A recent report from PwC has found that 60% of survey respondents said their approach to pricing included simple rules such as ‘cost mark-up’ or ‘matching the competition’. The allure and simplicity of cost-plus pricing can be infectious, but it can also be wrong and dangerous.
Over the last couple of weeks, the experts at Pricing Prophets have been helping a NSW business break the habit of cost-plus pricing. The company (whose name and products have been disguised) are both a manufacturer and an importer of a high-end office fixture.
Like many companies, there are three models in their product ladder, which for simplicity purposes, I will the most unoriginal of names: bronze, silver and gold. All three models come in a variety of different sizes.
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The bronze products are manufactured locally in Australia. Despite their position at the bottom end of the product ladder, they are far superior to the alternatives. The silver and gold products have additional features that are not available in the bronze product, including value-adds, as well as customisation.
Until now, all three of these products have been priced on a cost-plus basis, which is where the problem lies. The silver and gold products are made in China and arrive in Australia at a price cheaper than the locally manufactured smaller model.
The business naturally thought therefore, that the silver and gold products should be cheaper than the bronze, because production costs were cheaper. This is like saying a Big Mac should be cheaper than a cheeseburger, or a Lexus should be cheaper than a Toyota. It’s wrong!
Customers don’t care about costs, nor do they need to know what the costs to manufacture a product are. In this case, they care about the value-adds, the customisation and the beauty of the products relative to the alternatives available.
This company now has a pricing structure that properly reflects value, and not costs. And based on historical sales data at constant volumes, that pricing structure would yield an 11% revenue uplift. Creating that structure is the easy part. Its success will depend on the execution.
Given that value is always in the eyes of the customer, there’s no guarantee that the value attached to the products is in line with the perceptions of the customers. But all pricing is contextual, and those perceptions will be enhanced when the prices first appear on the company’s new-look website.
And thanks to a laser-guided missile approach to pricing, rather than carpet-bombing, the majority of the price changes are small in magnitude. The one or two that are slightly more significant changed in phases.
Is it time you stopped selling Big Macs for the price of cheeseburgers?