Pricing Starts With Customers’ Perception Of Value

With all the talk about the importance of differentiation and value-added services in acquiring and keeping customers, what sometimes gets lost is the importance of the actual price of the product. After all, what’s the point of going to the trouble of adding value — differentiating yourself and adding services, all of which requires an investment on your part — if you’re not going to reap some reward for doing so.

Patrick Campbell, CEO of Price Intelligently made some important points about arriving at the right price in his “Converted 2015” presentation How To Increase SaaS Monetization By 11%. Although the presentation was for software companies, the principles he set forth are applicable to virtually any kind of business. I’ve used the framework of his excellent discussion as a springboard for this article.

So what’s the right place to start when it comes to deciding how much to charge for your product?

1. Cost Plus. Retailers used to talk about “keystone” as the touchstone of pricing. It was a code word for pricing your product at double your cost to buy it. The assumption was that you could cover your overhead and have some left over as profit. It was a very rough estimate but it was at least easy to remember. The problem: Nobody cares about your cost. Not your competitors, and certainly not your customers. And the number you come up with may have nothing to do with what customers are willing to pay or what competitors might charge.
2. Competition. There was a time when it was generally assumed that customers would jump to the first competitor to lower the price of a comparable product, and that if you wanted to sell it, you had to offer it at the price as low as any competitor. You still see that today in “Lowest Price Guarantees” where big box stores offer to match the price of a competitor’s ad. But your competitors don’t know your clients. They may not even have talked with their own customers, so what do they know about what’s important to them, much less to yours?
3. Value to the customer. Customers will pay for what they value. Why are customers willing to pay more at the coffee shop than at the diner? The coffee shop, if it’s successful, has figured out what customers value and the price they’re willing to pay for that bundle of the product itself and the whole experience of buying it.

So, if value to the customer is what you need to know, how do you find out?

1. The online survey. This is such an easy and straightforward way to engage customers, it’s incredible how many companies screw it up, mainly by asking it too often and by packing every survey with too many questions. Instead ASK ONE QUESTION: List several options and ask customers: “Which of these is MOST important and which is LEAST important.” DO NOT ASK THEM TO RANK THE IMPORTANCE of each of the items listed. It’s easy for a customer to scan a list and select the one item that resonates most, and the one they don’t care about at all. Asking them to rank every item drowns out the Most/Least items in a sea of other things they really don’t care about. So why put them through the inconvenience? And how reliable or actionable would the results be when they’re based on answers extracted from a customer who may have started out satisfied, but who has now become unnecessarily annoyed and put-off by a burdensome survey?
2. The point-of-sale question. An example of this is where the cashier at Whole Foods asks: “Did you find everything you were looking for?” As a food market, Whole Foods is aware of the importance of getting customers to do all their shopping at Whole Foods. They don’t want us going to multiple food stores, so they want to know if there’s something you’re looking for that you didn’t find — and which you now plan to shop for elsewhere. There’s another question they could ask that they don’t: “Are there any items you found here, but are planning to buy somewhere else?” Sure, they might uncover some information that the pricing of some of their items is out of line. But they’re satisfied with their one question, and that’s probably a good decision on their part. It’s quick, informal, easy to teach their cashiers and yields enough valuable information without turning it into a conversation that burdens the customer trying to check-out.

Just because the old ways of cost-plus and follow-the-competition are not as helpful in today’s market doesn’t mean pricing has to be pure guesswork. Start by asking your customers what’s important, set what you think is a fair price and monitor your results.

Next: How To Move From Value To Price.