Mark Stiving has a Ph.D. in Pricing from UC Berkeley. He is the author of Impact Pricing and writes a popular blog PragmaticPricing.com. He is consultant and teacher at Pragmatic Marketing, which helps product managers at Fortune 1000 companies define, build and market great products.
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What Is the Customer Willing to Pay?
- What is the most important thing you can share about pricing?
- Charge what the customer is willing to pay.
- It has nothing to do with “cost-plus”.
- Service providers assume they have a cost associated with their time, which is not true.
- Understand the decision your customer is making right before he buys your product.
- Am I buying from you or your competition? (Which one?)
- Will I buy from you or not? (Will I?)
- When you have competition, you have price relative to the value you offer and the value from other providers.
- Customers usually are not price sensitive; providers often underestimate their value.
- The easy way to tell is, once you have won or lost a deal, ask the customer who else they considered.
- Ask it enough and you will start to be able to tell which type of decision the customer is making.
- With a “will I” product, create something unique (no competition), and you can capture more value with the price.
- How do you differentiate yourself so well that your customers do not even look at someone else?
- What is a telescoping focus on pricing?
- At some times, you must have a narrow focus on a specific transaction.
- At the same time, you need to have a broad focus on how you are building and pricing your product portfolio so that you are capturing the value you create.
- A service professional can take a broader focus by reading Mark's blog and book.
- As you see and discover different pricing models, ask if they can apply to your world.
- A company like Netflix makes you wonder if you can do subscription pricing and how?
- Experiment with the ideas you discover and then once you get comfortable, try it.
- Slack charges based on how value is delivered to its customers.
- Companies giving money back to customers will not become a trend.
It is a socialist idea that making profits is a vice; I consider the real vice is making losses.
– Mark Stiving
- What is the meaning of this quote by Winston Churchill in Chapter 1?
- A lot of times, people feel uncomfortable making profits, even though that is the whole point of a business.
- If your goal is not to make a profit, then what is it?
- Based on a corporate goal, you still might be able to use pricing to help with it.
- Chick-Fil-A keeps pricing low on purpose as part of a community outreach goal.
- You have to make a profit to reach toward a goal, even if you are a non-profit.
- Profit allows you to achieve your purpose.
Pricing Fundamentals
- How do you determine when is the right time to discuss price with a customer?
- It depends on what your customer's buying process is.
- If a customer is looking for a price and cannot find it, they might go to a competitor.
- If you provide a price too early, you might lose a customer because he doesn't understand the value you provide.
- Understand the best time to provide a price based on your type of customer.
- When someone asks about price, the answer is usually a big range until you understand more about the project.
- What are the three types of value and how do they help set a price?
- Deal Value
- “I paid a price lower than I expected to pay.”
- Set expectations so that people feel they are getting a “deal”.
- Value in Use
- How much inherent value do you get out of using something?
- Will I?
- Value in Choice
- How much value do you offer compared to your competition?
- Which one?
- Deal Value
- What are some of the most important “pricing fundamentals”?
- Get into your mind that value-based pricing means, “What is a customer willing to pay?”
- Get rid of the cost-plus thinking.
- There is a bias toward cost-plus based on our history. (See Jon Lax or Ron Baker.)
- Our customers may believe we use cost-plus pricing, but it is our job to not use it.
- We are delivering more value than the price that we charge, but if we raise our prices, it is OK to say the costs increased.
- If you are asked for a rate, you can say, “I normally charge $500/hour, but after we talk, if I cannot deliver that much value to you, we might bring that rate down.”
- However, it is much better to not do hourly billing.
- When you can deliver a flat price, it is saying that you understand this, this is what it is going to take.
- The fixed-fee process gives you the option to build product portfolios – good, better, best pricing.
- Your customer has a choice of how much service he wants.
- If you provide only one choice, the customer is more prone to look at competitors.
- Most people do not know what they need, so they usually buy the one in the middle.
- The “good” offering is the lowest price you are willing to accept.
- The people choosing that option are the most price sensitive.
- With the better, best options, people have more willingness to pay.
Determining the Customer's Value Price
- What are the five steps to set a “value” price when you have competition?
- Who is the individual for whom you are pricing?
- Know who your competitor is.
- What is the price of the competitive product?
- List all of your advantages and all your competitors' advantages.
- Put a dollar value on each of those advantages, even if you are just guessing.
- It is how to think about the process of pricing relative to your competition.
- If you have a unique product, then you do not have to go through these steps.
- How much value-in-use can you deliver to your customer?
- How you sell your product can also move you toward “will I”.
- Service professionals have more “will I” customers as what they deliver is always unique.
- What is value-based buying?
- Start thinking about how your customers are making their decisions.
- People look at the two products, and they start with the difference in price.
- Then they ask if it is worth it.
- Replicate the steps your buyers are using when pricing.
- How can you move beyond the fundamentals to “pricing segmentation”?
- Start gathering data on every deal you do.
- What are the characteristics of your customers?
- What are the characteristics of the transactions?
- What drives willingness to pay?
- Collect information on a systematic basis to determine how much people really are willing to pay and then you can use it to price.
- List of concepts that are top of mind in customer and transaction characteristics:
- Industry
- Geography
- Tpe of business
- Funding of the project
- Lead time
- Volume
- Weather
- Time of day
- Time of year
- Delivery during 4th quarter
- Use-it or lose-it budgets
- What is one of your best stories about creating value for a customer?
- Working for a semi-conductor firm, they put in a new pricing/quoting system.
- Buy-in was a challenge and they delivered more than $100 million per year in additional profit.
About Mark Stiving
- Life-long pricing consultant
- Blog: PragmaticPricing.com
- Twitter: @MarkStiving
Congratulations Kirk on the 50th episode milestone! Your podcasts always provide value and practical insights. What you do with show notes sets the standard for other bloggers.
Thanks Kevin! Most of the credit for the show notes goes to our project manager, Susan.
Great podcast series Kirk. I esp enjoyed this one with Mark Stiving (the ones with Lee Cockerell & Blair Enns stand out too – all are so good though!). His thoughts on pricing are quite different than what I have heard before – feels like some new ground. Will take me awhile to unpack all this info – eveytime I hear a new podcast I get so much insight for my service based (brand new, by the way!) business. I feel like I am getting an MBA in value pricing. Thanks much.
Geneve – Thank you for your feedback and listening to the show. The interview with Mark was very insightful. You may be interested in his book: Impact Pricing
http://www.amazon.com/Impact-Pricing-Blueprint-Driving-Profits-ebook/dp/B005DIBA4O/
Thanks Kirk!