Customers don’t buy products; they buy the benefits they get from the products. Customers don’t wake up in the morning and say, “I’ve got N10, 000. Let’s buy some bearings or drills or gaskets or glue or water pumps!” Rather, the customer has a problem (a.k.a. a need) and wants to solve the problem. The customer may need to get new consumers into her dress shop, so she invests not in a newspaper ad, but rather in the newspaper circulation that reaches and attracts her potential consumers. The customer may need holes, so he buys a drill. The customer needs 1,000 holes an hour. The price the customer is willing to pay for a 1,000-hole-an-hour drill is based on the value of getting 1,000 holes, or the cost consequence of not getting the holes. Determining the value of 1,000 holes to the customer is where the super marketer starts. To determine a potential starting price, you must know the value of 1,000 holes. If each hole is worth N50, then the buyer will be willing to pay up to N100.
Price your products or services according to the value the customer receives from the product. Do not price your product based on its production cost plus a markup. Do not price your product solely according to supply and demand. (Even the most basic commodities can be differentiated and priced to value. And gouging customers who need plywood during a hurricane may produce short-term profits but will long be remembered by the customer base.) Do not automatically price your product to mirror competitive pricing. Do not price your product below cost.
Pricing to value is a marketing strategy. This strategy is grounded in understanding the customer. Pricing to a target gross margin is a manufacturing cost-recovery strategy and has nothing to do with the customer or the marketplace.
Invariably, target gross margin pricing, which is by far the most common approach, misprices the product, often forfeiting significant profit. Manufacturing-driven companies often automatically pass any improvements in cost on to the customer via lower price. There are times when competition makes this practice necessary. But it should never be automatic. In pricing to value, manufacturing costs are irrelevant. It doesn’t matter if you make the product at zero cost. You price to value. If your price to value is lower than the cost of manufacturing, drop the product from your line. If it is a new product and cost exceeds value, don’t launch. Kill the product.
Pricing to value requires good customer knowledge, monetization skills, and courage. Most marketers are afraid to price the product to its real value. They are afraid the price is too high. They don’t know how to defend the price with the sales force (too many of whom prefer to sell on low price), or with the trade (which does not know to sell value).
The marketing superstar does not fear the price. The marketing superstar constantly educates the sales force, the channels, and the marketplace to the real value of the product.
When customers understand the actual value, price is just a detail.