Is Your Pricing Strategy Killing Your Profit?
Is your current pricing strategy killing your profits? If you have followed my writing over the past several years you will know I am a big advocate of the Value Inventory. For those of you who don’t know what a Value Inventory is, allow me to provide a brief explanation. A Value Inventory is the result of an interactive workshop performed with your sales, management, marketing, and product management staff. The workshop outcome is a matrix (Value Inventory) describing why your prospects buy, their business issue and true desired outcome. We also prioritize the issues, apply a solution and determine if your solution is superior or inferior to your competition. Below is an example of a Value Inventory.
The problem we are trying to resolve here is underpricing your products and services. There are many ways to determine a price for your products and services. Cost plus is one of the most common. This of course is when you figure your cost and add a percentage markup. Market driven pricing is what most organizations do. Market driven pricing is where the price is determined by what the competition is charging, and what the market will most likely accept. Tablets are a great example of market driven pricing. When Apple had the only tablet they charged a premium. As more manufacturers came to market with their version, prices began to drop.
The real question is how do you determine a price for a new product you want to bring to the market?
The Value Inventory can serve as a foundation for Value-in-use pricing. By understanding what your value is, you are able to apply value metrics (actual cost and value) to each line item you capture. Below is an example of an extended Value Inventory that includes additional fields for, base price, UOM, number of events per month, etc.
In the above example the value proposition is to reduce the amount of time IT spends on configuring BYOD devices. As you can see the cost per unit to configure is about $66.50 per device (2 x $33.25). For this company’s average customer they would need to configure about 1,000 devices per year. That means they would need to spend about $66,500 per year on just configuring for a BYOD program.
Next you will need to determine the value the (mobile) solution will bring to the problem. Value brought should be validated. Value typically can be measured in cost reductions, revenue improvements, or cost avoidance’s. An avoidance for example, may include avoiding the need to hire additional staff because your automated solution will reduce the need. Also in the above example the vendor determined they can reduce the amount of time spent from 120 minutes per device to 15 minutes per device resulting in a $58.19 per device savings or $58,190 annual cost reduction.
Once you understand the value you are capable of delivering for the products and services you sell, pricing them is a matter of choice. To determine your final price consider the competition, market pressure, and average price currently in the market along with your value of course. If you are releasing a new product with no real competition consider, your value and what the market will bear, and determine the margins you wish to maintain. Realize you may (like Apple) be forced to make pricing changes later. There are many different pricing methods depending upon what you sell. In software there is an ASP pricing or on premise pricing. Other products may charge by transaction, or usage fees. No matter what you sell keep your mind open to the various pricing models available.
My final point on value in use pricing is that you are considering the value you bring to the prospect based on your validations. Capture and accumulate the line items in your Value Inventory and use them to determine your true value. Once you have the true value you can use it to determine the best price.
Michael Nick is the author of three best selling business books: ROI Selling, Why Johnny Can’t Sell and his Amazon top 10 business book, The Key to the C-Suite. Michael is available for speeches, workshops, and web casts. Please visit www.roi4sales.com or email Michael at firstname.lastname@example.org.