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Value Based Pricing Is Only an Attitude

Car SalesValue Based Pricing means charging what your customers are willing to pay (WTP).

The other day I was describing this to a successful, self employed business woman, and she kept asking, “How do I know what my customers are willing to pay?”

I mentioned how she should put herself in her customers’ shoes, compare her offering to the competition.  She said, “I don’t always know who else my customer is considering, and I certainly don’t know what he thinks about our offers.”

I told her she could use win/loss data to narrow down the possibilities.  “I don’t have that many data points.  Will this be significant?”

I described how she could use conjoint analysis to determine what types of customers are willing to pay for which features.  “But that doesn’t tell me about the customer I’m talking to right now.”

I suggested she learn from her customers during the sales cycle.  “Sure, but they aren’t going to tell me the most they are willing to pay, even if they know it.”

Finally, I conceded with an Aha! of my own.  We will never know how much a specific customer is willing to pay in a specific situation.  We can’t read his mind and he’s not going to volunteer that information.  If we can’t know his true willingness to pay, what good is value based pricing?

Think of value based pricing as an attitude.  We know we won’t always be right, but we are doing our best to estimate what our customers are willing to pay and charging as close to that as possible.  We can use experience (and statistics if possible) to guide our estimating methods.  For example, if we continually lose, then we are estimating too high and need to lower our pricing.  If we always win, we are pricing too low and need to estimate higher.

When you go purchase a car from a dealership, the salesman is looking you over, trying to determine how price sensitive you are.  In other words he is estimating your willingness to pay.  He’s looking at the car you arrived in.  He studies your clothes and your jewelry.  Once you give him your address he will look up the value of your house on Zillow.  He can never know exactly what you will pay, but he can make estimates based on observable criteria.

This is what Value Based Pricing really is, estimating willingness to pay.  If you know which competitor your customer is considering, that can help you know how much to charge.  If you know which market segment your customer is in, you will price more appropriately.  The more you know about this customer and this situation, the better.

This lack of precision is probably one reason companies like and use cost plus pricing.  They know their costs.  (At least they think they do.)  If you always charge 2 times your cost then there is no uncertainty.  In fact, no thought is needed.

However, if you want to be more profitable, if you want to capture more of the value you create, then adopt value based pricing.  Value based pricing enables more powerful pricing strategies, like price segmentation and product portfolio pricing.  It has the power to focus the entire company on creating more value.

Value Base Pricing may not be precise, but it is powerful.  Adopt the attitude.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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Photo by brianteutsch

Irrelevant Price Comparisons – How They Work

Apple and Orange

“Rice flavoring is more expensive than a Porsche.”

“Ink costs more than blood.”

“Bottled water costs more than gas.”

Surely you’ve heard many more of these shocking comparisons.  Read any of these linked articles and you find they are justifiably true.  On a price per weight basis, rice flavoring is more expensive than a Porsche.  On a price per volume basis, the second two statements are true as well.  Although true, they are misleading and irrelevant.

What is going on?  The answer is simple.  We all have expectations about what items are worth.  Although we don’t explicitly rank the value of all of these items in our minds, there is an implicit ranking.  For example, you probably think a Porsche is worth more than rice flavoring, blood is worth more than ink and gas is worth more than water.

These comparisons are created when some imaginative person uses a common measure  for the two items even though both products are not purchased using this single measure.  We don’t buy a Porsche by the pound.  We don’t buy blood at all.  These are the easy ones to figure out.

What about water and gas?  The bottled water “study” linked to above shows that a 9 oz. bottle of Evian water sells for $1.49.  Do the math and that results in $21 for a gallon of Evian, way more expensive than gasoline.  But typically when you’re at the gas station you buy a small amount of water and 10 gallons or more of gasoline.  It’s not a reasonable comparison.

What would it cost to buy 10 gallons of “bottled” water?  A check of Alhambra’s web site finds they will deliver 10 gallons of water to your house every two weeks for under $15.  That is only $1.50 per gallon.  It would be even more economical if you drove to pick it up yourself.

Although fun, each of these price comparisons is completely irrelevant.  They do not add any value to a potential customer making a decision.  The only possible value they have is to grab someone’s attention, to shock them.

Of course sometimes there are absolutely shocking price comparisons that are true, like this one:  “This T-shirt is more expensive than a car.”  However, if you’re even considering purchasing this t-shirt, money doesn’t matter to you anyway.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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Photo by Kokopinto

Thank you to my friend Jon Manning for the blog on Price Benchmarking that got me thinking about this.

How to Earn a Raise – Lessons from Pricing

promotion and raiseThe other day one of my employees asked for a raise.  Believe it or not, as director of pricing at a large company, I don’t really have much influence on the salaries of my people.  However, I wanted to give him thoughtful advice on how to get a raise. This is just a pricing problem, people putting a price on themselves.  Here is part of my advice.  If you are an employee hopefully you will find it useful.

You are a product!

Just like your company buys computers, manufacturing equipment, building space and paper clips, they buy people.  Actually they buy your time and ability (your features) to generate results (their benefits).

Companies who properly price products charge what their customers are willing to pay.  You should too.

Imagine you are a PC.  One of the company’s PCs just quit working, so they have to buy a new PC to replace it.  How much will they pay for you?  The answer is it depends on how much other PCs are going for.  They will surely get more benefit than what they pay, but they will try to pay as little as possible.  If you as a PC cost 50% more than another PC you will not be selected.  The best you can do is charge the going rate.

Now imagine you are a Mac.  You charge 50% more than a PC and some people pay it.  Why?  Because a Mac has features that aren’t found on PCs.  Some people highly value the ease of use, the lack of virus, the beautiful design.  A Mac is different and some people are willing to pay more for it.

Let’s bring this back to people.  If you are like everyone else, you will get paid the going rate.  The company doesn’t owe you a raise just for being there.  The company may be willing to give you a raise but only if you provide more value to them than someone else they can hire.

Important lesson #1:  Add more value.  Ask yourself how you can build your knowledge and skills to make yourself much more valuable to your company and to the market.

Now ask yourself, are you commodity or a highly differentiated product?  If you are a new college grad, you are a commodity.  Many people graduate with the same degree you have.  Your salary will be based on the going rate for that degree.  Sure some companies pay more, but they are trying to skim the cream off the top.  Can you prove you’re cream?

Important lesson #2:  Become highly differentiated.  Pick an area where you want to focus and become an expert.  Prove you’re an expert through papers, presentations, blogs, social media, etc.  This one thing will make you more valuable.  It’s OK if other people are in the same area.  The point is there won’t be millions.  Become an expert.

IMPORTANT Aha! moment:  Doing your job will NOT get you a big raise.  Doing your job well will NOT get you a big raise.  The only way to get a big raise is to do MORE than your job.  Add more value to your company than anyone expects.  Of course this alone will not get you that raise, but it is a prerequisite.

Pricing has many more lessons to teach us employees about making more money.  We may cover them in future blogs (if there is interest).  But today remember the single most important lesson in pricing:  Charge what your customer is willing to pay.  Willingness to pay is completely driven by your value relative to the other options.

If you want a big raise, make yourself valuable.  Make yourself more valuable than others like you.  Become an expert.

 

(My friend Wendy Hanson and I discussed this concept on a radio show.  If you want to hear it go here.)

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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Photo by David Blackwell

Air Travel Pricing by the Pound – Some Lessons

Weight on planeSamoa Air recently announced that they will begin charging for airline tickets by the pound.  When you first heard about this, you probably had an emotional reaction, either pro or con.  Undoubtedly the average weight of the people who support this is much lower than the average weight of the people who oppose the idea.

One young lady this past week said to me, “This is fair because right now I can’t afford to fly anywhere with my children.”   Hence, the first lesson from this incident.

1. Change is fair when it’s to our advantage.  What would that young lady think if we put a surcharge on screaming babies in airplanes?  She would think it unfair, but the business travelers of the world would rejoice.

The second lesson to learn is based on the justification.  After all, airplanes run on weight.  The heavier the load the more fuel is required.  Airlines charge for overweight bags.  Doesn’t it just make sense to charge by the pound?

2. Consumers think using a cost-plus mentality.  If it costs more to serve a heavy person then it’s reasonable to charge them more.  Of course as pricing people we do not price using cost plus.  We price based on willingness to pay.  However, we can often influence willingness to pay using cost plus arguments.

Lesson three is huge kudos to Samoa Air for creativity and thinking outside the box.  Airlines have always priced by the seat.  To some extent they also price by the mile.  Samoa Air is doing something different.

3.  What do you charge for?  Just because your industry has always charged one way doesn’t mean that’s what you have to do.  If you want to be different, you have to be different.  (Profound.)  It may make sense to be different in your pricing.

The first 3 lessons all tend to support pricing by the pound.  The fourth, not so much.  The implementation is to have people declare their weight when they purchase the ticket and verify it by weighing each passenger when they are at the airport.

4.  Complexity reduces likelihood to purchase.  Making products easy to purchase helps them sell.  When we add complexity in our pricing schemas, customers will tend to buy from providers where it’s easier.  Of course if you’re skinny and you think you will get a much better price, then you’re more willing to put up with the added complexity.  Many of us may not.

It’s impossible to know if this will stand or get reversed.  But the fun part is we can learn from the situation.  Let’s watch to see what happens

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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Photos courtesy of LessWorkMoreLurk.com and foilman.

 

Shoppers are NOT Strategic – Accept It and Create Value

cyclist“People need to buy from us because if they don’t the local stores will go out of business.  Then there won’t be any local support available.”

This is a mindset common with many brick and mortar retailers, especially ones where local hands on service is valuable.  I often work with the bicycle industry and this is a very common attitude among retailers.  If all of the local bike stores go out of business, where will we get our bikes serviced?

Although the prediction of the future may or may not be true, here is one thing that is.  Customers are NOT strategic.  Customers are not using the logic that says, “Gee, if I pay a little more to the local retailer now, then 5 years from now I’ll still have a place to get service.”  Instead, customers are thinking how to get the most for their money right now.

Retailers thinking customers should be strategic is a waste of mental energy.  They aren’t.  What should retailers do?

In the near term, retailers must accept this as inevitable.  People buy where they get the most for their money. You must answer the question, “Why would someone buy from me instead of the Internet?”  The answer must be something other than, “If they don’t I’ll go out of business and they won’t have support.” Some good answers include awesome service, immediate delivery, or building a sense of community.

In the long term, retailers may be able to band together to raise the attractiveness in shoppers’ minds of purchasing local. Local retailers may be able to charge a price premium.

Think “Made in USA”.  As shoppers many of us are willing to purchase something labeled “Made in USA” because we believe it helps our country, our economy, and our neighbors.  We believe the quality is good.  We are proud to show others that we buy American.  According to a study by Boston Consulting Group, more than 80% of Americans are willing to pay a price premium for products made in the USA.

made in usaConsumers didn’t come up with this belief and logic on their own.  This was a concerted effort by unions, concerned citizens and our government to make this common.

Is it possible to start a “Buy Local” movement?   If all of the retailer trade associations banded together, it is likely they could.   Environmentalists currently use the phrase “Think globally, act locally”, retailer associations may be able to piggyback on this.

As a retailer though, you need to spend 95% or more of your energy building and running your business with the facts as they are today.  The fact is, customers will buy from you when you offer more value than your competitors, including the Internet.  The Internet will always have the lowest price. Accept it. Be creative. Create value.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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Photo courtesy of Richard Masoner / Cyclelicious

 

 

Charging to Browse – It’s Inevitable

This week it was reported that Celiac Supplies is charging $5, refundable with purchase, to simply browse in their store.  If you search Google news for “Celiac Supplies” you’ll see hundreds of articles denouncing them.

Why is everyone so quick to say this is a horrible idea?  The consensus is they are not being customer friendly.  For example the AdelaideNow reports that even Russell Zimmerman, executive director of the Australian Retailers Association said, “If I walked into the store and was told I was going to be charged to browse my immediate reaction would be to leave”.

But think about this.  As pricing people we continuously emphasize, “create more value than your competitors, give your customers a reason to pay more to buy from you”.  The problem in retail is this extra value is usually delivered before the purchase is made. Value in retail comes in the form of a nice, clean, well organized showroom; the ability to touch and try before they buy; and most important helpful and knowledgeable employees.  We are hopeful that when we deliver amazing amounts of value, the customer will feel guilty and buy from us.

The fact that the value is delivered before the purchase also makes it more difficult to execute on a strategy of phenomenal service.  Great service costs money and it’s difficult to give it away with the hope that customers will purchase from you.

Let’s put ourselves in Georgina’s decision.  Ignoring the phenomenal PR this has given her store, she has 3 types of customers.”

Her current customers will probably remain as customers.  Surely they spend more than $5 every time they visit.  With fewer looky-loos she now has the bandwidth to give her real customers more attention and better service.

Someone walking by who has Celiac or is lactose intolerant will probably pay the $5 because they are very interested in what’s inside, especially the expertise.  Besides, they can surely purchase something.

Someone who is not lactose intolerant (like me) probably won’t go in.  That’s good for her business!  Without the entry fee, I could easily see me walking in and asking questions about the disease, the products, using up time and never purchasing.

My advice to Georgina, take this opportunity to provide phenomenal service to everyone who walks in the door and pays the fee.  Make them all thrilled that they shop with you.  Go overboard.  Now you know most of the people aren’t just shopping price.  Also, I would change the wording on the sign to say exactly that.  “We want to provide great service to our customers.  This is our way to tell who are customers are.”

One last spin … I personally would be thrilled if BestBuy implemented this.  I can’t stand not finding someone to help me when I need help.  I would simply shop there when I know I’m going to buy something and hopefully get better service.

Celiac Supplies may eventually change their mind and stop charging for browsing, but if we want great service, retailers are going to need to find a way to get paid for it.  This is inevitable.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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The Hooker Story

This week, please enjoy this fun story about my experience with a Las Vegas Hooker.  (Pricing experience.)

I tell this story at the end of my pricing keynote where I make three pricing points:

1. Know your value

2. Segment your market

3. Build a product portfolio.

Please share your comments either here or on Youtube.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

 

Pricing Teeter Totter

Have you heard this from sales?  “Our prices are too high and we can’t win business.  Customers won’t pay that much.”

How about this from the product lines?  “We design in a ton of value.  Sales just gives it all away …  Salespeople don’t know how to sell.”

As pricing professionals we are caught in the middle.  Product lines pushing for higher prices, salespeople pushing for lower.  What do we do?

It turns out that the answer isn’t as hard as you might imagine.  Both groups want what is best for the company, but they have different perceptions about the truth. Our job is to help them get to the truth. It’s all about processes and data.

Product lines:  Tell them you empathize.  You want to train the salesforce on how to sell value, on how to win at higher prices.  However you need tools to help the field.  You need documentation on how our products compare to our competition.  You need both the positive and the negative so the field doesn’t get surprised, but we’re sure they can succeed given this information. After all, our customers won’t pay for our value if they don’t know about it.

Sales:  Tell them you understand.  You are watching what prices we win new business at.  You are talking to the product lines about maintaining accurate price lists.  The last thing a salesperson wants is to be embarrassed, to show up at a customer and quote a price that’s 3 times higher than the competition.  Yet be sure to share stories about the best salespeople, the ones who win at the highest prices.  With sales you must empathize, analyze data, and let them know you are working with the product lines to maintain accurate pricing.

We (pricing professionals) are the fulcrum of the business.  Product lines want higher prices.  Sales wants lower prices.  Our job is to convince them both we want optimal pricing.  That only comes from real effort and real analysis.

Good luck

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Photo by navonod

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Pricing’s Second Most Important Concept

There are a lot of articles and several books now that talk about the psychological aspects of pricing.  These are fun to read and may have some impact on your business, but long before you even think about psychology, you should focus on the two most important concepts, value based pricing and how your customers use price to decide. 

The most important concept is charge what your customers are willing to pay.  This is value based pricing.  You’ve read about this many times in previous blogs (and will probably do so again), but that is not the topic of this blog.

Second most important concept, you must understand how your customers use price when making their decisions.  We’ve talked about this in many different ways, but it recently struck me that many of those issues revolve around this one topic, how do your customers use price?  The more I thought about it, the more it became clear that this is an easy and practical way for businesspeople to think about pricing.

What follows are brief descriptions of several blog topics that fit naturally in the concept of understanding how your customers use price when making purchase decisions.

The blogs on Will I? Which one? described two different decisions customers make and how price effects each one.  Price has little impact when customers are deciding “Will I buy in a product category?”  Yet price is all powerful when customers are choose “Which one?”

Under the banner of “Which one?” we reviewed how customers make the choice, how they determine value.  When comparing two products they look at the difference in price and the differentiation of the products to decide if the higher price of the more expensive item is worth it.

We talked about the bigger game of pricing.  Sometimes people decide on bundles of products at the same time.  Sometimes people make one choice (like milk at the grocery store) which influence other purchases.  We also have people making repeat choices over time where we don’t want to abuse our customers’ loyalty.

And yes, our customers are influenced by the psychological aspects of pricing.  We’ve talked about 99 cents and good, better, best.  There are more coming.

Nobody says this is easy, but it is important.  Actually, it’s the second most important concept in pricing.  Understand how price impacts your customers’ decisions.  Once you truly understand how your customers think about prices, you can create and implement pricing strategies that will maximize your profitability.

 

Mark Stiving, Ph.D. – Pricing expert, Speaker, Author

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Photo by Mista Yuck

What You Get Paid For

If you are a believer in Value Based Pricing, you know we get paid based on how much value we offer our customers.  However, are you generating more value than you capture?  Can you capture more of it?

During my keynotes I love to tell the story of Disneyland.  511 acres of attraction in Anaheim California that people fly in from all over the world to see.  What grew up around Disneyland?  Anaheim.  Tons of hotels and restaurants catering to the tourists.  All of these business are capturing value that Disney created.

So, when Disney built DisneyWorld, they built it on 25,000 acres.  Disney owns 26 hotels and many many more restaurants.  When tourists travel to Orlando Florida, Disney captures more of their total spend.  In other words, Disney capture more of the value they create.

Two incidents reminded me of this while traveling.  Note the pictures.  One is from a restaurant where I had breakfast.  They sold advertising on their tables, a 3 year license which varied from $75 to $200, depending on size.  Think about that.  They created value, potential customers attention, and captured some of that by selling advertising.  It’s not their normal business of selling food, but they captured more of the value the created.

Then I looked at the keys on my rental car.  Notice there is a Macy’s discount card attached to these keys.  Wow.  Avis, a rental car company, found a way to make incremental revenue by selling the attention of travelers to Macy’s.

Two questions for you:  What additional value do you create?  How do you get paid for it?

Bonus question – Can you think of other examples of companies that get paid for something other than their main business?

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author