Our Price. Our Value. Our Success.
By Andrew J. Birol, President, Birol Growth Consulting, Inc.
Perhaps business's most feared villain on TV is Wal-Mart's yellow price-cutting, happy face. Every time it bounces, prices fall, consumers spend, and vendors cringe as their margins pancake. Wal-Mart has broken the back of many a supplier's profits by squeezing massive price cuts in exchange for a featured slot on the Wal-Mart shelf. While Wal-Mart is not the devil and volume purchasing should drive price concessions, why do so many local businesses compete on price as if their customer had the demand of a General Motors? I see countless businesses offering “courtesy” price cuts before a customer even asks. If paying for value is the best yardstick of a customer's satisfaction, why do so many area companies proclaim, “we're not worthy” of fair compensation by lacking the confidence to charge enough for the value they are providing? Are esteem issues the culprit when we provide a premium product or service and don't charge matching prices? Here are some common examples of our destructive pricing culture:
- By targeting large companies and competing against low-cost imports, we might feel validated but only temporarily. Eventually we will be put in our place in terms of price.
- For many individuals in this good-hearted region, money comes with baggage. We want to be charitable, partly to help others but also to absolve ourselves of being “haves” in a “have-not” world. We believe, perhaps only subconsciously, that giving away money is proof of our goodness. But what about our backbone?
- For many people, talking about money is about as comfortable as discussing their sex lives in front of their parents. Propriety hinders them from offering premium versions of goods and services at the higher prices and fatter margins their firms deserve.
In contrast, proper pricing shows you are confident in what you do and what your product or service is worth. Do you want your pricing to stress your firm's conviction as much as your quality standards or guarantees? Since price and cost are not connected, and since growing margins are the best indicator of business health, here are three steps to help you price on value:
- Quantify the value your customer derives from what you sell. Have your customers define the contribution your product or service plays in their profits and growth. If you can't show any greater value between your offer and your competitors' offers, change what you sell or change your business. Price to the total value that your product or service provides.
- Know your total cost of production, delivery, sales and service. If your cost is not well below No. 1, change what you sell or change the products or services you sell.
- Consider any additional but real value you derive from special customers. Consider tangible new skills, referrals or access to more business you can develop through a target customer. If you can quantify actual savings or incremental revenue, you can factor this into your final price.
Finally, here are two rules to help your company — and our region — thrive in a world of declining prices, increasing technology and relentless demands for more service: When you add technology, you must reduce cost. And when you add personal service, you must add value.
If you accept these two principles, then adding technology should allow you to increase margins. And adding personal service should always allow you to increase price.
In a time of ISO and CS 9000, requests for proposals and lowest bidders, temptation to cut price is everywhere. Yet our “price” as individual businesses and as a region represents our integrity. Giving away the store destroys our image, our financial health and is suicidal in an improving economy. We are all taught self-respect at an early age. As adults in business, there is no better way to show it than through the price we place on our value.
Articles by Birol Growth Consulting are © copyrighted and all rights are reserved. However, articles may be reprinted with prior written consent if attribution is included as follows:
© Copyrighted by Andrew J. Birol, President of Birol Growth Consulting, who helps owners grow their businesses by growing their Best and Highest Use ®. Andy can be reached at 412-973-2080, by email at firstname.lastname@example.org, or on the web at www.andybirol.com.