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Monitor When Lost Power Set Prices

Monitor When Lost Power Set Prices

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Published by: quizzy226 on Jun 20, 2008
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11/08/2012

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W
e’re all still watching our wallets.The economy, if no longer in freefall, remains weak, and consumersand corporate buyers alike are closely eval-uating every purchase they make.Competition comes from everywherenow, and in the race-to-the-bottom-line eraof Wal-Mart, your rivals are more aggres-sively courting the same business you want(and used to own). Indeed, competitors younever used to see are scrambling for or-ders—regardless of profitability—to avoidclosing plants and laying off employees.Not exactly a prime time to raise prices,is it? Both consumers and businesses arefinding it easier to comparison-shop not justnationally but internationally—not to men-tion that your corporate customers are fac-ing the same economic pressures as you are.If they don’t believe that
they 
can raiseprices, why should they allow
 you
to?But there’s no reason to feel powerless.The belief that you’ve lost pricing power isbased on incorrect assumptions about themarket, your customers, and your competi-tors. Ask yourself:• Have we quantified the value of ourproducts, in dollar terms, to each of ourcustomer segments? Have we comparedthis value to our customers’best alter-native in each market segment?• Do all customers in each market seg-ment completely understand the valuewe provide versus competing offers?• Where our offering is superior—i.e.,more dollar impact than the competi-tion—do we negotiate in a way thatcompels customers to acknowledge it?• Do we have a price menu clearly layingout the customers’options and choicesand pricing policies to ensure they cannegotiate everything (options andchoices) except the price? Are thesepolicies followed by the entire organi-zation and enforced?If you have to answer “no”to each of these questions, you have indeed lost pric-ing power, and it’s only a matter of time untilyou are out of business. For everyone else—you have more power than you think.
How Much Are Your ProductsReally Worth?
One of our clients was up against thewall, selling what management believedwas a commodity product into the automo-tive sector. The industry had significantexcess capacity; many competitors weredesperate for new business and were pric-ing accordingly—low, low, low. Manage-ment felt that the company’s product of-fered no more than those of these smallerplayers; the only way to compete was, evi-dently, matching their low—fatally low—prices.We began by looking at a few of the com-pany’s major auto-parts customers. Someof these customers were startlingly costlyto serve, frequently demanding last-minutechanges and placing rush orders. To ourclient, this meant significant internal dis-ruption, but the cus
tomers never noticed aproblem—it was the way they had alwaysdone business.
When You’ve Lostthe Power toSet PricesWhen You’ve Lostthe Power toSet Prices
By Cameron C. McClearn
 AMERON 
C. M 
 LEARN 
is a principal of Strategic Pricing Group Inc., a Waltham, Mass.-based consultancy.
 
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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:
Customer targeting.
 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.
Customer understanding.
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.
Offering design.
 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.
 Value communication.
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.
Negotiation.
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.
 
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turn on a dead-end road: You’re mov-ing but you’re not going anywhere.For example, if you choose the wrong customer segments—enteringa blind alley where you cannot de-liver value—nothing else you can do(understanding those customers,communicating with them, design-ing offers, and negotiating) will make you competitive and profitable inthat segment. You need a new map. What follows is a definition of each of the five critical steps on the value-pricing map—and where manycompanies go wrong in trying to fol-low them. When you navigate yourbusiness along this map, you’ll regainpricing power.
Poor Customer Targeting
Customer targeting is both the firstarea in which to lose your way andthe easiest way to maneuver into adead end—particularly for firms ag-gressively trying to grow revenues,since gaining unprofitable share andrevenue is a dangerous path. Ex-panding to serve more of the marketshould always be driven by your abil-ity to deliver better value than com-petitors can (we’ll call this unique value) at competitive advantage. Tar-get portions of the market in which you can deliver unique value.Companies pursue unprofitablecustomers for a variety of reasons:pressure to increase revenues, un-used production or delivery capacity(both physical and human), compet-itive rivalries. Several years ago, oneof our clients, a regional cell-phoneservice provider, was in the processof rolling out a digital transmissiontechnology that enabled greater vol-ume of mobile calls with better callclarity. The new technology was nec-essary—the growth of the company’ssubscriber base and density of itscoverage area was severely taxing itscall-delivery capabilities, and cus-tomers were increasingly dissatisfied with dropped calls and intermittentservice. At the same time, our client facedthe entrance of a major national com-petitor with deep financial pocketsand, ominously, a publicly stated planto sustain years of losses in the hopesof eventually becoming the domi-nant U.S. player. The competitor wasentering the market with digital trans-mission technology and promising“free and clear” call quality, a pow-erful message for customers frus-trated by poor performance withtheir current supplier. Because of thedecreasing call quality, some of ourclient’s management team wanted torespond to the competitor by match-ing its price levels. The problem, of course: Reducing price would sig-nificantly reduce profitability—and was unlikely to deter the competitor.New technology required signif-icant financial investment, so maxi-mizing profits from the existing cus-tomer base was critical for fundingthe migration plan. As the dominantregional supplier, our client ownedmost of the market, but an exami-nation of the customer base revealeda serious customer-targeting issue.Our client served two segments:business users and everyone else.For the high-end business user, theoffering consisted of premium serv-ices, feature-rich handsets, and dedi-cated customer support—an effectivepackage throughout the years whencell-phone service was mostly a high-end business tool.In the hopes of expanding its rev-enue base and market share, thecompany had expanded its focusand pursued much more price-sen-sitive buyers such as fleets, taxicabs,and small businesses. These cus-tomers were given basically the sameoffering as the high-end businessusers, but at a lower price. Revenueincreased and overall profit grew,justifying the money spent to pursuethis new segment, even though thesenew customers were less profitableon a per-minute basis.Since profit margins were above50 percent on each minute of talktime, the sales team was given wideflexibility to negotiate deals, and themore price-sensitive customers tookadvantage of that: They were skillfulnegotiators and usually received thelowest prices. Unfortunately, theypurchased only a small number of phones and service contracts andtended to utilize the network moreextensively, congesting it for thehigher-paying customers.The new competitor entered themarket and, as anticipated, cut pricesaggressively. Its package, with onlyslightly less comprehensive cover-age, contained twice as many min-utes at just 25 percent of our client’sbusiness-package price. Intimidating,certainly, but we saw an opportunity:Our client could use the competitorto fix its customer-targeting problem,by securing the most profitable users,offering a tailored package for someof the more price-sensitive cus-tomers, and letting others go. We proposed a two-target-seg-ment approach. The company up-graded its transmission system andcapacity where high-end businessusers traveled most, and it enhancedcustomer service, including per-sonal service both in customers’ of-fices and at local phone stores. Inorder to get these improved services,customers would have to commit toa multiyear contract, but they coulddo so at slightly reduced rates.For other, lower-profit customers,the company reduced the level of service and raised prices for heavyusage. Contract rates were not offeredto these customers, and some, as
Target portions of the marketin which you can deliver unique value.

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