In these days of global competition, the customer is more
in charge than ever. That doesn't mean that you need to
offer services that cost you a fortune: Better designed
pricing can be a great help.
Let's consider an industrial example. A commodity
manufacturer of building materials studied its customers in
terms of how the mix of products they ordered affected
profits.
The company had a unique manufacturing process that made it
cheaper than competitors to produce higher volumes of
identical items, but more expensive to produce smaller
volumes of those same items. This was true because every
item was made to order.
The ideal solution for this company would be to have
customers split their orders, buying the small unit
quantities from competitors and the larger quantities from
this firm. The manufacturer had prided itself on being the
low-price supplier across the board and wasn't sure how
well this focus on getting profitable volumes could be
accomplished.
Using market research, the company was able to determine
that a high percentage of current and potential customers
would be willing to split their orders in this way if a
price disincentive were provided for lower volume orders.
The manufacturer provided that disincentive by raising
prices on small volumes of individual items, and keeping
low prices on the higher volumes.
Quickly, its business mix shifted towards its highest
margin manufacturing configuration, and its profit margins
soared. This happy result occurred despite having just lost
much of its low order-volume business.
A Hewlett-Packard unit investigated how its customers used
its various service capabilities in the mid 1990s. Products
were priced as though every customer used each service
offering equally. In fact, some customers did use most of
these services while others did not.
The profitability of an account that did not use the
services was much larger than that of a customer who used
most of these services. The services also presented another
problem in that providing the services often tied up the
best people at Hewlett-Packard.
Based on this analysis, the Hewlett-Packard unit began
charging for most of the services that were not used by the
bulk of its customers. At the same time, it could lower the
price for those who used few services and gained market
share with those customers.
Services that were hard to supply or were too intrusive on
the time of key people were priced at a substantial premium
to their cost, to discourage anyone using the services who
didn't really need them. As a result, Hewlett-Packard saw
its costs drop as the required service levels declined
while revenues rose due to more competitive prices for
those who didn't need much service. The increased volume
also helped drive costs down.
How can you adjust your prices to encourage low-cost
behavior by your customers?
Copyright 2008 Donald W. Mitchell, All Rights Reserved
----------------------------------------------------
Donald Mitchell is chairman of Mitchell and Company, a
strategy and financial consulting firm in Weston, MA. He is
coauthor of seven books including Adventures of an
Optimist, The 2,000 Percent Solution, and The Ultimate
Competitive Advantage. You can find free tips for
accomplishing 20 times more by registering at:
====> http://www.fastforward400.com .
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