The Press, April 2011

Who thought the humble pint of milk could be so controversial. That symbol of all things healthy and good has become mired in an increasingly bitter controversy over the price we pay.

Ironically, it is the opposite problem many companies selling business-to-business (B2B) have when pricing their products and services.

An incredible 91% of people in a recent Consumer New Zealand poll thought they were paying too much for milk. And you know it is getting emotional when almost 80% demand a government enquiry.

Billions of dollars lost in leaky homes and finance company collapses, but try and charge Kiwis too much for their daily milk, and you have a revolution on your hands.

It’s because price is driven by perceptions of value. If we feel we are getting value we willingly pay the cost of something. In the milk situation we just don’t know.

Various Fonterra spokespeople have tried to explain it, but their case either seems unconvincing or unclear. People remain worried they are being ripped off by having to pay more for milk than a similar volume of Coca Cola.

For B2B companies, particularly those selling complex high value products, the situation is often the reverse. It is hard to be sure they are getting the appropriate value from their customers for the product or service they are providing.

The 2010 Market Measures study of hi-tech sales and marketing, produced by Concentrate and PricewaterhouseCoopers, showed Kiwi tech exporters were typically selling high quality products but getting similar or lower prices to their foreign competitors. In other words selling ‘Mercedes’ products for ‘Toyota’ prices.

Many reasons are at the core of this – having weak brands, large and aggressive competitors, ineffective channels, poorly managed sales processes – but their pricing approach is also a major issue. Like the poor old milk consumers, they simply don’t know or understand enough.

Pricing can be a bit like those old school days where you didn’t understand what was going on, but were too embarrassed to ask (at least that was my experience). If you simply asked you’d know exactly what to do, instead you stumble on as best you can.

Consequently companies struggle to price effectively because they don’t have a clear view of the value their customer is receiving. Pricing is more typically built on their internal cost of creating and delivering their product and service, plus a margin.

Value-based pricing, when your pricing calculations are based on the real benefits the customer receives, takes a fundamentally different approach. It starts with trying to understand the real problem you are solving for the customer, and therefore what it is worth to them to have that addressed.

The ultimate extension of value-based pricing is those restaurants that let patrons pay whatever they think their meal was worth. It puts a laser-like focus on providing a good experience, and an obligation on the customer to really think about they are getting for their money.

Would you be confident enough in your own products and services to do this?

While it may be difficult for a more complex business to do this, the principles remain valid. Rather than simply setting a price you think will be acceptable, involving the customer as much as possible in the process can change the way you price and the margins you can achieve.

It also increases the importance of conveying to customers the value your product provides. Unless customers recognise the return on investment you are delivering, a value-based pricing approach will fail.

Kiwis can be too low key in export markets. For example, the US customer of a local technology exporter initially thought they were a “Mom and Pop” business because they were so laid back and understated about doing business. He was later surprised to visit their site in New Zealand and discover how large and hi-tech the operation was.

Getting the right price is sometimes about behaving like you deserve it. Kiwi firms often deserve more.

So how do you get enough information to build a good pricing strategy?

Talking to existing customers is a good place to start. Trying to understand the need you are meeting, the impact on their business of your product (quantifiable cost savings and softer business benefits), how they buy, what else they buy to help meet that need and so on.

You can develop return on investment models, i.e. a detailed analysis of the cost and benefits of your product, with early customers in exchange for favourable pricing or conditions of purchase. Similarly, in large corporate sales it can be useful to understand how the person you deal with is justifying the expense to the decision makers higher up in their business.

Competitor’s pricing levels and structures is another piece of invaluable information that is worthwhile trying to get.

Ideally you can even do some market testing. In certain situations it is possible to try and sell a product at different price points to see what works best i.e. that is the closest match to the value your customers feels they are receiving.

Getting your pricing right begins with acknowledging that all the answers to your pricing questions lie with the customer. Just don’t be too embarrassed to ask.

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