In the 1970’s, a Swedish manufacturer of mining equipment, sold worldwide, could not supply a much needed rubber grommet for its hard rock drills. When the situation became desperate, one resourceful area manager went off in search of an adequate replacement, in order to keep the customers’ drills working. After a few enquiries, the area manager was directed to a rubber component manufacturer in Vancouver. When he produced a much worn example of the grommet and asked if they could make this for him, he was astounded to be told that they had, in fact, made the original he had in his hand. He was even more astonished to learn that the over-the-counter retail price to him was less than 10% of the price he would normally have paid the mother company. Based on cost to manufacture, this small item warranted a low price. But in a drilling equipment application the replacement grommet was costly simply because it was a microscopic portion of the total machine price and an even tinier percentage of the dollars per hour lost when the grommet failed and the machine stopped producing. Therefore, the price reflected not a cost to make, but need in that market segment.
A common mistake made by business owners is to assume that their purpose is to set a price for a product rather than for the customer segment. Identical products or services can be sold at many different price and profit levels.
In a current example (2012), the price of rare earth metals has risen as China restricts exports. Niobium is essential in every cell phone on the planet but the sharp rise in price has not had any impact on the price of cell phones. This is because only a ¼ of one cent’s worth of niobium is used in each phone. Sellers of niobium, whose customers manufacture cell phones, have vastly increased prices and profits but the price of cell phones has not risen.
Purchasers can and do evaluate your product or service in terms of reputation, durability, reliability, after-market service, freight costs, installation, inconvenience, and payment terms. Your business and your sales offering, need to address important factors like these, in a way that means something to the customer. Otherwise price becomes the sole, only and determining factor that makes a customer buy from you instead of the competition.
The following three steps, with accompanying examples, illustrate how to do MISSION IMPOSSIBLE. Every businessman’s dilemma can be overcome using innovative solutions and will result in increased sales, increased profits and more customers.
Analyze your customer and press the hot button
In 1954, DuPont introduced a new polyethylene resin used in pipe manufacture. Until that time, all polyethylene pipes had been made from a by-product of off-grade resin. While the new pipe looked exactly like pipe made from off-grade resin, it had a longer life than competitive pipe material and could withstand greater pressure.
After the product’s shaky entry into the market, DuPont developed a strong promotional program for the new pipe which communicated its notable benefits. Sales grew strongly despite the fact that extruders sold the pipe for between $9.50 and $13.00 per 100 feet vs. the $5.00 to $7.00 price for pipe made from typical resin. This price ratio, almost 1.9, is greater than the ratio of the relative life spans of the two types of pipe.
But there was a secret in this strategy’s success. In a typical use of this pipe, a farm application, the pipe goes underground. It is clear that if the pipe bursts, it would have to be dug up- a time consuming and expensive chore. The value or utility of the pipe was greater precisely because the salesman focused attention on the pain of having to dig up burst pipes more often than was necessary now that new pipe was available. The sales programme was successful because it pressed the hot button labelled “dig all day in the cold mud looking for busted pipe”. At that point, the price difference became irrelevant.
Market the BENEFITS not the features.
Unless your customer is an engineer, the latest product specifications are gibberish. Your new resin, new alloy or new gadget must answer the WIFM question if it is to be sold. WIFM = what’s in it for me?
It could be new drill bits with titanium points. They are harder and can drill longer without sharpening. But that has to become a tangible benefit by translating from “longer between sharpening” to 14% more holes drilled. At that point, the potential user will price out his down time for drill changes first and then secondarily the cost of re-sharpening. Price takes back seat to the cost savings.
Before setting price levels, examine the customer perception of what is a cost.
One manufacturer of laboratory instruments was plagued by a high number of very small orders for a limited array of repair parts. On analysis, the product manager found that end users were annoyed at having to place these small orders because the administrative and shipping costs were greater than the parts prices. Furthermore, the manufacturing company was losing money on the parts for the same reason.
Even more costly, customers were upset at the downtime caused by not having the correct and low value parts in stock. A few customers, with a multitude of similar model instruments, seemed capable of keeping the right mix of parts in stock but others, with limited experience, could not develop good inventory rules. To alleviate the problem, the product manager developed repair kits with an assortment of parts and offered them to customers using a wide variety of instruments. The company’s picking costs went down, average invoice value went up, profits went up, shipping costs went down, and customer satisfaction increased because instrument down time was minimised.
There are 3 common threads in all these examples.
In each, someone has done a careful cost benefit analysis from the CUSTOMER POINT OF VIEW. Even if the customer cannot articulate it well, the salesperson painted a vivid picture of the annoyance and costs of repeatedly digging up pipe, idle production because the right repair part had to be ordered, or down time costs whilst changing drill bits.
Secondly, the penalties were identified first, not the price. Price was introduced after the benefit picture had been painted in stark, primary colours
Thirdly, the price matched the customer specific situation and was MORE than would have been invoiced based upon cost and mark-up formulations.
Want to turnaround your business? Then develop an innovative pricing strategy.