Is your price worth it? And why you settle for less!

How many times have you been approached to match a price after working diligently to provide a solution? You may have incurred design, engineering, sourcing and/or many other soft assets in the engagement that are typically built into the price of the product. You lose this job many times because a competitor has swooped in and offered a “deal” that the customer can’t refuse. Or was it that the customer never perceived enough value to those soft assets?

Following is a guest blog post from Dr. Eric Reidenbach on Value Based Pricing. Dr. Reidenbach is the Director of the Six Sigma Marketing Institute, the leading organization and authority of Six Sigma Marketing. His consulting services are absolutely unique are designed to help you grow market share and top line revenues. He understands the meaning of value.

Value Based Pricing

Markets, when freely operating, do many things. One of the things that they do, and do well, is to operate as a pricing mechanism. This will not come as a blinding insight to many economists, but it will shed some light on how companies need to move forward strategically. Within this basic function as a pricing mechanism is a host of implications for how organizations need to manage their product lines.

Companies put their products or services on the market for what they think are fair and competitive prices. This initial offering is often based on costs and other financial considerations. For example, they might use a break even pricing system or one based on a payback period. This can be made even more sophisticated by using a discounted cash flow model. Once on the market, the real pricing process begins. Potential users asses and evaluate the offering in terms of its quality and then ask a fundamental question, “Is it worth it?” Failure to pass the worth it test means that end users will not buy the product or service. This poses two options for the company.

Option one is to reduce their price and make it more consonant with the quality of the product or service. Buyers are telling them that the quality of their product does not merit the price that they are charging. Reducing the price brings the calculation of quality and price into a more acceptable outcome.

Option two is to enhance the quality of their product or service offering. This is a longer tem option but one that is strategically more sound. Quality enhancements, if done effectively and efficiently, allow the company to either keep their original price or offer the product service at a higher price.

Knowledgeable readers will understand that I am really talking about a value based pricing approach. Value is the relationship between the quality of the product or service and price that the company is asking for it. This also means that many companies that think they have a pricing problem really have a value problem.

Value problems can be hidden by multistage distribution systems where products move from their point of production to their point of consumption. As long as each stage of the distribution process is adding value, real value as determined by the end user, price sensitivity is less of an issue. This suggests that manufacturers should think of their distribution system as a value delivery system with each member of the system understanding their role in value delivery. Many models that define value show that the factors that drive quality are not necessarily product related but rather related to services that are provided by the other members of the value delivery system. This poses a real challenge to those companies that are product focused and believe that all quality and value is resident within the product itself. In these product focused companies quality initiatives may impact only a small portion of how the market defines quality and value. These organizations must learn to look beyond the manufacturing floor and embrace a much larger and more powerful definition of value. Changing this thinking and making the organization more market focused is the long term solution.

Old methods of pricing are more workable in familiar domestic markets. Globalization will require organizations to understand the quality price calculation in terms of how less familiar and foreign markets define value. Pricing is inextricably related to value and failure to understand value will make market penetration difficult at best and impossible at worse.

Since the publication of Listening to the Voice of the Market, Dr. Reidenbach has published Six Sigma Marketing, created the Six Sigma Marketing Institute and has launched the product, The 5Cs of Driving Market Share. The power of Six Sigma Marketing is illustrated and embodied at www.drivingmarketshare.com where you can be introduced on using Value to Drive Market Share.