I am always relieved to read that what I have been teaching for twenty two years or advising our clients is right! Did I make it all up? No. I accumulated wisdom during my journeys inside Xerox for seventeen years and other later companies. At Xerox, we still re-unite after all this time and talk about the sixties and seventies and our excellence as if it was yesterday.
So I was delighted to read this week a new book “The Three Rules” by Michael Raynor and Mumtaz Ahmed and also to read in today’s Economist “Schumpeter: Thinking Twice About Price”. What sensible people! It is a shame that we are not permitted to know who writes Schumpeter but he/she has it spot on. What is also enlightening is that all they say is consistent with what I learned in Xerox in 1967 at sales school Fort Lauderdale; so all that goes round, comes round!
The three rules that Mr Raynor and Mr Ahmed expound are spot on. “Better not cheaper, revenue before cost and there are no other rules”. Superb. This is supported in essence by The Economist article.
And yet, we still seek to conduct business in the UK in complete ignorance of these rules. My expressions for the same ideas have always been “differentiation” and “cost reduction is not a strategy”. Cost reduction is so boring and mindless an activity which some poor sod down the hallway has to pursue under the tight supervision of a finance person presumably believing that a halfpenny reduction in the cost of the packaging or the paper clips will deliver the budget! These people tend to come from the cost plus school of Neolithic pricing. They congregate in retail procurement, engineering and manufacturing! Whatever has your cost of delivery got to do with your pricing? Absolutely nothing. As a tutor at Westminster University I used to teach with often said to our audiences, “anyone involved in measuring the costs may leave the room. Your opinion in setting price is not required”. Great stuff!
So how do you set the price? It is supposed to reflect the value that the customer perceives in your offer. Sounds simple. It requires you to research your customer’s objective opinions of your offering which 95% of businesses do not do. They assume their offering meets customer needs until they lose the business. We have conducted volumes of qualitative market research with our client’s customers over twenty years and always find a 50% mis-match between what the client believes is their differentiator and what their customers state they are! So you may have a reason to move towards value pricing that you did not know about!
Having commissioned this research work (has to be independently conducted), you can advance to setting price either via positioning and competitive benchmarking which is an advanced stage of practice or you can move to the top of the class and embrace value pricing. What is Value Pricing? It is not a simple price increase. It seeks to share the benefits of the incremental business you enable your customer to achieve or to share in the cost savings that you hand your customer via your innovation. It can be likened to payment by results but it is more sophisticated than that. It tends to be more successful if accompanied by tactical pricing offers that ensure the situation is a win-win solution too.
Give us a call or email if you would like to know more.