This week’s Wall Street Journal contained an excellent article on the subject of pricing strategy that I highly recommend reading. The main point of the article is that most companies are going to achieve better results by competing on performance not price.
Figuring out how to do this is the tricky part. Your ability to charge a premium is directly correlated to your ability to improve your product in ways that your customer finds meaningful (seeking a high fidelity position).
The article discusses how a global chemical company evaluated which products they could develop using a performance pricing strategy:
To be considered for performance pricing, an offering had to meet two basic tests. First, it had to have either a strong competitive position in its market or a highly ranked benefit to the customer (benefits were ranked, from low to high, in three groups: offering low acquisition price, helping reduce operating costs, and improving sales by enhancing quality). And second, the product had to be manufacturable at a cost that yielded attractive profit margins.
Besides giving a good case study example, I really like how the article advocates for a continuous process of customer benefit research. Finding benefits that resonate with your customers are the starting point but can’t be looked at as a one time event.
From the article’s sidebar discussion on mistakes of poor pricers,
The first thing a company can do to help itself identify and communicate new areas of value is to create a system for reliably gathering and analyzing data on every product and service for every customer—basically, what each customer wants more of, and how much that will cost to deliver. That’s the foundation for coming up with a new value proposition that your marketing and sales people will understand and embrace.
Over time your customer is going to be influenced by competitors and new market trends demanding you keeps pace if your product is going to continue demanding a premium. If your offering is stagnant, you could find your premium features relegated to entry level expectations or even worse, completely inconsequential.
John Furgurson has a insightful post on the Brand Insight Blog on being an authentic brand. I like how John works to clarify why authenticity is so important and such a challenge. John comments,
I think the general public believes that marketing — by definition— is not authentic. Guilty until proven innocent! And if someone sniffs even a hint of corporate BS they’ll blog about it, post negative reviews and announce it to all 7,694 Facebook Friends.
Being authentic means staying focused and saying no once in a while. The more you diversify, extend your product line or tackle new target audiences, the better chance you have of alienating people. In a down economy it’s always tempting for small businesses to branch out. You take on projects that are beyond your core competencies, because you can. People trust you. Then if things go south you lose some credibility. And without credibility there can be little authenticity.
One of my favorite examples of authenticity comes from the burrito chain Chipolte. Right from the start of the company, Chipotle’s focus was on creating the best, freshest product possible. They even went as far as to design their restaurants so that all the fresh food was easily visible to the customer and made the kitchen in plain site so there was no mystery behind how the meat was cooked.
As the company continued to grow, so did the commitment to building as fresh a burrito as possible. Here is a summary time line of the company’s efforts:
Chipotle begins serving naturally raised pork.
Chipotle opens first green building at Brodie Lane & 290 W in Austin, Texas.
Chipotle begins serving naturally raised chicken at a few locations.
Chipotle opens in New York, and all meats served there are naturally raised.
Chipotle begins serving about 10% organically grown black and pinto beans.
Chipotle opens second green building at 8th & Congress in Austin, Texas.
Chipotle converts to frying oil with 0 trans fatty acids long before it became an industry standard.
Chipotle increases its percentage of organically grown black and pinto beans to about 15%.
Chipotle implements plastic and glass recycling in 70 restaurants.
Chipotle serves 20% organically grown black and pinto beans.
California Avocado Commission endorses the avocado sustainability program developed by Chipotle.
Chipotle increases its percentage of organically grown black and pinto beans to about 25%.
Smithfield, the country’s largest pork producer, announces the gradual elimination of sow stalls, credits Chipotle as inspiration.
Chipotle begins serving sour cream free of the synthetic growth hormone rBGH.
Chipotle begins to purchase some of its produce from local farms.
Food With Integrity is what Chipotle’s calls it.
I call it a consistent commitment to being authentic.
There are certain pieces of data that cannot be efficiently or effectively collected with qualitative research, either due to the sample size required to get a trustworthy answer, or because qualitative techniques introduce an unacceptable risk of observation bias in emotionally charged questions.
The challenge is to go deeper on what the customers are requesting. This is where customer feedback is not the final answer. Rather, it’s an important clue as to what “job” your customers are hiring for.
Surprisingly, compensation is not necessarily the reason many people opt to participate in these types of market research studies. The fact of the matter is people want a voice. They want to feel important and are excited that an important market research company values their opinions and thoughts.