by John W. Myrna
You are vulnerable to inappropriate price comparisons and perhaps to the loss of customers when a substantial portion of your company’s true value is hidden from customer view. Here’s a cautionary tale to illustrate how this happens, from a time early in my career at Scientific Time Sharing Corporation (STSC). In 1969, STSC was in the business of developing and selling access to what was at the time the most powerful IBM computer mainframe. We billed customers for the number of minutes dialed into our centralized computer, the number of mainframe CPU seconds consumed, and the bytes of data they stored.
I thought our prices reflected the value our customers received—I was wrong! The true value was STSC’s ability to help them quickly develop custom applications and support them through its extensive network. STSC developed applications free of charge but collected fees when the programs ran. STSC’s revenue grew rapidly by supporting an increasing number of applications. Better support led to more users, which resulted in additional computer time.
For a long time it didn’t matter how we priced our services. Our customers couldn’t afford to purchase and operate the specialized hardware and software required to match our service. Since users were billed for minutes, seconds and bytes, they assumed that was what they were paying for. They were wrong.
Our collective wrong-headedness didn’t matter—at least until technology advanced (and its pricing declined) to a point where our customers could afford to purchase hardware themselves. Then customers leaped to the obvious, albeit incorrect, conclusion that they were being ripped off. They said: “I can buy a disk drive for less than what I pay STSC for a year’s storage.”
I replied that they were actually paying for access to a nationwide application development and support organization at their beck and call 24/7/365. Unfortunately, most customers remained unconvinced—it was too late to change their perception about STSC’s value proposition and have them recognize the value of the development and support services we had always provided for free.
The consequence of appearing to be “too costly” was declining growth in new applications. In good times, our clients focused on developing new systems and capabilities, not on reducing the cost of existing systems. But the back-to-back recessions prompted managers to cut costs. Overnight, outsourced services were targets for cost savings. Applications were brought in-house. The computer time-sharing market collapsed, with service companies failing one after another. STSC, with its misdirected pricing, was an early victim of this shift.
A partially unbundled pricing strategy has a dark side.
Your company’s value proposition may include non-obvious features like:
- The extra capacity required to handle surge and emergency orders.
- The quality assurance that eliminates the need to inspect.
- The senior technical staff that can troubleshoot products and services.
They provide value, albeit intangible, for your customers and create additional operating costs for your company.
You will look overpriced if you allow your customer to do price comparisons without factoring in the value of these features. If the customer insists on ignoring “intangible” features, you have no choice but to sell 100 percent unbundled services priced separately.
Your executive team must understand which elements of your products and services are truly valued by your customers. Understanding what is valuable to the customer today not only enables smart marketing and pricing, but also motivates every team member to support the established approach.
Be aware of efforts to diminish your value proposition.
One of the most insidious pricing-related ways to lose key customers may work as follows: Every few years, one of our clients—let’s call it Service Company Supreme or SCS—comes under price pressure. One of SCS’ customers hires a consulting firm to help them improve profitability. The consultant bombards that customer’s vendors, including SCS, with endless questions about how long it takes to perform each step in delivering the service. The consultant then conceptually unbundles each vendor’s service, identifying each step that costs more than a competitor’s or that the consultant considers valueless. Then the consultant insists that all vendors should reduce their price to match the analysis.
Since it is unreasonable to expect a vendor to provide a high-value service at a dramatically reduced price, the only response may be to totally unbundle your services. Update your service agreements to make explicit what clients receive for the reduced price. Establish charges for anything outside this service agreement. Hardest of all —charge for everything—which may mean instituting monthly minimum charges or additional charges for services such as documentation, design engineering changes, and other types of support.
Changing your company’s pricing and service culture is a challenge.
You can’t successfully implement a strategic decision to “charge for everything” when employees are driven by a culture that emphasizes doing “whatever it takes to make the customer happy” regardless of cost, or when they frown on “nickel-and-diming” the customer.
Your company’s pricing culture has a direct impact on how employees prioritize their daily activities. If nickel-and-diming is what it takes to remain profitable, then you must re-direct and supervise employees’ daily activities until they internalize and incorporate approaches that support the new priorities reflected in the new pricing structure.
The recent recession has dramatically changed the value proposition of many industries and companies. Get your executive team together and revisit your corporate strategy, including pricing. Start by making sure everyone is on the same page regarding your strategy. Ensure that your understanding of your value proposition correlates with your customer’s reality, and remember that you must change a customer’s perception of the value proposition before they raise an issue. Keep your value proposition in front of the customer at all times, and don’t allow that value to be obscured by the mechanics of billing or consulting shops’ profitability analyses.
John W. Myrna is a management consultant and cofounder of Myrna Associates Inc., a company that helps organizations thrive by designing new strategic plans, formulating actionable tactics, and evaluating workforce performance against those plans. His most recent book is The Business Expert Guide to Small Business Success (Business Expert Publishing, 2010), to which he contributed chapters on strategic business planning and implementation. He can be reached at firstname.lastname@example.org or visit Myrna.com.