About Best Practice Pricing

In today's economic environment companies must make every possible effort to retain and if at all possible, increase, their profits. Instituting good pricing practices is one of the most powerful ways to combat the rising costs of energy, transport raw materials, just to name a few. Yet, only a small number of companies seem to care at all about best practice pricing, resorting to erroneous methods they are familiar with, like "gut feel", "market price" or "cost plus". Why? Well, because cost cutting has been the mantra of business for the last 30 years or more, and most companies don't really know what best practice pricing means.

Sunday, June 29, 2008

The $300,000 Watch That Doesn’t Tell Time

I'm intrigued, and cannot stop thinking about, this limited edition Swiss watch launched back at the end of April 2008 for a whopping $300,000 - it sold out in 48 hours. So while this is a very extreme and unusual consumer goods/luxury goods example, what is there to learn here for companies selling product or services in the business to business space? Well, what it means is that if you or your company are able to identify a segment of your marketplace with needs and desires something you can exclusively meet, you have pricing power; you set the price; you don't discount; you don't negotiate - you increase your profits.

One of the objectives of best practice pricing is just to identify such a segment, to understand that segments' willingness to pay, and leverage that knowledge into higher profits.

Now, in this case, was $300,000 the optimum price? Probably not. If the vendor sold out in 48 hours it really means they were too cheap - how ever odd that sounds for those of us who would be reluctant to spend that kind of money on a watch. It also means that the vendor guessed "the best price" as opposed to useing one of the several methods available for companies to accurately define willingness to pay. The vendor could have optimized the price and thus captured the maximum of that willingness to pay, but did not. As a result they lost several millions of dollars in real profit.

Your company have the same choice - use guesswork, often expressed as "I know what the market is willing to pay for this new product" or do the work to discover the actual value of your product or service, and capture the profits you are entitled to!

With warm summer regards to the reader,

Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com


2 comments:

Anonymous said...

Per,

I am interested in your approaches to measuring willingness to pay. Can you share any thoughts as to how lest say a service business selling a customized performance service can determine where a market woul;d lets say understand the value of optimization? Can you tie it back to the core value prop? I'd be interested in discussing more.

Mike Borek
mborek@sol-stice.com

Per Sjofors said...

Hi Mike,

Yes there are ways to measure willingness to pay also for customized services. By abstracting your offering into a number of "attributes" and "outcomes" and then use the either Conjoint Analysis, Van Westerdorp's PSM or Value Attribute Positioning, or a preferably a combination of these three. Then mapping these attributes and outcomes back onto your services, you get a accurate measurement of your customer's willingness to pay for the elements of your customized offering as well as for bundles of these elements.

Best regards,
Per