Pricing is … Externally Focused

At first glance, this seems obvious.  Charge what customers are willing to pay.  Customers are external, so pricing is … external.

So why don’t more companies behave this way?

Cost plus is an example of internally focused pricing.  Most companies still use versions of cost plus pricing.  Determine the cost of building a product, add a markup, and that’s the price.  Nothing external about this.

How about finance requirements to raise prices to achieve higher gross margins?  If implemented across the board, this is obviously an internally focused pricing exercise.  What if, instead, the company implements price hikes only on products that can justify them.  Then I have a very important question … Why didn’t the pricing team do that before?  If customers are willing to pay more, then we should have been charging them more.

For pricing to be done right, it has to be focused externally.  Always start with the question, “How much are my customers willing to pay?”

 

Mark Stiving, Ph.D. -Pricing Expert

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