Book Notes: Pricing with Confidence

Read: June 30, 2012
Read through this just to get a refresher on pricing strategy for a coaching client. So many good points here, especially as pricing relates to value.
Pricing represents a strategy to increase sales volume at a profit while incorporating and communicating critical messages about the value the offering delivers to the customer. In general, most organizations fail to use pricing in such a disciplined fashion. Something else happens, of course, but many organizations don’t figure this out until it’s too late. (location 99)
On Value:
Using price as the primary competitive weapon in most markets doesn’t buy any additional business; it just gets customers to focus more on price and less on value. (location 160)
Value is the basis of business exchange. You provide products and services to customers so they can build their own value. In exchange, they take a part of that value you helped them build and return it to you in the form of price. That’s the way business is supposed to work. Here’s the million dollar question: Do you understand the value you provide for your customers? If you don’t, how can you set prices rationally, much less have confidence in the prices you set? (location 191)
If all you talk about with customers is price, there is no price that is going to be low enough. Price is important, but there are considerations that must come first. We learned to start the conversation with value.  (location 263)
Companies that lack a clear definition of value to the customer cannot negotiate effectively. After all, how can you build your pricing confidence around a concept that you yourself cannot define? (location 475)
Decrease your customers’ total costs and/or increase their revenues and you increase their profits. Now we’re talking about a definition of value that everyone understands. If you lack the ability to connect what benefits your offering delivers to how it will improve profits for your customers, you are operating at a huge disadvantage. If you can’t articulate your value in dollars and cents, you won’t get paid for it. (location 488)
Discounting (or not!):
Customers who switch to you for price will be the first to leave when another low-price competitor comes along. Price competition provides no sustainable competitive advantage unless it can lead a firm to take over an industry and only in the high-growth phase of a life cycle. (location 190)
Research shows that big companies are more than twice as likely to be price buyers. These customers are expert at draining every last drop of price discounts out of their suppliers. (location 353)
The starting point in being confident in your price is being confident in your value. That starting point begins at the top of the firm with the leadership and senior managers. If you want to stop any habit, you’ve got to replace it with something. If you want to replace the discounting habit, we recommend a couple of steps. First, recognize how bad it is. Once you realize how much money you’re leaving on the table in your customer negotiations, develop some rules for when you will and won’t discount. Start with your smallest, highest-value accounts and write those rules in stone. Notice the results. See, you didn’t lose as many customers as you thought you would. (location 284)
Getting customers to think about the cost of your service/product as an investment, not as an expense!
Was she thinking about this exercise as an expense or as an investment? She paused but answered honestly that she was thinking about it as an expense. That gave us a chance to talk about how it should be viewed as an investment and that there would be a probable payback on that investment. (location 267)

Should you serve every possible customer? No, probably not, here’s a way to choose:

Within the global view of possible markets, identify which customers and markets you cannot serve at a profit. If some customers are marginally profitable, but others are significantly more profitable, is your company better off serving the former, or are you better off focusing resources on the more profitable opportunities? It’s a matter of defensive strategy. It’s simply better for you that unprofitable customers are served by your competitors. It’s one less burden for you and one more for them. (location 346)

The first thing to do is select the low-hanging fruit. Make a list of all your customers, from the most profitable to the least. Focus on the 5 or 10 percent of your customers who are least profitable and fire them. These are the customers getting the big discounts but who fail to give you the big volume they invariably promised. These are the high-maintenance customers who the customer service department has on speed dial because they are so demanding. These are the customers who pay late. In other words, these are the customers who cost the company to service and keep on the books. (location 358)
The goal, of course, is to convert unprofitable customers into profitable ones. Before making a unilateral decision, we recommend that you have a candid conversation with the customers. Tell them why the relationship is not sustainable in its present form and let them know you are prepared to end the relationship. Some percentage of those bottom customers (larger than you may think) will understand and offer to keep doing business with you on some new terms. Only rarely is a customer’s interests served by terminating relationships with trusted vendors. Sure, they will push you on price, and they will continue to push until you push back. (location 365)
Some of our clients are tempted to ask their customers if they are satisfied with your prices. This question also is a mistake. The truth is you don’t want customers to be totally satisfied with your prices. If a customer is satisfied, your prices are likely too low. A better scenario is when customers acknowledge that your prices are fair or reasonable. If you sell high-value products with lots of service and support, you might want customers to acknowledge that, yes, your prices are high, but on the whole you are worth it. (location 506)
How to create your pricing:
The key to winning the pricing game is to (1) create a range of low-to high-value offerings, (2) provide quantifiable value propositions and sales tools that define value at the level of the individual account, and (3) create pricing strategies and price levels that capture a fair share of the value that you create. (location 467)
The key to unlocking all of these benefits lies with your organization’s ability to understand how your offerings create financial value for your customers. Understanding value comes from a process that should be familiar to just about everyone in your organization: asking customers questions about their business. (location 498)
To create high-impact offerings, set out some basic objectives. These should include: • Matching offerings with the high-value needs of target customer segments. • Offering low-value flanking products that appeal to price-sensitive customers and reduce the effects of price negotiations on high-value offerings. • Meeting or beating competitive performance on core customer needs. • Building strong fences between high- and low-value offerings that prevent customers from negotiating for high-value offerings at low prices. • Enabling sales to have clear discussions with customers to define price-value trade-offs during negotiations. • Arming sales with well-defined value levers to alter offering value and price by adding or removing specific features.  (location 1356)
What is this? I read most of my books via Kindle software on my iPad and I like to use the Highlight and Notes functions to mark things I want to remember or come back to. I thought I’d share those highlights and notes here with you. If you’ve also read the book, let me know what stood out for you too!

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