Think “value creation strategies'“
Value is at the heart of business success. Learn what customers and other stakeholders will value, find ways to create value, grow value and maintain the value you provide in the face of others' frontal assaults and flanking innovation.
Yet, we are in a world that on the face seems price driven. Whether it be Wal-Mart versus Target, automobile dealers, commodities suppliers or trade groups, price is where the action seems to be.
Pricing strategies are surely important, and they abound. Imperfect pricing either means revenue is left on the table (price too low) or sales are unnecessarily limited (price too high). But we firmly believe that starting from price when strategizing is the wrong way to go. It assumes that the value of the product or service is a set factor, which is hardly the case. Making price the determinant, sending the message, "We aren't different but we are less expensive," leads to commoditization and invites others to innovate, "decommoditize" and displace your offering by providing better benefits.
In fact, as William D. Neal and Stefan Bathe of SDR Consulting have described in a paper on the value equation, value is composed of three factors:
Tangible product or service features ("the physical and readily identifiable features of the brand that delivers specific, tangible benefits to the purchaser").
The brand's image or equity ("some perceived intrinsic value associated with the brand name due to such things as the image transferred to the purchaser, trust, longevity in the marketplace, social responsibility, consistent performance, and so forth (i.e. the intangibles), impacting purchase choice").
Price.
The driver in the second factor, the brand's image or equity, is perception. Perception is the ghost we all chase when meeting the market. It's that illusive factor that makes the iPad the coolest thing ever and a competitor's similar tablet a kludge. Perception is a reason why Vuarnet sunglasses can command a price 10 times higher than the sunglasses sold in the local pharmacy.
Certainly, real, actual value - the tangible product or service features - is a big driver of what people will pay, but perceived benefits can be as important. Placebos work because the people who take them believe they will work. McKinsey consultants command extraordinarily high hourly rates because the C-Suite believes engaging McKinsey not only will provide needed answers but also will have a rub-off on the company and the leader as having engaged "the best."
This thinking says that "pricing math" is the wrong place to start. The pricing decision has to be based on real and perceived value. The tangible features of the product or service might be obvious, but the weight the customer places on these features is not so apparent. And the intangibles, the perceived value, are even harder to pin down.
This is an argument for going to the customer first - consult existing research, survey, crowd source, tweet, test, watch and listen, whatever will add understanding of what your product or service delivers, tangible and intangible, what you can build more value on and what differentiates you from the current and potential competition.
