing.
- Stays focused on its ideal customer.
- Avoids the temptation to discount, reward their customers or create loyalty in ways other than providing superior experiences.
…is doing a good job of pricing.
For those at the summit, my apologies for the fumble. Hopefully I’ve recovered the ball with this post.
Do you have a clear brand promise? Find out by using my confidential Brand Promise Self-Assessment.
Are you getting compensated well for the value you provide? Use my confidential Pricing Self-Assessment to evaluate your company’s pricing.
Are your marketing messages attracting the right customers? If you’re getting primarily price buyers you may want to use my confidential Marketing Self-Assessment to discover why.
Is your sales force putting pressure on you to lower prices? Our confidential Sales Self-Assessment can show you why. Check out Dale’s latest ebook, Brand Promise: What Do YOUR Customers Expect? You have a brand. The question is “Is it the one you want?”
If you’d like to increase your prices, profits and customer base, call Dale at 314-707-3771.
Within three months I’ve heard two successful business people say:
“No American wants to pay another American a fair price for his products.”
“No one wants to pay you your price, yet they expect you to pay their price.”
Is this a disturbing new trend? If so, what can we do about it?
I believe it is a trend, but one that’s been with us for some time. Indeed for the past 3 decades or more we, as business leaders, have been almost exclusively focused on two things:
The majority of customers still pay for value when they can see it and quantify it.
In part 1 we dismissed the argument value is ‘vague’ by demonstrating there are only three things any buyer buys - image, innovation or time savings. This realization has the added benefit of removing complexity from the value pricing process. Then we looked at a sample result highlighting the fact that value-pricing results are demonstrable. Now we’re going to discuss two concerns many business leaders express, that value is a moving target and that price pressures prevent consistent use of value pricing.
There is no question value changes over time and that, in todays’ world, change occurs more quickly than ever before. Movement through a product’s life cycle from innovation to mass market, and the to saturation, occur at an ever-increasing pace.
This reality doesn’t alter the fact that early adopters of innovation often pay 3 to 4 times what the mass market pays. It simply means the mass market is going to enter the market earlier than it did previously.
Once we realize basic buying habits haven’t changed, and the only difference is when buyers enter the market, we find value pricing is easier to implement than expected. We have the same pricing triggers that let us know when it’s time to lower our price for the mass market or for the late adopters, assuming we even want to serve that group.
The key is to realize value has always changed over time and the majority of customers still pay for value when they can see it and quantify it. Those are our challenges, to identify what customers value, provide that value, quantify the value for them so they can see it and then communicate that value effectively. When we do this work for them, our customers reward us with premium prices.
Doubt that? Then why do Mercedes buyers pay 7.5 times as much as a Chevy Aveo buyer for a sedan? Why do Nordstrom’s customers pay 12 to 13 times as much for a sweater than a Walmart customer? Buyers continue to demonstrate a willingness to pay premium prices to get what they want, yet we ignore their pleas and focus our attention and theirs on price instead of value. Shame on us.
That brings us to the question of price pressures - from our competitors and customers.
Nothing keeps business leaders up at night as much as the fear of not being ‘competitive.’ That’s why competitors’ pricing and customers’ challenge “...but your price is too high” put so much pressure on them to lower prices.
Fear is an ugly thing. It triggers an emotional reaction. Emotional reactions preclude objective analysis. If it didn’t, then why would we see so many businesses following their competitors down the rabbit hole of reverse auctions? Why do we see earlier and more frequent discounting during peak selling season? Why do we see businesses giving away ‘improvements’ in their offerings instead of charging for them? Why do we see businesses invest heavily in process improvements only to give away the savings in lower prices?
Absent the fear, we’d quickly realize that when we relinquish control over our pricing to our competitors and customers we become one of many providers. We commoditize our offerings, which serves to validate our customers’ limiting perception that what we’re offering is a commodity.
Conversely, when we’re able to look those customers in the eye and say, “This is how we’re better, this is the value you’ll get and this is why our price is...” we establish ourselves as leaders in our industry. And leaders, by virtue of their nature, command respect. When we establish that leadership role, we distinguish ourselves in ways that are attractive to the vast majority of the people in our markets and we do so at higher prices than our competitors get.
The choice is yours, cave to price pressures and commoditize your offerings or distinguish them by demonstrating value and commanding prices commensurate with that value. Choose wisely.
Hopefully I’ve been able to demonstrate that value pricing:
- Isn’t as vague as previously thought
- Isn’t as complex as you imagined
- Can produce measurable results
- Is no more a moving target than it was a century ago
- Is the antidote to pricing pressure from competitors and customers alike
If you’re not using value pricing, you’re not only leaving a lot of money on the table; you’re depriving your customers of the ability to make informed buying decisions. If you truly care about your customers that should be motivation enough.
Even though you may have many customers, you’re only addressing three categories they value: image, innovation and time savings. These categories simplify value pricing.
In Part 1, we addressed the concern that value is vague. We did so by recognizing the fact that even though each of us defines value a little differently, there is a commonality to our humanity allowing us to create categories of buyers based on what they value most - image, innovation or time savings. This week we’re going to address two more concerns - the complexity of value pricing and the ability to produce demonstrable results.
Value pricing is complex
As we saw last week, even though you may be dealing with thousands or hundreds of thousands of customers, you’re only dealing with three categories of value. These categories simplify the identification of market segments and value prices for each of those segments.
I’m sure some of you are thinking, “Dale, you have no idea how many products (SKUs) we sell. It isn’t just the customer that adds complexity, it’s the array of offerings we have.”
No doubt what you say is true. Two questions for you:
Why do you have so many SKUs?
Adapting Pareto’s principle, which 20% of them are producing 80% of your profits?
Regardless of your answers, the solution is to establish a process for identifying your 20% most profitable offerings, identify who’s buying them and eliminate the rest. Not only will you simplify your life, you’ll use your marketing dollars a lot more effectively. You’ll very likely free up a considerable amount of cash as well.
If that strategy is a little frightening to you, then eliminate the 20% least profitable SKUs. From experience I can tell you once you see how little impact it has on your sales and what a dramatic improvement is has on your profits, cash flow and employee productivity, you’ll quickly eliminate the next 20% least profitable until you arrive at my initial suggestion.
Which brings us to the next concern many business leaders have, being able to determine which results can be traced to value pricing and which are related to other operating decisions.
Often business leaders point out margin improvements can be achieved from a variety of operational changes including:
- Productivity improvements
- Sales force compensation arrangements
- More effective marketing
- Improved offerings
Or simply from an improving economy. So the question they ask is “How do we know the margin improvement came from value pricing?
The answer is all of these factors are, or should be, part of your value pricing strategy. You can’t establish an effective pricing policy without evaluating all of the factors that influence value creation. Recently I helped a client improve his margin on one line of business from 24.8% to 41% by streamlining the sales process and eliminating back office processing. We accomplished this without raising prices.
While we were evaluating his value creation process, we were also able to justify a 12.5% price increase by calculating the value of his offering. How? By identifying what he was selling was time savings and using demographics to identify the value buyers in his market were placing on their time.
With the 12.5% price increase, his margins more than doubled from 24.8% to 53.5%. If that isn’t a demonstrable result I don’t know what is.
Next time, we’ll discuss the two remaining reasons business leaders avoid value pricing - the perception that value is a moving target and price pressures.
People value and buy image, innovation and time saving. While value is personal, these common buying criteria enable us to price based on each.
There are only three things any of us buys - image, innovation and time savings. So while value is personal, there is enough commonality to our humanity and enough buying data to allow us to categorize markets, design offerings and price based on the value to each of those market segments.
It’s no secret the quickest, easiest and least expensive way to grow your top line, margins, and bottom line is to raise prices. Why, then, are you resisting value pricing?
Is it because:
- The term ‘value’ is so vague it defies comprehension?
- Value pricing is complex? Instinctively we know different market segments view value differently.
- Providing demonstrable results is difficult? It often feels like you’re trying to prove a negative.
- Value is a moving target? Given how quickly economic conditions and customer interests change as well as how short product life cycles are today, does it even make sense to calculate value and pricing to reflect that value?
- Senior leaders feel the pricing pressures they’re getting from their competitors and their customers make it nigh on impossible to get premium prices?
Of course there are other reasons. As a senior leader you might be:
- A price buyer and logically assume everyone else is as well.
- Volume focused, preferring to own a large share of the market even though a smaller share would be more profitable.
- Concerned your organization isn’t providing value necessary to warrant higher prices.
If you’re a senior leader and any these last three conditions resonate with you, I’m going to save you a lot of time and energy. STOP READING! The likelihood of you employing value pricing is so small reading the rest of this blog will be a waste of your time.
For the rest of you, we’re going to address each of the concerns highlighted in the opening.
Value is ‘vague’
Value is personal. Each of us determines the value a given product or service has for us and it’s often much different for us than for our family and friends. Naturally the question that comes to mind is “How do I establish value prices when everyone values things differently?”
The answer lies in the commonality of our humanity, which is manifest in our buying behaviors. There are only three things any of us buys - image, innovation and time-savings.
As sellers, any benefit we claim to provide fits into one of these three categories. For example, quality can enhance our customers’ image, save them time by helping them avoid repairs or a combination of the two.
Some of Apple’s customers by iPhones and iPads because they love innovations Apple builds into their products. Others buy because they love the look and feel of those products. Why? Because it enhances their self image.
The good news is that customers who value image are willing to pay as much as those buying innovation. Indeed there is readily available buyer data to show exactly what premiums people are willing to pay, depending upon where they fit on the image, innovation or time-savings spectrum.
So while value is personal, there is enough commonality to our humanity and enough buying data to allow us to categorize markets, design offerings and price based on the value to each of those market segments.
For those of you selling B2B, don’t forget you’re selling to people not organizations. Those people represent organizations, but each also possesses a self-interest motive that influences their buying decisions. So don’t dismiss the commonality of our humanity as a B2B phenomenon.
Next, we’ll explore the complexity of value pricing to see whether or not it’s a valid reason to avoid adopting value pricing.