The question is, are you going to make more money by attacking a segment that you couldn’t get before? This is the idea behind versioning. I take my best product, and I bank on cheaper version. Why? It’s going to cannibalize the sales of the best product, but it will also grow the volume down in this other segment. So you have to think, am I trying to grow the volume, or am I trying to go the price? How does your hypothesis of a change in price structure, feed in to improving mix, improving price, improving volume, or reducing variable costs? And then on the profit bridge, you can say, “my hypothesis said, I should expect this a year later. I got that. Was this good plan?” Study, repeat, constant improvement.
My competitor keeps cutting prices and offers lower price than my customer. What are some tips to retain market share?
You know, the old adage from the airlines – “you can only price as smart as your stupidest competitor,” made by the CEO of Continental (long before it became part of United). There’s a simulation that I use in class called “Universal Car Rental Simulation.” And as the professor, I get to set it up so my competitor always prices lower, competitor does tit for tat, the competitor is just going after capacity utilization. I can set it up. Predatory pricing, tit for tat, etc.
And the variation of profitability is like a factor of four between the best and the worst students on these simulations. You know, what really kills the profitability? I set it up so the market is tanking, meaning there’s less demand most quarter after quarter. And then they start losing a $100m dollars and there’s nothing you can do about it. Or I set it up so that the market is growing quarter after quarter, and there you can’t do anything wrong – you’re going to make money. So the market itself is probably more important to think about than that particular competitor.
I’m not saying ignore the competitors – I’m saying acknowledge them, but really focus on what your value is to whom, and why, and how much that segment will be willing to pay for you. Given that they know that there’s an alternative, all prices are set compared to the alternative – better or worse. Do they care?
What are some strategies for overcoming resistance from frontline sales or product management when implementing value-based pricing strategy?
You have to walk them through this and show them, case-by-case, account-by-account, what your pricing outcome suggestion implies for those individual accounts. And this is where that account matrix comes in. Did they absorb a price increase? Are they getting a better mix? How much do my accounts command? You’re counseling the salespeople as to where they can move the accounts to make them more money. Now, if you’re making a price change for, say, $2 to $20 in one year, you’re going to scare everybody. So you had better be able to convince and provide evidence that the market is going to be better by raising the prices that much, or maybe instead of doing $2 to $20 in one year, you do it over time. All prices should be dynamic.
