Tobin Lehman — December 19, 2018 — December 19, 2018
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There are plenty of ways to come up with pricing. One of the best (and most overlooked) is to use pricing as a position in the marketplace.
Typical Pricing Thinking
For many businesses, the typical way of creating pricing harkens back to days spent in any basic economics class. The predominant method: calculate the cost to deliver the product or service, and then calculate a possible margin from there. This is a cost-focused pricing method, and it’s where most people start with pricing.
The problem with this thinking is that it is only one way of thinking. This focus makes margin a function of the gap you can create between cost of goods sold and the acceptable price in the market. This works great in commodity markets, but when you venture into other markets, it can be very limiting.
Whether your follow this model or some derivative, it’s likely that the general idea of pricing for you is to drive down the cost of production to maintain or create margin on top of it.
But what if there was another way of going about the discussion? What if you could increase the margin and the price of your product or service in the marketplace without focusing solely on cutting costs? This is what we all want to do, yet few of us know how to do it.
Value Equals Price
There’s good news: adjusting product costs isn’t our only lever to influence pricing. We can also change the price we can charge to the market if we focus on value as opposed to cost.
If you have ever tried to raise your prices, you’ve probably encountered some feedback from your clients. The main argument is typically this: “I only paid X for this two months ago, why am I paying more now? Nothing’s changed.”
Frankly, they’re right. Arbitrary adjustments, even if based on the inflation rate, rarely ever bring out warm and fuzzy responses from clients. The error, of course, was that you did not change the value of the product or service; you only changed the price.
With that, the first thing we need to adjust is our ability to create new value in the marketplace before we raise prices. To charge a higher price, we need to provide value that is unique – or at least rare – in the marketplace. There is a whole litany of things we could talk about in doing this: customer service, product enhancements, the customer experience, the delivery methods, expertise, etc. But the simple way of saying this is that Step One is to create a better value in the marketplace than anyone else, or at least better than everyone else except the select few.
You may scoff at that statement if you are a VAR or someone who deals in hardware. You have fixed costs and your competition is selling the same hardware, so the low quote always wins. I hear you.
But here’s the thing: we all understand what they’re neglecting and cutting to provide that low cost. And while it may seem like the entire market is after price alone, I promise you they are not.
Customers are always looking for value. If cost is the issue, you missed creating value.
Following that path, if we can create new value, we can dictate pricing and cost at our discretion.
Pricing as Positioning
If we have a product or service with industry-leading value, we can now begin the conversation around creating a price that matches that value.
How high is too high? I’m not sure there is a “too high” if your value and your offering are well-aligned. What value could the client expect from your product or service over time? What is it worth to them? More so, what would it be worth to others or their competition if they had it? I don’t think we have a ceiling, only a fair value of what’s provided to the marketplace.
Let’s get to the point: your price tag will serve as a position in the market. To use a very common example, let’s look at coffee. Why do you get unlimited cups for a buck at a dinner, yet each cup costs three to five bucks at the big coffee chains? It might be a marginally better product at those chains, sure. But I would submit to you that the price is reflective of the value it provides to the customer in other ways. The customer finds value in that 5 dollar cup of joe in social status, in product quality, in the in-store experience, etc.
Coffee shops have found a way to put more value into the product, and thus create more margin.
This is replicable for just about every business, even most of those that fight in the commodity space. What value can we create so that we are a high-value, high-price offering? Can we create two offerings – one at a mid value and one at a high value to provide a premium option to the marketplace?
The higher cost will serve as an indication to the market that you are a higher value. It will differentiate your product from your competition. The price itself is a way of positioning your value in the market. Under this method, rather than hiding the pricing, or making pricing the last conversation, pricing is one of the first conversations. It’s used to help position the product or service as premium or unique, and it opens the door to creating new value for your customer in the marketplace.
None of This Is New
The topic of pricing is deep and full of creative authors and thinkers. I can’t claim any of the above thinking as my own ideas, but the application of these ideas to our clients’ companies has been our trade. Look at books like The Paradox of Choice, or Priceless, or Value Proposition Design, as well as others to dig more into this topic.
The point is, the limitation on your margins is mostly in the value you create for the customer – not in the cost of creating and selling a product. Go headfirst into value creation and see what happens.
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