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.