Pricing Strategies for Small Business. Andrew Gregson

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      The Trap of Customer-Driven Pricing

      So, should the owner just ask the customer what he or she wants to pay for the product or service and then sell it at that price? No. It is wise to pay attention to customers but unwise to be swayed by anecdotal evidence, even if it is firsthand. Only numbers count and having the statistical evidence to back up customer comments is the only valid method I know.

      Suppose you invent a nifty new technological solution to a computer-networking problem that plagues most small companies. Should you decide to take this “magic widget” to the market and ask customers what they will pay for it, you will get a wide variety of answers from zero to hundreds. After all, the customer has never seen anything like it before. How do you price it using the concepts we’ve discussed?

      This example is laced with a key misconception. You are not selling the widget, you are selling the solution. And if the problem your widget promises to fix amounts to hundreds of dollars worth of frustration, downtime, and lost productivity every year, then the widget sells for a multiple of that number regardless of its production cost.

      Just asking what the customer would be willing pay for the item is not enough. As a wily business owner, you must know what problem the customer is buying your product or service to solve.

      Again, if the product is a chop saw and the weekend warrior is in your store, the salesperson’s first question has to be, “What project are you planning?” If the project is crown moldings, the cheapest machine will simply not be satisfactory.

“The job of sales and marketing is not simply to process orders at whatever price customers are currently willing to pay, but rather to raise customers’ willingness to pay to a level that better reflects the product’s true value … Low pricing is never a substitute for an adequate marketing and sales effort.”^[4]

      The Un-Trap of Customer Driven Pricing

      Consider for a moment turning this argument on its head and giving yourself a new vision for your business.

      What would happen if you started with the price at which your research shows you can sell Product X? You are certain of the volumes because you have a purchase order in your hands.

      Can you make or produce Product X for that price and have a profit after all costs are taken into account? One of history’s greatest industrialists did exactly this.

      What Ford put first: The profit lure of mass production obviously has a place in the plans and strategy of business management, but it must always follow hard thinking about the customer. This is one of the most important lessons that we can learn from the contradictory behavior of Henry Ford. In a sense Ford was both the most brilliant and the most senseless marketer in American history. He was senseless because he refused to give the customer anything but a black car. He was brilliant because he fashioned a production system designed to fit market needs. We habitually celebrate him for the wrong reason, his production genius. His real genius was marketing. We think he was able to cut his selling price and therefore sell millions of $500 cars because his invention of the assembly line had reduced the costs. Actually he invented the assembly line because he had concluded that at $500 he could sell millions of cars. Mass production was the result — not the cause — of his low prices.

      Ford repeatedly emphasized this point, but generations of production-oriented business managers have refused to hear the lesson he taught. Here is his operating philosophy as he expressed it:

“Our policy is to reduce the price, extend the operations, and improve the article. You will notice that the reduction of price comes first. We have never considered any costs as fixed. Therefore we first reduce the price to the point where we believe more sales will result. Then we go ahead and try to make the prices. We do not bother about the costs. The new price forces the costs down. The usual way is to take the costs and then determine the price; and although that method may be scientific in the narrow sense, it is not scientific in the broad sense, because what earthly use is it to know the cost if it tells you that you cannot manufacture at a price at which the article can be sold? But more to the point is the fact that, although one may calculate what a cost is, and of course all of our costs are carefully calculated, no one knows what a cost ought to be. One of the ways of discovering … is to name a price so low as to force everybody in the place to the highest point of efficiency. The low price makes everybody dig for profits. We make more discoveries concerning manufacturing and selling under this forced method than by any method of leisurely investigation.”^[5]

      As you examine the methods to analyze your business in later chapters and the appendices, you will discover that starting at the desired end product and working backwards generates some fascinating insights. Ford explained that he started from a price and worked backwards to make the product fulfill СКАЧАТЬ