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Encourage Price Test Proposals

Jun 27, 2008
As with improving customer benefits at similar price levels, you need to focus your organization's thinking first on producing solid pricing test proposals. Watch out for the tendency for everyone to want to defer to those in sales for price-adjusting tests. Although sales people will certainly be a good source, they will often not know about key operating factors that should influence your thinking.

An alternative approach is to built multi-functional teams (at least one person from each function) to develop price-testing proposals that will improve your competitive advantage. The more people who can filter their thinking into these teams, the more you will learn. But don't make the teams too large, of they will get bogged down.

If you have good relations with partners and suppliers, have them involved as well. You can also hold discussions with customers to understand the problems that pricing causes them now.

One business-model innovating company found that its pricing methods (not its prices) were by far its biggest barrier to improving customer relationships. A typical installation came with over 40 pages of invoices. How would you like to check through all that looking to see if you got all the little bits of wire that you were being charged for?

The following questions are intended to simplify your search for price-based business model advantages. Use them as starting points to creating your own questions that fit your situation the best.

How can you change the structure of your pricing to make it more attractive to buy increased volumes over what is purchased now from you?

In answering this question, you want to focus on making price disappear as much as possible from being a factor considered in purchase and usage decisions. You may find Disneyland's use of multiple-day and annual passports to encourage people to return after the first visit to be a good metaphor. What can you do that would work even better?

How can a new price structure reduce your costs?

This question will be a very fruitful one for you. It requires understanding how your current pricing policies affect your costs. For example, many companies offer large specials at the end of fiscal quarters, especially the fourth one. Operations incur extremely high costs to handle these volumes while sitting empty during the early weeks of the quarter. How would your costs shift if you had a steadier load on operations?

You may also offer expensive customer benefits that everyone doesn't want or need. If these are costly, can you charge extra for them and drop the base price for those who don't need them? Again, remember that your standard costs will not tell you the story. You need to look at the economic reality of how you operate. Activity-based costing is designed for this measurement purpose.

How can changing your price structure make you more attractive to customers in non-price ways?

Can changed pricing make it more convenient to work with you? If people won't be charged every time they call you, you may get more chances to sell them more business while being an on-going service provider. Can changed pricing make scarce resources more available to those who need them the most? Can pricing improve your image?

How can a different price structure both reduce your costs and make you more attractive to customers?

No, this isn't the same as the last two questions. But by having first answered them separately, your mind will be primed to locate opportunities that combine both kinds of pricing benefits.

How can an improved price structure make better use of your resources?

Almost every organization has resources that are idle and potentially available, incurring costs, for some portion of the 24 hour-a-day, 7 days-a-week world. People are awake and working or playing then somewhere on the globe. How can you use pricing to attract and provide offerings for those who would use your idle or under-used resources?

How can a better price structure expand the market faster?

Answering this question often requires understanding how your offerings fit into the customers' and end users' worlds. At many points along the line, the way you price your offerings inhibits purchase and use.

How can you turn that around so that pricing encourages purchase and use? For example, you could have discounts that reflected such low marginal costs that almost everyone would take the offering.

When America On Line (AOL) first shifted from a time-related charge to a fixed fee for unlimited usage, the market expanded so rapidly that AOL struggled to keep up with the demand. A similar thing happened when AT&T's cellular services put its One Rate plan in, that meant your price-per-minute for long distance calls was always the same.

How can we use the timing of price changes and price structure to assist in gaining market share?

Obviously, timing such breakthroughs to occur at times when you have plenty of spare capacity and your competitors don't is one such option. Be sure to think about that question because companies that employ new pricing models are often surprised by how much their volume increases. If you aren't prepared, you will have just caused a period of unhappy customers and ridiculously high costs as occurred both at AOL and AT&T.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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