7 Deadly Sins of Pricing: Valuation Sins
The 7 deadly sins of pricing that hurt your company’s growth and erode margins can be viewed through three lenses: Differentiation Sins; Valuation Sins; and Presentation Sins. Last time, we discussed the Differentiation Sins. In the second of three parts, we discuss the Valuation Sins. Valuation Sins are committed by not aligning value to the components the customers value most.
Cost-Plus Competitor-Centric Pricing
Companies often price their products or services by looking at their internal costs and their competitors’ pricing. They then pick a price that is slightly lower or higher than their competitors while allowing them to cover their costs and make a reasonable margin.
With this approach, an IT security firm might charge a set price per hour that’s less than a larger competitor. Its customer, in an industry where one of their competitors lost $500 million from a security breach, might be willing to pay $2.5 million to prevent a similar fate. However, with a cost-plus, competitor-centric approach, the security firm’s pricing was only $250,000.
Selecting Wrong Drivers for Pricing
One question we ask prospective clients is what their top pricing driver is. In most cases, it’s per-user pricing or a pure cost-plus play like per-hour pricing. In many cases, per-user pricing works. However, there are times where per-user pricing leads to sub-optimal performance or attracts competitors and lead to margin erosion.
A services company improves its customers’ sales through some exceptional proprietary processes. Pricing is based on the hours spent creating processes and training the customers. An award-winning video producer whose product speeds up their clients’ sales prices their services based on the cloud storage costs. In both examples, the price derived from the drivers (hours spent) and cloud storage costs are minimal in comparison to the ultimate results for the clients.
Given the services company’s expertise, they spend less time creating unique processes and training for their clients. They’ve made less money (eroded their margins) as they’ve refined their steps. Cloud storage, like cell phone data and long distance, have a way of declining on a per-unit basis over time.
Ignoring Component Values
If your invoice has more than one line item, you should determine which item has greater value to your customer. As we discussed in Pricing: A Lever for Growth, customers surveyed viewed a 2-item mechanic bill very differently based on the proportion of parts versus labor. Understanding your values, could alert you to where prices should increase.
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