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The management team saw fastand
reliable response time as some-thing they had to do to maintainthe business at large accounts. Theauto manufacturers insisted thatthey got this kind of service fromevery supplier. But did they really? And what did fast, reliable responseto changes mean to an automobilesupplier? We discovered that whilesome component suppliers accom-modated last-minute changes,none of our client’s competitorscould deliver those changes as reli-ably. Making late changes and de-livering rush orders allowed theauto-parts customers to hold lowerinventories and sustain productionlines. These benefits had a signifi-cant economic impact for the cus-tomers, and quantifying that impact was a key first step in regainingpricing power.
During annual contract negotia-tions with one customer, our client was able to quantify—in dollars—the value of its “quick turnaround” capa-bilities.The information helped theclient increase its share of that cus-tomer’s business for the next three years, increase prices by 1 percent (ina declining price market!), and alterthe order process to make last-minutechanges cheaper to effect. The result:more volume at a slightly higher price while reducing the costs to serve theaccount—all by understanding eco-nomic value and costs. That’s pricingpower.The key to mastering pricingpower is in managing five elements:
You mustensure that you have identified theright target customers—those to which you can deliver real value thatcompetitors can’t match. The value your product delivers must be supe-rior to those competitors for the seg-ment of customers you choose.
Forthose customers you do choose toserve, you must know their businessinside out—the basis for organizingthe entire firm around value deliveryto your target customers. It also pro- vides a foundation for ensuring thateach functional area is focused onthe right activities—the activities thatcreate and deliver value to your tar-get customers.
Value deliveryoften can be augmented by design-ing appropriate complementaryservices. Frequently customers can-not realize full value delivery with-out supporting services—and theability to access those services.Products, services, and channelsmust be integrated.
Once you have identified the right cus-tomers, understood their needs, andcreated products and services thatmeet those needs, you must clearlycommunicate the value of your of-ferings. This sounds easy, but valuecommunication is more than punchybrochures and flashy sales tools. Pric-ing strategy, offering menus, adver-tising, and selling scripts must bedesigned to facilitate it.
Finally, when youhave identified the customers you want, presented them with the rightoffering, and begun sales discus-sions, you must be prepared to closethe deal without undercutting the value of your offering. Especially intoday’s economic environment, cus-tomers will expect—no, demand—that you negotiate prices. Many com-panies give up pricing power innegotiation, and it’s a slippery slope:If powerful customers are able to ne-gotiate significant concessions, beprepared for all of your customers todemand that low price. How do youregain power in the negotiation pro-cess? By returning to your value quan-tification, compelling customers toacknowledge your value and forcingthem to trade value for lower prices.Performing well on these fivecomponents will set the stage for re-gaining power to control your pric-ing. Each of these five componentsbuilds on previous activities. Thinkof them as steps on a roadmap to value-based pricing. If you fail in oneof the earlier steps, it’s like taking a
Quantifying that impact wasa key first step in regaining pricing power.
Just when he had conquered his fear of the wine list,the water sommelier appeared.