How Pricing Can Drive Your Business

Companies exist to create value for customers. Customers only buy when they think the value they will receive exceeds the price. 

Stop and think about those first two sentences. They’re the foundation of what is to follow. Customers buy value. Companies create value. Pricing puts a number on the transaction. The price must be lower than the customers’ perceived value for a transaction to occur.

For new products, pricing is usually an afterthought. The first time you price the product is after it has been developed and when it’s ready to market. You likely had a target price in mind during development, but it was little more than a guess. Then, after marketing and selling the product, you might tweak your price up or down, testing to see the effect on profitability. But little is done to understand the value buyers perceive.

For large transactions, price is used as a negotiation tool. We want to win the big deals, and even the small ones, when procurement threatens to buy from a competitor. When the response to, “We need a better price, or we’ll buy from your competitor,” is a discount, you aren’t focusing on customer perceived value. 

Most people see pricing as putting a number on a product. In many situations, that’s the final outcome. However, the real magic derives from what it takes to get there. 

Great pricing is always Value-Based Pricing, meaning charge what your customer is willing to pay. To do that, you must understand how buyers value your product. In hundreds of engagements, I’ve yet to find a company that deeply understands how its customers value their products. 

The key role of your pricing department should be to help the product lines understand and document the value your buyers will receive. Sometimes that value is relative to a competitor, and sometimes not. The objective is to understand how your customers make purchase decisions. Once you know the value your customers receive, you can more effectively price the product. 

But wait. Once pricing goes to the effort of helping product lines understand how buyers perceive the value of their products, think about where else that information can impact your company. 

Imagine that your salespeople understand what a specific buyer values: the problems they’re trying to solve, the results they’re hoping to achieve, and the incremental profit they will earn. If the customer agrees, the deal is practically done. If a discount is required, it would be much smaller than usual. 

When salespeople can help buyers determine the profitability of an investment, those buyers will like and trust that salesperson. They are more likely to buy. And the developed ROI analysis is crucial when an individual buyer needs to sell the solution internally to executives or a committee.  

Now imagine how much more effective marketing would be if they knew and “messaged” about the problems and results potential customers care about. Instead of writing about your features (which nobody cares about), create copy that resonates with your market. 

What if your product managers, who choose how to invest your development resources, understood the problems buyers value the most? They could stop building what engineering thinks is fun and instead focus on what the market will pay for. 

This is all common sense, but it rarely happens. Very few people know why their customers buy their products. Test your own company. Ask your product managers, marketers, and salespeople why buyers buy a specific product. Then, call a half dozen customers and ask them why they bought. You’ll be surprised at the disparity. 

In reality, pricing shouldn’t drive your business; value should. However, pricing is the department focused on how much buyers are willing to pay, which means they need to understand value. The point is, what if more people understood value? Since your company exists to create value for customers, it makes sense for everyone to focus on value. It could transform your company.

Written by Mark Stiving.
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