You must rework your value proposition if you want to be a price- setter

During one of the recent financial health- check assignment, I went through the pricing strategy followed by the client over the years. The data showed that the client did not increase the product prices except to the extent of the changes forced by the tax policy. The product was being sold almost at the same price as was sold three years back.

The client's logic behind the stagnant prices was that it is difficult to hike the prices in the business - to - business markets, and that their customers demanded that a significant portion of benefits generated from of efficiencies must be passed on to the customers. The client had resigned to being a "price- taker", resulting into compressed margins and stressed cash flows.

If you are resigned to being a price- taker, you destroy value. There will always be some or other competitor who will beat you on the cost; they will reduce the price and you will also be forced to do likewise. A price- taker will find it difficult to earn decent margins and create investor wealth. When this is clear, why do businesses accept price set by the market? It is because of the fear of the customers moving to a competitor.

Being a price- taker is a frustrating experience. (Image courtesy: pexels.com)

Businesses usually focus on cutting costs, which strategy, though necessary, has a much lower impact on the bottom line. However, if you are able to increase the price while maintaining volume of sales, the increased revenue flows straight to bottom line. In a business which makes 15% net margin on sales, a mere 5% increase in price means a 33% increase in net margin (from 15% to 20%). While this is intuitive, one needs to be constantly reminded that setting a right price is critical. Value based pricing is the best approach.

Value- based pricing requires that the business must clearly articulate value proposition. Focus must be on understanding why customers buy the product or service, what benefits its delivers and how the value perceived by them can be increased. Value based pricing strategy will challenge you to continuously improve the product or service and improving delivery channels for improved customer experience.

I have seen a number of examples of businesses setting price. These businesses range from a small tea vendor selling a few thousand rupees of tea every day to companies earning millions every year.

There is a scope for setting price - in every business. (Image courtesy: pexels.com)

A small tea shop vendor where I frequently visit, used to sell tea in china cups at Rs 8.00 per cup. He also sold biscuits priced at Rs 5.00 a pair. He soon started offering the tea in paper cups with better design and his own logo; the price of tea in paper cups was Rs 10.00. It was meant for more hygiene conscious customers. Over next few months he started selling sugarless tea as well. He soon created a combo offer with tea and different types of sides like biscuits, all procured ready-made, since his space was limited.

After coloring the shop using some artistic sense and improving furnishing, he sold the same tea at over 50% higher prices within a year. His sales have increased 2.5x in a year's time because of different products and combo offers. The gross margins have increased and new margin has zoomed. I, his pro bono consultant, am forced to take a free cup of tea once in a while when I visit the shop, howsoever hard I try to convince him that I should pay!

A commercial interior work execution contractor is getting continuous stream of business since he started offering a complimentary 24 - hour onsite support to this clients for three years. Interesting fact is that in a quarter, he gets hardly one or two a requests for support outside of work hours!

A UPS/ inverters manufacturer increased his repeat business with current clients by integrating a monitoring and reporting module through wireless network. The money he pays to the software vendor is more than adequately compensated through AMC revenues.

A fabricator offered free quarterly inspection and preventive maintenance for three years for large contracts, which differentiated his work and demonstrated his confidence in the quality of work delivered. No wonder his clients liked it. Architects were confident of brining him in for the project execution.

A travel agent routinely performs check-ins for the clients and alerts them on flight delays, without relying on the airlines to do this work. He has partnered with a cab operator for coordinated airport pickup and drops, increasing his revenue as well as customer stickiness.

A price-setter creates value. (Image courtesy: pexels.com)

So, if you are a price- taker today, you must change your mindset and explore how you can become a price- setter. Differentiate your product. Bundle your products or create a bundle of product and a service. Integrate backwards or forwards by partnering. Use tiered pricing to cater to different customer preferences. Or, create an intellectual property, the best long-standing differentiator.

#Business #Finance #Price #Profitability #Value #Differentiation