NZTE Export News, December 2010

20 years ago I bought a Ford Laser, one of those icons of atrocious 1980s car design. It had the same body, same engine and largely similar interior features as the Mazda 323. They were probably made side by side in the same factories. A blue Ford badge on the bonnet, and the higher price the Laser attracted, were the only real differences.

Pricing is not simply about cost of production plus a margin. People are willing to pay more for a brand they know and trust, or for a brand that doesn’t make them look cheap. There is real value in this - the Ford badge was actually worth more to me than the Mazda alternative (how perceptions of car brands have changed in 20 years).

Getting pricing right is one of the most crucial parts of your marketing mix, and something Kiwi exporters in sectors like technology are not getting right often enough. This is reflected in the 2010 Market Measures study jointly produced by Concentrate and PricewaterhouseCoopers.

A study into the sales and marketing activity of 144 technology companies, mainly exporters, it explored how they positioned their products and what pricing they achieved. Only 1.2% positioned (i.e. differentiated from their competitors) their brand on price i.e. offering the cheaper option.

Over 90% of companies positioned themselves as either offering a better quality product or a superior service performance (i.e. better, faster, easier). However, only 22.1% attracted a premium price over competitors, and 70.9% were either the same or lower than others in their market.

Technology exporters are selling a story that they are ‘cheap but good’. Offering technology products and services the equivalent of anything else on the market, but selling it for a cheaper price.

This approach is potentially a valid strategy, after all the house brand (e.g. Pams or Budget) approach is very successful in supermarket retailing. By selling larger volumes at a lower price, without having to invest in a lot of advertising and other brand building activities, supermarkets achieve good returns with these brands.

It is unlikely this sort of strategy guides the approach of Kiwi tech companies, who are mostly tiny by international standards and not able to play the volume game. It would also be risky as companies from India, China and other lower cost countries increase the quality of their technical output. As they catch up it leaves our exporters in a weak position.

Going for a cut-price strategy can also affect your brand. Positioning yourself as the lowest price offering can have real implications. If you’ve built your reputation on outstanding customer service or product innovation for example, that brand position will be eroded. Customers will start to wonder if you can maintain your standards if you are cutting margins tight.

“I was beaten on price,” is something I often hear from companies. “I was beaten by something that was perceived as better value,” would be a more accurate statement. A customer rarely buys on price, they make a decision based on the perceived value to them, particularly in large business-business type transactions. Customers typically balance things like product quality, support and price before deciding. A customer won’t select the lowest price if they have to trade off too many other elements.

A more likely explanation of our poor pricing returns of some Kiwi exporters is the weakness of our technology brands. The quality of our products and services is without question, we are a country full of world-class engineers and technologists able to deliver world leading innovations.

However, too often our tech companies are the “Mazda” to their competitors’ “Fords”, but without the volume to make up the difference in price points. Consequently we are leaving a lot of value on the table.

How can we change this, and attract premium pricing for our technology exporters?

Using a ‘value pricing’ approach is a fundamental. That is, making the price a customer pays equivalent to the value perceive they receive from the product. Too often I see New Zealand technology exporters delivering smart solutions that are saving their customers tens of thousands of dollars, but that is not reflected in the price they charge.

Apart from wresting some control of pricing from the accountants, there are some more clues to achieving this from the Market Measures study.

The highest performing companies in the Market Measures study, presumably those who were also attracting the premium pricing positions, had some similar characteristics. One was their high rating in terms of focusing on a market.

This is essential to good pricing strategy. On one hand it is hard to build a strong enough understanding of what value you are delivering customers unless you really select and know a market niche. On the other, unless you identify a manageable market segment, you can’t hope to build a brand strong enough to attract a premium price.

What the outstanding companies in the Market Measures study also did was implement “programmes” to shepherd their target market through a buying process. We called this the “moving the flock” strategy in the study.

Having identified a tightly defined market, these companies build a programme, often working with channel partners, to increase customer awareness of their brand using tactics like social media and advertising. That means when their sales people start calling, prospective customers are already aware of them and understand the value they offer compared to the competition. This makes it easier to price more confidently.

The contrasting and more common picture from the study was a group of small technology exporters bravely traversing the markets of the world, grinding through sale-by-sale with a small team of typically resourceful and gutsy Kiwi sales people. A lower level of focus on a market, and without the backing of a marketing programme means they have a harder time achieving a price premium. The customer has to be sold on their value, and that often means they have to price hard against the competition.

Our technology exporters need to move to having premium-priced brands like BMW rather than price-taking Hyundai, which takes focus and a sustained programme of marketing activities. As Kiwis we are smart at the innovation, we just to need to match this with our smarts on sales and marketing to get top dollar.

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