When a company has the required quality, the next thing it needs is the price to be able to compete and perhaps this is where the main problems arise due to the lack of creativity in pricing.
Many managers try to manage their companies striving to optimize the departmental for which they develop adequate indicators for each operation, by doing so, the perception of value of a product will be strongly influenced by the departmental efforts required to design, produce, sell and deliver the product.
To calculate a price, we generally rely on cost accounting, assuming that it is something real, forgetting that its true essence is to calculate the cost of the product, and to quantify the efforts absorbed by the product. This means that it is considered that the price of the product must be equal to the cost plus a reasonable margin.
It has always been said that the mechanism for determining prices depends on supply and demand. Suppliers have a fairly accurate perception of the value of the product they offer, so they want their value perception, determined by cost accounting, to dictate actual prices. On the other hand, the perception of market value is related to the benefits of having the product. Rather than talking about supply and demand, it is preferable to show it as the clash between the perception that companies have of the value of the product they offer and the perception that the market has of its value.
While the perception of the value of companies is based on the effort they have had to make to produce the product, the perception of the market is based on the benefits derived from its use. Prices and quantities sold are determined more and more on the basis of the perception of market value and less and less on the perception of value from suppliers, so fully satisfying that perception is the key to success and to compete properly in an open atmosphere like the one that is coming.
It is generally believed that selling below the cost of the product will lead (at least in the long term) to losses, which is why there is a reluctance to accept low margin orders and even go to the extreme of eliminating low margin products.. When you remove a low-margin product, you lose the money you were making from customers who purchased that product. The question is whether what is saved is greater than that amount, because although the variable cost is cut, the fixed cost is not always greatly reduced and worse still many times not even the entire variable cost is reduced.
If a company does not have a bottleneck, and all costs that were part of the calculated product cost are not cut, then it is jeopardizing the company itself.
There is a belief that there is essentially a single fair product price, although different market segments may have different needs, that is, they may have different perceptions of value even for the same product for which different prices could be obtained. Actions must be implemented to ensure effective segmentation, because if a company neglects the search and implementation of those actions, if one segment finds out what the other is paying, it can expect that two segments with different perceptions of value demand to pay both the lowest price,. Actions must be taken to ensure that even though from the supplier's point of view it is the same product, from the point of view of the market it is not, here is the true essence of pricing.
A clear example is given in aviation lines where the price of a ticket depends on when you bought the ticket, where you bought it, if you bought group tickets or individually, time that will be spent at the destination, without none of this is related to the actual cost of transporting a passenger. Recently this segmentation has also been seen in VIP cinemas, where the same movie has different prices, the additional value is on the periphery.
Two sections of the market are said to be segmented from each other, only if price changes in one segment have no effect on the other segment. A company can take actions to effectively segment a market that may seem uniform at this time, as long as this market contains segments with different needs.
When a single price is imposed, customers who have a high perception of value are being allowed to pay a low price and, on the other hand, eliminate customers for whom the price is too high, in relation to their perception of value.. Most companies do not take advantage of the enormous potential inherent in market segmentation. Marketing is not geared towards taking advantage of a more promising course and one that is also almost virgin.
Advanced solutions are desperately needed, if we want to continue competing both externally and locally. It is important to consider customer perception and supplier value perception in order to generate enough sales.
When the market is segmented, profits can be increased, both current and future, even selling with negative product margins. Orders must be accepted due to their function of the impact they will have on the generation of money (throughput) and on operating expenses.
To protect our businesses from new competition, all capacity must be sold at above-average, not below-price. The obvious way is to be able to charge a multitude of different prices, which means taking actions to segment an apparently uniform existing market and sufficiently increase the perception of value that the market has in relation to the company's products.
Since the product is the actual physical product from the supplier's point of view, this vision offers very limited opportunities for improvement, as we all know.
From the market point of view, the product is somewhat broader, including the service that goes with the product, the credit conditions, the guarantees, the place where it is distributed and so it is accompanied. The product is the entire offer.
Despite the fact that nowadays great importance is being given to customer service, the fulfillment of promised dates, reduction of delivery times, if a supplier talks about improving the product, instinctively it translates it into investments in engineering, equipment and enormous amounts of weather. To change the market perception, what needs to change is the periphery, the section of the offer that is not the product itself, which can be achieved without additional investment and very quickly. The market's perception of the value of the product is not the effort to produce it, it is the benefits derived from having the product.
There are two types of benefits, adding something positive or removing something negative. The most powerful way to increase perceived value is to improve the incorporation of more positive aspects, but the easiest and fastest improvements come from eliminating the negative. The client knows him perfectly, there is no need to persuade him that the negative aspects exist. It is necessary to know the client and make sure that they are oriented to their needs.
When it comes to solving customer problems, you should be focused on solving the customer's core problem. Working with symptoms is ineffective, it must be aimed beyond the root causes, it is about correcting the spinal problem.
Lastly, while it is true that a good strategic objective for a company could be to "sell the capacity without reducing prices", another very important objective would be "to have a dominant and apparent competitive advantage", which can only be achieved if it improves considerably the perception that the market has of your product.
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By: Gilberto Quesada for Grupo Kaizen SA Base text «It was not Luck«, by E. Goldratt.
