Over 30 years ago, a young woman broke my heart. To be clear, she ripped it out and stomped on it. I struggled to understand why someone would do that to me. It made no sense. I struggled with this until my mom helped me realize she didn’t do this “to me”. She did this “for herself”.
That’s when I started creating one of my life philosophy’s, everybody does everything in their own self interest. You may argue with this. You may even find edge cases where this isn’t true. But this philosophy has served me extremely well. (I later learned in economics this is called utility theory.) I learned I can’t tell anyone what to do, but I could find or create situations where people wanted to make the decision I wanted them to make. I found ways to align their goals and mine. It’s really about predicting and influencing decisions.
I was lucky enough to internalize utility theory at an early age. This has been a huge asset in my pricing journey. You see, as pricers, we need to understand how people make decisions (in their own self interest), especially how they use price in those decisions, and how we can adjust our prices so we can win those decisions at a good price. Pricing is about predicting and influencing decisions.
To properly set prices we need to understand the value we deliver to the buyer. Value can be estimated by understanding how our buyers perceive our quality. How important to the buyer is our differentiation? What else would the do if not buy our product? Since this is how our buyers will decide, these are things we must understand to set a winning price.
Just learning to set prices this way is challenging for most organizations. But it’s only the first step. Once thinking about setting prices is second nature, then it’s time to take step two. Once you understand how people use price to make decisions, you have the knowledge and ability to create products that increase your profitability.
During step one, you internalize that people pay more for products that have higher quality and/or better capabilities. When this is second nature, it becomes obvious that you should build products with higher quality and/or better capabilities. This comes easily when you have a pricing frame of mind.
Yet, there is a third step in your pricing journey driven by this mindset, portfolios of products. When you put yourself in your buyer’s shoes you realize they never really know the quality and/or capabilities of the products, and more importantly they don’t really know what they need. So they use cues in the market to help them decide. One important cue they use is the set of products in your portfolio.
To further complicate the story, your buyer’s decision process is now a little more complex. They are deciding between you and a competitor, and they are also deciding which product from your portfolio to choose. You want to keep your choices simple, but still capture more value. A powerful way to do this is Good, Better, Best.
We’ve written about Good, Better, Best before, but that’s not the point of this blog. The the lesson here is you want to internalize a pricing frame of mind. Your buyers get to make their own decisions in their own best interest. Some of these decisions are rational, some are not. Regardless, a pricing frame of mind is all about understanding how those decisions are made and in particular how price is used in those decisions. We then create pricing, products and product portfolios all to win business at good prices.
Pricing is so much more than setting prices.