On a recent podcast, one of our listeners contacted us with a Business Pickle with which he wanted our help. Peter Harvey is in a Business-to-Business (B2B) organization. Their offering does not have the lowest price, and they have no plans to lower it. However, their customers keep complaining. Peter wanted to know what we thought he should do.
Since price is something that can seldom be low enough, I figured some of you face the same issues, and I would share our advice here with you.
Too many organizations don’t have a pricing strategy. However, having one is essential for your experience. There is an intersection between psychology and pricing, and there are a couple of different approaches you can take in this area.
In another podcast, we discussed Fernando’s problem regarding distinguishing a commodity from the others in the field. The main point of that podcast was that a critical part of customer strategy and competitive differentiation is to determine how you are different from the pack and communicate that to your customers. These same principles often apply to pricing strategy.
There is a difference between creating value and communicating value. So, my first advice to Peter is to ensure that the organization provides enough value to its customers to justify the higher price.
Also, customers should recognize that value. Nothing is valuable until somebody is willing to pay for it. From a marketing standpoint, perceived value is the only value that matters ever. Therefore, Peter’s company should then communicate those value points so that customers understand what their pricing gets them beyond whatever offer they compare. In other words, if you are pricing your product as a superior product, it ought to be superior in quality, customer service, or performance.
The question then becomes, how much should they pay for that superior performance?
For example, Apple has a higher-priced product than its competitors in the phone space. It is a great product that does many things very well, and it has a perceived value tied up in its brand. However, the iPhone hasn’t always beat the competition in every category. For example, over the years, Samsung’s comparable model has been objectively better in some categories, like memory availability or camera clarity, etc. So in a side-by-side comparison, Apple does not come out on top.
However, what Samsung doesn’t have is the picture of an apple on the back. Instead, people see the brand’s value from design, shared community, or another less quantifiable attribute. Sometimes, superior performance is not a necessity for a premium, or at least it isn’t in every product category—but only if you have a brand like Apple. Many customers, not all, mind you, perceive the iPhone as a better phone no matter what the facts tell them, and they are willing to pay for it.
Getting back to Peter’s Business Pickle, it could be that your customers don’t realize all the value you offer them. Perceptions are inspired by communication. Also, prices could be considered, at least in some sense, a negotiation between the buyer and seller. It might be an actual negotiation in Peter’s position since he is in the B2B space. However, the negotiation metaphor works for a retail situation; the “offer” is the retail price, and the negotiation is whether the customer takes one off the shelf at that price and buys it.
A strategy you could take with this pricing negotiation is an Economic Value Analysis. This term refers to translating all of your benefits into dollars and cents. So, if that is the way a customer is deciding, then ensure that they know what all your offer is worth.
Another option is to communicate how you don’t nickel and dime customers. Instead, you talk about all the services and other perks of your offer. The goal here is to change the conversation away from price and toward the total cost of ownership.
It is essential to communicate what a customer should compare to competitive offers. Often, organizations don’t realize how much customers don’t know about their product category, which can lead to some interesting deciding factors.
For example, I bought an uninterruptible power supply a few months ago. As I was comparing the different versions, I had a list of all the things it would do. The only thing I understood on the list was the amount of time it would give me uninterrupted. So, that’s how I made the decision.
This idea is related to pricing in that I went into the decision process with a vague sense of priorities about what I wanted. I could have just chosen the cheapest one, which would have indicated I was focused on price. However, I didn’t buy the cheapest one (though I am not unfocused on price, either). Instead, I wanted one that would help me the longest in times of emergency. As an inexperienced buyer of uninterruptible power supply products, I chose this one because it was the most straightforward to evaluate.
For the uninterruptible power supply manufacturer with the best of everything in that long list that I didn’t understand but has a higher price and a lower run time than the one I chose, that stinks. But, again, it all comes back to perceived value. The other product was better for me and provided the most value for the price, but I didn’t understand that.
It could be the same for Peter’s customers. That’s why communication about what attributes should be part of the decision process might be an essential step for companies in Peter’s predicament.
So, are you communicating what matters to customers? If not, you should first determine what customers use to decide what to buy and then ensure you are the best on those things. For example, the amount of time an uninterruptible power supply allows one to be uninterrupted seems like an excellent place to start. So, if that’s what people use, ensuring yours lasts longer than the others to justify your premium price is a good pricing strategy.
Another strategy could be educating customers on what should matter to them. So, if the amperage rating is more important in an emergency because it runs more devices, then tell customers that. Give them an understanding of the long list of features they are ignoring.
In Peter’s case, his company could communicate the benefits of the attribute you are superior on over the competition so that customers perceive the value of your product as well as you do. Then, they might be willing to pay more.
Consider this Volvo ad about precision steering:
(ouch)
And this one about toughness:
Besides being fantastic fun to watch, these ads show vital attributes of the trucks that their customers should understand: precision, quality, and toughness. They might not be the cheapest, but they have these attributes for which their customers pay a premium. If these attributes are not worth it, then shop for another truck.
The Curse of Knowledge and What to Do About It
It’s a little bit funny how often firms forget to take the perspective of their customers. It’s a psychological bias called the curse of knowledge.
The idea is that once you know something, it’s hard to remember what it was like not to know it. So, the uninterruptible power supply engineers designed the product well and are proud of the extra amps they squeezed out of the mechanism. However, the company forgot that most people don’t remember why amps are essential and, perhaps most importantly, don’t care about them.
So, to summarize, Peter should communicate value or figure out what attributes are essential to customers and maximize those. Alternatively, suppose Peter is superior in other characteristics. Then, they should ensure they can communicate that, so people understand what it means and why it matters to compare appropriately.
Finally, Peter should ensure that he knows his customers. We did a podcast a few weeks ago about firing your customers. I’m not suggesting that Peter needs to fire his customers, nor was the point of the podcast that you should fire customers at the first complaint they throw your way.
However, it could be that the customers that are complaining about Peter’s company’s high price are not the correct type of customers for their offer. If price is their primary driver of decisions and Peter’s product or service isn’t the cheapest, and there are no plans to change that, these customers are not a good match in the first place. These price-conscious consumers are not the target of the firm’s customer strategy. If Peter spends too much time trying to convince them to stay, his team could be missing out on the potential customers that are a good fit for the offer.
Many B2B companies are focused on price, and some of them even hire pricing consultants to do the negotiations for them. It can be cutthroat, too. However, not every B2B transaction is like that. It is best to communicate about the price if that’s the language of that customer’s decision. However, not every transaction is about price. Finding those customers and communicating your value proposition to them can be a winning pricing and customer strategy if you aren’t the cheapest.
I hope that helping Peter was helpful to you, too. Maybe you have a different pickle in your customer strategy? If so, please tell us about it at www.beyondphilosophy.com./pickle. Perhaps we can feature you on the podcast and help you, too.
There you have it. No promotions, no gimmicks, just good information.
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