Why Pricing is Not a Silver Bullet Solution
I often talk to executives who say things like, "We're doing pretty well, and now we just need to fix our pricing to take the company to the next level." But, no, it doesn't work like that. Never.
Likewise, I spend a lot of time talking to entrepreneurs and startups, and I hear a similar story. For instance, "We just need to complete our product, then we will look at the pricing," or, "We just need to define our marketing, then we will look at pricing," or, "We are just about to complete our go-to-market strategy, then we'll look at pricing."
In my book, “The Price Whisperer - A Holistic Approach To Pricing Power”, I expose the truth that pricing does not live in a vacuum. Pricing is not divorced from the rest of a company's operation. To "just" fix pricing doesn't work. What is needed is a holistic approach and an understanding that to price "right" and gain pricing power, everything in the company must be done right. Customer targeting must be "right," product to market fit must be "right," and the marketing must be "right.” Then your salespeople can sell value, not discounts, and as a result, the company gains better pricing power and can enjoy higher sales volume at higher prices.
What is “Right” in Pricing?
We need to understand what "right" means. My definition of "right" in all these cases is:
Targeting the Customer Profile That Leads to Maximum Sales or the Maximum Revenue
This will happen at different prices, but it never happens at too low of a price. Depending on what the company is selling, in some cases, it may be appropriate to focus on the customer profile that will lead to maximum sales, as this will maximize the network effect.
The network effect is all about maximizing sales volume so that the maximum number of customers start to talk about the product or service, as well as recommend the product or service to friends and others. Thus, a product or service leading to more customers buying the product or service will most certainly lead to more recommendations. This is where demand will positively start to snowball.
In other cases, the network effect is not important but then capitalizing on product development to get a quick return on the investment is. This is done by selecting the customer profile that will lead to the highest revenue. But for this to happen, a company needs to know how sales volume and revenue are affected by price for different customer profiles to choose the profile that leads to the highest sales or the highest revenue.
So, do companies do this? Unfortunately, most don't. Instead, companies guess about the price and the customer profile relationship or look at the competition and then convince themselves to do the same. Sometimes it can work well by pure luck, sometimes, it does not work very well, and more often than not, it does not work.
Understanding What Customers are Willing to Pay, Not Just Buy
In the same way, most products are developed or services defined with just a scant understanding of how different features and functions affect what prices can be charged. Of course, companies talk to potential customers, hold focus groups, do market research, analyze how people interact with current products or services, do competitive analysis, etc. This tells the company what potential customers want, which is not necessarily the same as what they want to buy. And it certainly does not say to the company what its potential customers are willing to pay for specific features and functions, meaning that it does not inform the company about the current features set and the benefits that will lead to pricing power. This leads companies to define products or services so that they are not optimal in driving the highest possible revenue and sales, which means they leave money on the table, and in some cases, a lot of money.
Testing Messages Based on Revenue
From interviews with potential customers, from market research and competitive research, and also from new product developments and/or service definitions, and experience and gut feelings, companies drive their marketing through a few different messages or themes and then test them in different ways to find what is most effective in driving interest for their product or service. But rarely, if ever, do they test whether these messages are effective or not in driving higher revenue. One message may be good in driving interest at low prices, while other messages might be effective in driving interest at higher prices—leading to higher revenue. Unless you test your messages, on different marketing channels, at different prices - you would not know.
Having a Value Proposition
Salespeople are almost always supposed to sell value for any product or service. But if they don't know what features or what benefits drive the highest revenue, the features and benefits that best defend higher prices and monetized value, how can they possibly promote that perceived value to customers?
Taking all these points into account, how can pricing be a silver bullet that will fix everything in a company? The reality is that it’s a bit more complex than that.
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