For some firms in a b2b market, a 1% change in a product’s price level moves profits by 10-12%. My journey in learning how to make this change began with a predicament.
It was a daunting predicament. I had started a new job, moving from R&D and into Marketing of a b2b specialty products unit (SPU). Before the move, an unprofitable SPU was added to my unit. I needed to make it profitable in 3 months.
A mentor, a Sr VP, came to my rescue. He said, “There are 90 products in the unprofitable SPU. They’re used as subcomponents in personal care products. Write a letter to our customers informing them that next month we are raising the price 20%.“
I wrote the letter, dreading that profit will now drop still further. To my surprise, only 5 customers stopped buying. The rest accepted the price increase. It was my first taste of value pricing; learning how to find the economic value users place on a product.
Why did my mentor’s advice turn around the unprofitable SPU? He leveraged his knowledge of branded personal care products. Makers of these products face a switching cost of > $100k to qualify a new supplier of a specialty sub-component. This meant the unprofitable SPU had set prices much lower than they should be.
Now with >30 years experience as a customer research consultant, I use Prof. Dholakia’s definition of value pricing. It helps find the economic value of a client’s product to each user.
“Value-based pricing is the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitor.”
It’s simple, but not easy
Negotiating value pricing needs a quantitative estimate of the economic value of the product as viewed by a user. For b2b specialty products, this value varies with each product and each user.
To legally root out this value is simple, but not easy. It requires fieldwork in an outside-in, customer research, blind study, such as I do. The fieldwork gathers quantitative data on a product’s value from 30, well-informed users.The unique knowledge of value discovered gives a client leverage in value pricing negotiation.
An earlier post describes how a client used this leverage to increase profit by $10 million/year for 13 years. In future posts, I will use other fieldwork examples to show the advantages of finding the real value of a product to a user.