By M. Dana Baldwin, Senior Consultant

By M. Dana Baldwin, Senior Consultant

Strategic Planning Expert

Pricing can be very tricky in times like the ones we are going through currently.  Too high a price and you can lose considerable volume, customer loyalty and market share.  Too low a price could lead to diminished profits, commoditization of the brand or product/service and lower long term prospects.  The key is to strategically determine the pricing band, which is best for your product/service in light of current conditions.

To do this, you need to determine where your products and services are positioned in your market places.  Each one of your offerings needs to be analyzed in terms of where it is located on a spectrum from pure specialty to pure commodity. 

We define a pure specialty product as one, which is priced to take advantage of the uniqueness of the product or service.  Key characteristics of a specialty product or service include:

• Unique “product” or “packaging” – “packaging” equals services wrapped around the product/service offered
• Market perceives clear superiority of the product or service provided
• Sales result from having the right product at the right price
• Strong margins/profits on each individual sale
• Value-based pricing – taking advantage of what the market and competition will allow to maximize profitability
• Exceed customer requirements – providing the extra services which add perceived value
• High level of customer support – to keep the perception of value valid

By comparison, a commodity product or service has very different characteristics.  They include:

• Little differentiation between products/services offered by all competitors
• Substitutability – One company’s offering is little different from another
• Sales result from low price
• Weak margins/profits due to tight margins
• Competitive pricing in order to gain market share
• Meet customer requirements – no added services can be afforded
• Order taking – because there is no budget for added services

Almost all products and services have some of each characteristic – commodity and specialty.  The challenge is to determine the behavior of the specific product or service in each market in which it competes.  You need to determine where each offering is located on the spectrum between pure commodity and pure specialty.  You also need to determine what the overall characteristics of each market segment are, to see where you are competing.  For example, are you providing a specialty product in a mostly commodity market?  Entirely feasible to do, but you must know this or your pricing could be hurting your profitability by being too low. 

An example of this is windshield washer fluid (appropriate for this time of year).  This is basically a commodity market, with the majority of sales of the blue fluid centered in a narrow band within a few cents of each other.  There is a specialty part of this market, however.  Some people buy the green version, which contains more alcohol and more soap, allowing better functioning at lower temperatures and with the ability to clean the windshield better.  The price of the green fluid is considerably higher, due to the higher performance and specifications.  This green fluid is a specialty item in a mostly commodity market.  If the vendors of the green fluid were to price their product at or near the price of the blue fluid, they would be leaving money on the table.

By properly understanding the positioning of their product, the makers of the green windshield washer fluid can keep their profitability higher and keep their perceived value high to command the higher price. 

Some additional thoughts: 

Pricing policy is one of the most strategic issues that a company can deal with-both for the short term and the long term.  It is tied to market strategy (expand, maintain etc.)  e.g., do we need to buy our way into a market?  Do we need to do some pre-emptive price-cutting to make a market a competitor is eyeing less attractive? 

In custom manufacturing, cost-plus std. margins can be the kiss of death.  You either over-price and lose the business or leave money on the table and get the business. 

Competitive intelligence needs to feed into pricing as well. 

You may want to take a look at Tom Ambler’s 2-part article “Mining Your Unexploited Value”.  It offers a process to address the pricing issue.

M. Dana Baldwin is a Senior Consultant with Center for Simplified Strategic Planning, Inc. and can be reached at baldwin@cssp.com.

© Copyright 2010 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution

By Robert W. Bradford, CEO

Strategic Planning Expert Robert Bradford

One of the intractable problems of economics is that first-time buyers bring a lot of uncertainty about the value they will receive to a transaction.   An excellent example of this is to compare the sale price of new electronic items on eBay with those at an online retailer like Amazon.com – inevitably, the individual sellers on eBay will be selling the same products at some discount to the prices on Amazon.  This happens because most online buyers have some experience buying from Amazon – and no experience buying from a specific eBay seller (of which there are thousands).

Your company faces this same “value uncertainty discount” when selling to a new customer for the first time.  Your customer, never having experienced doing business with you, does not know much, if anything, about what that experience will be like.  Will you be accommodating or difficult?  Will you be generous or nickel-and-dime the customer?  If there are issues, how easily and quickly will you handle them?  In many markets, these are not trivial questions.  Indeed, for customers in some markets, the answers to these questions are more important than some of the basic features of your products or services.

Imagine you are a customer who is looking to switch suppliers – or establish a new supplier – for a given product or service.  If you have no way of establishing confidence about the utility of the relationship with a given vendor, you are very likely to discount it entirely.  This can lead to very commodity-oriented buying behaviors, which isn’t really in anyone’s long-term best interest.  The smart customer, then, starts looking for signals that you might offer more than the basic product or service.

Here are a few clues that people commonly look at when trying to establish value:

1.      Referrals from other customers – perhaps the most credible clue

2.      Guarantees

3.      Price (higher price signals more quality/service)

4.      Advertising

5.      Quality and responsiveness of sales support

6.      Appearance of “packaging” – including sales literature, and possibly even your plant and office

There are more – but this list should give you some ideas about how you may signal higher value to prospective customers.  Clearly, it is the function of your marketing to address how you will signal this value – and it one of the primary tasks of strategic planning is to assure that other elements of your business, such as finance and operations, reinforce that value in execution.

How do you signal value to your customers in your marketplace?  More importantly, is this signal any different or more credible than your competitors?  Strategic planning is an excellent time to consider how to set yourself apart from the competition in this way – and having your human resources, IT, customer service, operations and product line support this vision is a wonderful way to increase the strategic muscle and staying power of your business.