Posted by: Patrick Lefler | February 4, 2010

Aligning pricing with customer value

When one thinks of what customers value most, pricing strategy is probably not high on the list. And on the surface, it makes perfect sense because in most cases, pricing strategy is designed to extract the most revenue dollars possible from customers. I’ve even heard some folks make the analogy of customer pricing to “playing poker” with your customers; complete with hidden cards, bluffs from both sides of the table and a winner-take-all mentality. Not exactly a key selling point or value proposition.

So here’s a slightly different way to look at your pricing strategy. On a regular basis, step back from the tactical aspects of pricing and look at it from a strategic point-of-view. Look to see if there ways to change the competitive landscape by changing the strategy – not just tweaking your existing policy but radically changing the industry model. One way to look at this is from your customer’s perspective. Does your pricing strategy align with what matters most to them? Make sure you understand what the business drivers are for your customers and how might that change in the next few years? Are there ways to change your strategy that anticipates the needs of your customers?

One of the best examples of game-changing pricing strategy innovation came from General Electric and their commercial-aircraft-engine business. According to a 2003 Boston Consulting Group (BCG) Article titled; “Pricing Myopia”, engine manufacturers had traditionally used engines as a loss leader to secure the lucrative business of selling replacement parts. GE changed all that when it offered airlines the option of buying power by the hour – in essence, purchasing as a package engines, parts, along with maintenance, repair and overhaul services and paying on the basis of per hour of use. The strategy not only allowed GE to make the most of its competitive advantages, but more importantly, it aligned pricing with customer value (by tying prices to airline up-time) and aligned their customers’ interests with its own. According to BCG, GE’s strategic use of the power-by-the-hour concept helped it transform the competitive position and profitability of its commercial-aircraft-engine business.

I’ve said this before and I’ll say it again…We spend far too little time thinking about our pricing strategy. I used to joke that for every 100 hours we spent building our products, we were lucky to spend 10 minutes thinking about the actual pricing strategy. Sad but true.

More on this topic and others next time…

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