Pricing

Pricing is the ability of a firm to capture value delivered to its customers in the form of revenues and profits for the company. Pricing is always dependent on the alternatives available to customers and, contrary to popular belief, not on the cost of the product. For more details see Pricing for Profit: A Primer

We have deep experience in pricing strategies across multiple industries- from high-tech (software, hardware, asp, services) to no-tech (mechanical, metallurgical, and other engineered products). We have developed pricing methodologies for new, ground-breaking technologies as well as mature products and services.

In our opinion, a firm resorts to "commodity pricing" (and lower margins), when it has failed to differentiate its products from its competition, in ways that are important to customers.

Here are a few case studies for some basic products, and contact us for more:

Process Equipment

This firm manufactured process equipment, with applications that spanned several industries. During the investigative phase to determine segments and drivers for each segment, we discovered that the firm, for consistency’s sake, had a uniform pricing methodology.

From the firm’s perspective, it was a purveyor of process equipment and it cost the same amount to produce the equipment, irrespective of the industry it was sold into. However, customers in different segments valued the "whole" product that the firm sold differently. The fertilizer market placed value only on the core "device" while the pharmaceutical market valued the device as well as the services that the firm offered. However, pricing was the same to both markets. Additionally, the competitive nature of the fertilizer market put extraordinary downward pressures on pricing, which was unconsciously transferred to all other segments, sacrificing margins across all of them.

The firm rectified the situation by focusing on the high margin businesses and withdrawing from low margin ones. Revenues and margins from profitable segments more than compensated the withdrawal from unprofitable ones. Additionally, the firm’s focus helped it immensely in reallocating scarce resources, and adding more value-added services to its core businesses for competitive advantage.

Alloys

Customers develop methodologies to purchase products at the lowest price. One of these methods is to develop metrics and multiple alternatives for price competition.

This firm is in the business of supplying "commodity" metal alloys for the mining industry. These alloys are abrasion resistant and are used to line earth moving and transportation equipment. Customers’ purchasing agents and the firm had fallen into the groove of pricing on a unit weight basis, irrespective of performance of the alloys.

During the investigative phase, we discovered that changing the perspective from "what the purchasing manager buys" to "what the CEO buys" gave us insights for pricing a superior product. The CEO of the firm was interested in production at the lowest cost with minimum down time. The hypothetical CEO’s expectations were in the length of time that the alloy performed and its cost, not in its weight.

In some instances, where data was available about the "expected value" of a commonly purchased benchmark, pricing was changed from a "per pound basis" to a "per day" basis, with the assurance that the client’s product would surpass the benchmark. This methodology changed the rules of the game.