By Frank V. Cespedes,Elliot B. Ross and
Benson P. Shapiro
Face it: Most companies can't compete on price. And the good news is they don't have to.
If performance pricing is so profitable, why don't more companies do it?
Largely because most businesses stick to one or more of the following wrong ideas when it comes to pricing their products:
NOTHING WE DO DESERVES A PREMIUM PRICE: The first thing a company can do to help itself identify and communicate new areas of value is to create a system for reliably gathering and analyzing data on every product and service for every customer - basically, what each customer wants more of, and how much that will cost to deliver.
That's the foundation for coming up with a new value proposition that your marketing and sales people will understand and embrace.
A question to discuss at your next leadership meeting: Is your marketing budget better allocated to gathering customer feedback and training your sales force, or to developing another vague "branding" campaign?
AVERAGE PRICING SEEMS FAIR: Many executives celebrate a sort of pseudo-democracy in their pricing policies.
For years UPS prided itself on charging one price to all its customers.
But when FedEx Corp. entered the market, one reason for its swift success was its variable pricing, which recognized inherent value differences between customers, orders (parcels versus messages) and times of delivery (a.m. versus afternoon).
Using an average price across your customer base almost certainly means that you are leaving money on the table with some customers who are paying less than the value they receive and perceive, and overcharging customers who don't receive or perceive the same value.
COST-BASED PRICING IS EASIER TO EXPLAIN: People around the world do understand and accept pricing based on costs.
But that shouldn't stop sellers from experimenting with other price structures, or forms of payment, that yield more profit.
It's all about how the prices are linked to benefits and framed.
EVERYONE ELSE PRICES IT THAT WAY: Many companies think there is safety in charging the same prices their competitors do.
But the essence of performance pricing is being smart about being different.
Relying on herd pricing also means running the risk that your prices are the legacy of obsolete circumstances.
OUR SALES TEAM'S GOALS ARE DRIVEN BY VOLUME, NOT VALUE:
With performance pricing, a company doesn't want its sales team to be pushing for increased volume across the board.
Sales goals linked only to gross volumes often motivate cuts in price to meet volume goals, and may even be counterproductive if the cost of maintaining those volumes is too high or if the reduced prices are met by competitor price cuts.
DON'T STEP ON ANYONE'S TOES:In too many companies, marketing, operations and sales are expected to stay out of each other's way as they independently pursue top management's goals.
Performance pricing breaks down the separation of roles across the company.
All departments must do their part to figure out not only what customers want, but how it can be delivered in the most profitable manner.
Interdepartmental meetings on pricing strategy should use a common language and keep information flows current to the whole company.
THE CUSTOMER "TELLS" US THE PRICE:Few customers wake up wanting to pay a higher price.
But most do seek value.
By voting with their feet, customers determine what they are willing to pay.
But it's your responsibility to frame and deliver the value proposition, and the pricing mechanism.
Remember: A price is not the same as pricing. The price is what a customer is willing to pay. You and your organization do pricing; and the leverage - up and down - can be tremendous.
Frank V. Cespedes is a senior lecturer at Harvard Business School. Elliot B. Ross is chief executive of MFL Group, a Beachwood, Ohio, consulting firm that assists clients on growth strategies and pricing. Benson P. Shapiro is the Malcolm P. McNair professor of marketing emeritus at Harvard Business School.