DEC 20, 2019
Why is understanding customers’ perceived value and the impact on price differentials so important?
To achieve the price we deserve we first need to have to look at the motivators of the individual customer & understand the customer’s Willingness To Pay (WTP), Anybody who has spent time in sales will agree that asking a potential customer to part with their hard-earned cash can be very difficult if that individual is not appreciating the value of the product or service on offer. On the other hand, occasionally some customers just place their money on the counter and say ‘yes please!’
In pricing strategy, our higher intent is to create a framework that helps our business find answers to the following questions on WTP:
- What constitutes value for our target customers?
- How do we map our products and services to specific customers’ needs?
- How do we identify & apply value pricing methodologies that match price to value?
- How do we price for value, given the pre-conceptions of various customers?
- How do we measure our ongoing performance against specific needs for each of our customers?
- How do we communicate our value proposition to our customers in order to avoid competitive pressure and market conflicts (i.e., prices wars)?
All of us who are involved in making or implementing pricing bring a unique perspective to pricing decisions depending on our role, experience and knowledge. Our requirement is to unify these multiple perspectives by firstly looking at pricing from the customer’s view.
How to increase willingness to pay?
I believe that in most businesses, we strive to achieve a greater ability to create and deliver value for our customers (relative to our competition). This belief is based on the fact that businesses will typically invest a significant amount of resources in research, product innovation, and customer support and market development. It is in this context we say that we deserve to receive price for value. Unless we choose to behave as a low-cost, discount seller, we will reinvest a percentage of our resources in R&D in order to sustain our business differentiation.
On the premise that creating, delivering and communicating product &/or service value is key to our ability to achieve ‘price for value’, the sales and marketing teams have an important role in creating, delivering AND communicating value to all our existing and potential customers. Value creation and delivery role of sales and marketing organisation involves an effort to provide superior pre-, during- and post-sale service to our customers. As for communication, sales and marketing teams form the most important interface with our customers.
Creating a virtuous CYCLE of ‘Pricing for Value’
Once we are able to price our products, services and solutions for value, we are on our way to delivering sustained profitable growth – allowing us to reinvest in our future (research, product innovation and market development) and create value for our shareholders, employees and partners across business cycles – consistent with our company’s vision. Our virtuous cycle of ‘pricing for value’ is presented below:
The pricing CYCLE framework being discussed is based on the core idea that a superior understanding of customers’ needs helps us to price our products and services for the value we deliver. We sell what the customer needs, deliver the promised value and receive the price we deserve.
Where to start?
The starting point of pricing CYCLE is our investment in R&D and market expansion which allows us to develop and deliver products and services to meet specific customer needs. Once we have the required products in our portfolio, sales and marketing teams work together to communicate our value proposition to different customers and customer segments, enabling them to have a satisfying experience with our product and service portfolio. Higher satisfaction is expected to result in higher customer loyalty, thereby, higher volume and better prices. Increased volume helps us obtain greater economies of scale, thereby, increased profitability, which in turn, enhances our ability to invest in R&D and market development.
A superior understanding of our customer needs allows us to allocate resources to meet these specific needs, thereby, minimising the waste through misdirected effort. Once we are delivering the value our customers are looking for, our customers are ready and willing to pay and we are better positioned to price our products for value.
Our ability to deliver value helps us contribute to the larger cause of creating more jobs, advancing our market place and making it accessible to a large section of our society – the very reason for our existence.
The relationship between research and customer outcomes should specifically guide the level of investment we are making and the share of sales generated from new products. Given that our ability to invest is a function of our margin and margins, in turn, a function of our price realisation, our ability to price for value is the key to advancing the health and well-being of our business and our employees.
What does it take to obtain a fair return?
|DECK THE HALLS Tesco slashes price of Christmas trees and decorations by up to 80% Levi Winchester, Senior Digital Consumer Reporter 11 Dec 2019, 14:36 Updated: 11 Dec 2019, 14:42 Tesco has confirmed the discounts are available nationwide and confirmed a list of Christmas tree deals to The Sun.The supermarket giant has just under 4,000 shops in the UK.You can find your nearest one here but it’s worth calling ahead to check if your local is running the discount.However, Tesco doesn’t have the cheapest 6ft or 7ft Christmas trees for sale.We found a 4ft tree being sold on eBay for £6.99 with free delivery, plus a 5ft tree for £8 from Wish.com.Amazon also sell a 6ft Christmas tree for £8.99, and there’s this 7ft tree on eBay for £17.99. Ref: https://www.thesun.co.uk/money/10529274/tesco-christmas-tree-decorations-sale/|
We want to ask the above mentioned questions and expect the sales teams to say that it is already difficult, if not an impossible task and it does take some thinking and coordination to achieve the desired state. It requires for us to work as a team and coordinate actions closely to achieve our pricing CYCLE objectives. In many of our markets, we may have experienced significant periodic levels of discounting. It seems like a game that we are unlikely to win.
This example, as recently published in the UK, shows a retailer with heavy Pre-Christmas discounting, however the reporter goes on to provide other competitive offers for the consumer to consider.
What does it take to contain discounts?
An understanding of our customer’s needs allows us to target our effort and resources more effectively. The fact is containing discounts can happen only when we coordinate all our effort and communicate well with each other. In the business context, our effort would involve a close coordination of our sales and marketing teams with the rest of our organisation. We would then need to communicate with our customers to ensure that they understand the value we are delivering for them, and as matched to their specific needs. It is not easy and requires all our effort and commitment. The airline industry gives a good example of understanding customer needs and targeting of limited resources, if we consider the airlines that focus on the international ‘business’ travel in Asia (i.e. Singapore Airlines, Qantas, Cathay etc.) these airlines provide specific value to business travellers, in contract there are Asian airlines that have the holiday traveller in focus (i.e. SILK, SCOOT, JETSTAR etc.) All airlines provide the essential levels of safety and service, however each airline has a target market and knows their customer needs well, therefore allowing them effectiveness and efficiency.
If you capture perceived value can you win?
There are many companies that have been able to capture the customer’s attention and deliver value that is truly recognised. Examples of leading companies in the personal computer market, such as Apple, Microsoft, Intel, Dell, Acer, have all gone about successfully capturing the customer’s perception of value. Each company may have approached their target markets differently and with their own unique flavour, however each company was able to be successful in driving market share and performance. In summary, our ability to price for the capture of the customers’ perceived value is the most important factor in determining our long term contribution to our shareholders, our employees as well as our customers and our society.