“Competing on price is the price you pay for not knowing your clients.”
So began a presentation entitled “Time to rethink your pricing strategy” by Dr. Andreas Hinterhuber of Hinterhuber & Partners in
Dr. Hinterhuber’s presentation focused on six key myths. For starters, he said, people believe that costs are a good basis for pricing. “This kills profits,” he explained. “There is a big relationship between what customer will pay for and your costs.” Instead, look for what is in demand, and let the perceived value determine the pricing.
Myth Two: Small changes in price are not important. “Profitability is destroyed by small discounts repeated over and over throughout the year,” Hinterhuber said. “If your operating profit is below 10 percent, small discounts can make the difference between gain and loss.” He also noted that many Asian clients say that Asians always insist on payment to the last penny. “
Myth Three: The customer is price-sensitive. While some customers will always be concerned about prices, Hinterhuber feels that the price-sensitive segment of the market is rarely larger than 50 percent. “There are segments that value something else: ease of business, branding, etc. How big is that segment, and what kind of services do I offer them? Determine how big they are and meet their needs.”
Myth Four: We sell a commodity. Many agents and event planners might feel that their services could be performed by a competitor, and that they will lose business if they charge more for their expertise. “That’s a bad way of thinking--in fact, it becomes a self-fulfilling prophecy,” Hinterhuber said. Instead, focus on your unique advantages. “How can you translate that to price? You can differentiate anything if you understand your customers needs. Value is the best basis for setting price.”
Myth Five: I have to compete on price or I’ll lose business. Revenues and profits are not correlated, Hinterhuber said. “Many large companies go bankrupt,” he added, citing General Motors and several airlines. It is better to maintain a smaller slice of the business and remain profitable than chase volume and collapse into bankruptcy. “Focus on your unique niche and strengths.”
Myth Six: Managing prices means changing prices. “You can manage your price well without changing price,” Hinterhuber said. “Focus on improving your value to your customer [and] improve the communication of that value.” To begin, ask how you are different from your competitors, and figure out the value of that difference. “Is it knowledge, brand, speed, ease of doing business? This gives you differentiation value, and the maximum price you can charge. If you don't know your value, you can't determine your price.” And don’t be tempted to look to competitors for guidelines. “By taking a price from competitors, you let them dictate your worth.” Dig into the customer’s soul, he advised.
- “What is the value-driver?
- What are my unique advantages?
- What is that worth?
- How am I different from the nearest competitor?
For a number of products and services where you are differentiated, the price is too low. If you truly understand the value-drivers, you can set a higher price and still stay successful.”
With thanks to Jonathan Ricketts and CIM Magazine.
