By Lisa S. Thompson & Charlie Pope

In the early 1900s, most businesses had a myopic worldview leading them to sell only what they could cost-effectively manufacture. You’ve heard the famous words of Henry Ford who, talking about the Model T said, “The customer can have it in any color they want…so long as it’s black!” What you may not have heard is the context of his statement: he was responding to a group of salespeople who were focused on requests from a sliver of the customer base (Ford estimated only about 5% of his customer base were clamoring for cars in a different color.) He questioned at the time whether enough customers would be willing to pay more for different colors to offset Ford’s cost to produce them.

Pricing Strategy

To survive in today’s hypercompetitive global business world, meeting the demands of multiple customer segments is critical. Gone are the days of selling one model car in one color! Given that the type and level of competition as well as costs to serve vary among customer segments, business leaders must offer various product/service combinations with varying price points. Most organizations are still making price optimization decisions in isolation of broader considerations around the business environment. The natural inclination is to believe there’s an optimal price point above which we lose an unacceptable amount of volume. But to maximize the total contribution dollars for the business, leaders must think more broadly about pricing strategy, not price-point optimization. A comprehensive pricing strategy will increase customer willingness to pay by positioning products in ways that are uniquely attractive to specific customer segments. The starting point for developing an effective pricing strategy is to answer the right set questions for the business:

Don’t ask: What are customers willing to pay?

Ask: How much can we convince customers to pay given the economic value we offer beyond the next best competitive alternative?

Example: Business leaders in a global provider of industrial software knew they had a competitive advantage of reliability and uptime. Although that advantage had diminished over time for many segments for those customers who can’t afford even a millisecond of downtime, the value of their marginal advantage was still worth millions of dollars to the customer relative to the reliability of competitors.

Don’t ask: How do we segment customers based on their revenue?

Ask: How can we segment and target customers in ways that capitalize on our competitive advantages?

Example: One airline took the industry by storm when they segmented passengers based on the reasons they fly and how those behaviors impacted the costs of operating an airline.

Don’t ask: How low do our prices need to be to maximize volume?

Ask: Which segments should we surgically target with a lower value offering and prices to drive incremental contribution?

Example: That same airline then designed a low-cost offering that appealed to 2 segments (retirees and students with lots of time, little money, and a willingness to forego meals) which they could serve profitably.

Don’t ask: How do we ensure customers pay prices that fully cover our costs and provide additional margin?

Ask: What price metric best tracks with how customers get value from our products and services?

Example: One SaaS provider offered monitoring services for critical infrastructure in the hospitality space. They were originally pricing on an annual subscription basis plus upcharges for type and volume of reports generated. After careful analysis, we realized their services tracked with value based on the square footage of the customer buildings they were monitoring. Changing the price metric enabled customers who received significantly less value to pay lower prices (which still kept us in the market for those deals) and higher prices when value was justified (driving price premiums) which all dropped to the bottom line.

Don’t ask: How much do we need to discount to close the next deal?

Ask: When customers ask for a discount, what tradeoffs can we offer that preserve price integrity and still win the business?

Example: The VP of Sales in an industrial manufacturing company realized that her salespeople were training customers to ask for discounts by granting them (at least in part) every time a customer pushed back on the original price. Recognizing that she didn’t want to lose volume and negatively impact sales, we worked with her to create a set of policies that were justifiable reasons for customers to earn discounts such as decreasing the costs to serve them, improving payment terms, increasing share of wallet or increasing order size. Customers began to learn that the company’s prices had integrity and that receiving discounts was possible but required tradeoffs.

The bottom line is that when companies focus on optimizing for a specific price point, growth and profits are suboptimized.  We leverage deep expertise in economic theory, go-to-market strategy, and data and behavioral science to help clients generate highly profitable pricing strategies. If you would like to learn more about Axiom, let’s chat today.

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