Use value calculators to establish pricing

Transcript of Chapter 34

Some companies do a great job developing high-value products… and then leave money on the table when they set the price. To avoid this, consider how value is transferred between a supplier and customer.

The supplier innovates and offers value in the form of a new product, which helps the customer improve his process or product. The customer returns some of this new value by paying a higher price. This is value creation and value capture.

To create much value, your improvement must satisfy 3 conditions. It must be important to the customer… measurable by them… and distinctive. If customers can get the same value elsewhere, you haven’t created value, you’ve just matched it.

Your price thinking might be supplier-focused, competitor-focused, or customer-focused. Supplier-focused pricing is cost-plus pricing. It’s inside-out, leaves money on the table and only indicates your pricing floor.

Competitor-focused emphasizes unit pricing, and is only useful for me-too products and gauging initial price reaction.

Customer-focused pricing reflects the economic impact on customers. It’s outside-in and does require more work for you. But if you want to maximize value capture, it’s the only way.

You must accomplish 2 things to maximize pricing: Understand how much value your new product delivers over competitors… and raise customers’ perception to this point. A good value calculator does both. This is a financial model showing how much money customers will make or save with your new product.

You need customer economic data to build this… and it’s critical you gather this at the same time you’re asking questions that help you create value. Once you launch your product, customers will have no more incentive to answer your questions.

If your new product delivers real value, it’s worth the extra effort to create a value calculator. It could let you capture hundreds of thousands—or millions of dollars—in added profit over the years.