In my experience, following a value pricing strategy is a rewarding decision. For a specialty product, a 1% improvement in pricing raises profits by 6%. Still, bored product managers leave money on the table. They don’t nail down all the relevant costs of providing a beneficial feature to their user’s product.
Determine relevant costs before determining economic value of a feature
I was one of those bored managers. Then one day I overheard our plant manager’s conversation about a picky user.
Our plant produced a specialty component used to manufacture polymers. We use unique equipment to make batches of the component. When batches do not meet a user’s expectations, the plant’s manger loses part of his wage.
Yet, if the plant shipped the same rejected batch to other users, it met expectations. By trial and error, the plant found how to make batches that satisfied the picky user.
The plant manager blind-sided me by making a change that benefited the user and left money on the table. It’s hard to recover that value by ratcheting up the price to the picky user.
Lesson learned: Always determine a feature’s relevant costs before raising prices.
Framework for cutting money left on the table
Understand the relevant costs for the top 2 economic value features of a product.
Before I begin work for a client of a project on value pricing strategy, we meet for a day.
- At the meeting is the team who will carry out the findings of the project.
- During the meeting the team choses the top 6, economic value features
- To legally root out the value of each of these features is not easy. It requires fieldwork in an outside-in, customer research, blind study, such as I do. The fieldwork gathers quantitative data on valuable features from 30, well-informed users.
After analysis of the field work, the team decides on the 2 top features as judged by each user. For pricing decisions, user value is significant since it is unrelated to cost. The team’s skilled sales persons meet with the user to negotiate the price of the product.
(Studies show that the 2 top features capture >80% of a product’s value to a user.)
In less than 3 months, the price increase covers the client’s expense of the value pricing work. This increase sticks for at least 5 years, returning millions of dollars to the client’s bottom line.