Our book, “Grassroots Strategy: Cultivating B2B Growth from the Ground Up” has just been published, so driven by some combination of curiosity and vanity, we have been somewhat obsessive about checking our page on Amazon.com. We have been somewhat frustrated that while the book is available to ship in less than a week, Amazon’s description says “usually ships within one to two months.” To us, this seems like a great way to scare off potential buyers.
Well, apparently, we are not the only ones who think so. On a recent visit to the site, we noticed that while Amazon lists the new books at our list price of $29.95, there was now an option to purchase a used one for $94.19. That is not a typo, someone is betting that there is a market segment that might pay a threefold premium to get the book earlier.
A little investigation revealed that it is actually a book wholesaler, not just one of our relatives trying to make a buck on a book we gave them.
This strange (and probably transient) pricing anomaly, helped us realize that it is a good time for a refresher on value pricing.
For starters, what is the goal of pricing? We believe it is to maximize the earnings your company receives… Over the life of the offering… Based on the value it delivers to your customers. Note that this does not say that the goal is to maximize the revenue from each unit you sell this quarter – that is what makes value pricing a challenge, and why it will always be a blend of art and science.
Pricing is a critical component for most companies, but often overlooked or taken for granted (as we did with the price of our book). But it should be a continuous balancing act: if you price too low you leave money on the table, yet if you price to high you lose the sale.
The literature is full case studies on different pricing approaches. While there are probably as many pricing strategies as there are articles on the topic, they can all be grouped into one of 4 categories:
- Cost-Based Pricing
- Market-Based Pricing
- Psychological-Based Pricing
- Value-Based Pricing
While it may be easier and faster to focus on cost, market or psychological based pricing, it is always best to invest the time and resources into value-based pricing. In our experience, every other pricing approach starts with the wrong reference point. In a B2B setting, the only thing that matters to the customer is how much value they receive when compared to their next best alternative. This sets a maximum price that you can charge, but remember the goal is not to charge the maximum price, but rather the optimal price over the life of the offering. That is where the artwork comes in.
Feeling overwhelmed? Here are some key factors to consider when setting your price based on value:
- Competitor response: What are some likely competitor responses? How important is this business to them? Does their cost structure give them flexibility to respond?
- Sustainability: How sustainable and defensible is your differentiation over time? Is your differentiation based on IP or trade secrets that will be difficult to copy, or is it merely assembling available technologies in a way that others could quickly copy?
- Impact on customers’ cost: Are you a major expense item for your customers or a small part of their total spend? How do switching costs play into customers’ thinking?
- Impact on the broader business: What else do you or can you sell to this customer? What options do they have to shift their business?
Although your maximum price is the incremental value that your offering provides a customer plus the price of their next best alternative, your optimal price needs to take all of these other factors into account. For instance, even if your offering provides a huge amount of value for a customer, if a competitor could quickly replicate your offering, you will need to share a significant amount of that value with the customer. The goal of value pricing is to figure out how much of the total value created you can keep and how much you need to share with the customer in order to maximize the earnings that your company will receive.
So, back to the book: what could the premium seller be thinking? They seem to believe that they offer something unique (guaranteed early delivery) and that this is important to some customers. In addition, they are probably thinking that their scale is infinitesimal compared to Amazon, so a competitor response is unlikely, and since they are selling on-line behind a veil of anonymity, they are probably not too concerned about the impact on sales of other items.
In short, maybe they are not crazy, they might just sell a few, and if not, there is nothing lost. But also, shame on us; it means we may have underpriced. So, buy the book now while it is still a bargain!