Is your offering underpriced? It happens more often than you’d think. For example, during a recent consulting project, I helped a particular business unit at a material manufacturer realize they were charging $100,000 for an offering that was delivering $1.2 million in value.
How is that possible? Five primary reasons:
- They came up with their existing price of $100,000 based on how much it cost them to make the product (aka, cost-plus pricing).
- They were also using their competition’s price ($250,000) as a benchmark for their own price (aka, discount pricing).
- The existing price provided over 60% margin, which was higher than many of their other products.
- They were focused on other areas of their business and never paid much attention to this particular product line.
- They had never stopped to consider or quantify how much value their product delivered to customers.
This is a classic example of what happens when marketers rely on cost-plus or discount pricing models to figure out how much to charge for their offering rather than looking at the value they provide. I would guess that 80-90% of pricing decisions fail to take value into account. Therefore, most companies are underpriced on their offerings (if you’re overpriced, the market will quickly tell you).
Figuring out Your Value
As we’ve said before, figuring out your value is hard work. In the case of our client, we worked with a cross-section of their teams—including folks from customer support, sales, marketing, engineering, and research and development—to test their assumptions.
As our engagement was coming to a close, they happened to receive an order for their offering based on their existing $100,000 price. They decided to use this as an opportunity to test their new pricing and told the customer, “We’re happy to accept your order, but we recently performed a pricing study and our price for this solution is now $500,000.” They expected pushback but instead got a pleasant surprise: the customer came back and said, “Okay. When can you ship it?”
What’s interesting is that initially this business unit came to us wondering if they should kill this particular product line, because it was small and wasn’t directly related to their core business. They had no idea that their particular offering increased the yield of their customers’ processes by a significant percentage.
Setting Your Price
Setting your price is never as simple as looking around the market, seeing what your competitors charge, and choosing a slightly lower price. When pricing, your only goal should be to maximize the long-term profit of your offering based on the value your offering delivers to the customer. You’ll want to consider the following questions:
- What’s your differentiation in the market, and how sustainable is it?
- What are your customer’s alternatives to solving their business problem? (Buying from a competitor? Building a homegrown solution?)
- What’s the value of your offering, and how much does that value represent in dollars and cents?
- Will your price encourage customers to find new, alternate approaches to solving their business problem?
Sometimes companies fear that customers will balk if they start charging more, especially if their product has been underpriced for months or years. This was definitely the case with the client we were working with. But the only “pushback” from the customer was a request for a 10% discount on a bulk order. Even with a 10% discount, the net profit on that order increased by more than $350,000 (because any increase in price drops straight to the bottom line).
If you’ve done your homework around value, you’ll find the conversation shifting from price to business problems. And that puts you in a great position to influence the customer and help them solve those challenges.