In the pricing profession, there are times when we will be seeking the right price: the perfect price. But even with sound pricing methodologies and firm price execution in place, we still end up with the prices we set (target price) not necessarily meeting the prices we actually get (price realization).
Well, we have been asking the wrong question…
- Everyone asks, “what is the right price?”
- But nobody asks, “why is this the right price?” or “what exactly makes this the right price?” or “when is this going to be the right price?” (when is it not?)
Prices are, in fact, points that shift dynamically back and forth on a given scale. This scale represents the market price range, or the customer’s willingness to pay. In order to manage prices effectively, we need to learn from the stories behind each price point to understand why a price is where it is on that scale.
- Identify the relevance of value drivers
It is said that value drivers shift prices to the upper end of the scale, while value detractors do the opposite, bringing the prices down. But value drivers are merely worthless features if they are not going to be relevant to the customers, i.e. they are not needed nor wanted.
So the next time you’re doing value-based pricing, make sure you’re not using irrelevant value drivers.
Validating question: When will the customer be using it?
Scoring: Now (10 points) Maybe later (5 points) In the future (1 point)
2. Understand customer’s buying behaviors
Customer perceived value is a parameter that is often not objectively defined. It is based upon the experiences of having “received value for the money” vs. “not worth the money spent.” These positive or negative experiences shift the price scale upwards or downwards accordingly.
The customer’s readiness to spend (if this is a quantifiable parameter) indicates how narrow the price scale will be and its potential to be scaled upwards (with an increased readiness to spend).
Validating question: When will the customer buy it?
Scoring: Now (10 points) Soon (5 points) Need to think about it (1 point)
3. Know the customer’s alternatives
Competition provides customers with alternatives. The more comparable the alternatives are, i.e. less trade-off to be made, the narrower the price scale. On the other hand, the more unique and versatile they are, the broader the scale.
As competitive pricing requires external data sources, effort is required in combining competitive portfolio analytics and competitive pricing intelligence to help deliver these valuable insights.
Validating question: How much is the trade-off the customer is making by taking the alternative?
Scoring: Huge (10 points) Some (5 points) Little (1 point)
Now, if we stack up these findings together, we might just end up with the right price on the scale – maybe then the perfect price?