Honestly, comparing your products and services with your competitors’, are you significantly better? Do your customers praise you for your superior value or do you get into discussions about discounting and claims that your offer is a commodity? Are you just another player in a commodity market or do you continuously strive for differentiation and stand above your cost cutting competitors?
Perhaps there are no easy answers to these questions? Part of your value proposition is probably just the same as your competitors’ while other parts represent your unique selling points. The key questions is how you have managed to price the different parts of your offer? Do you charge for your value add or do you include it in the price of the commodity? Is your pricing innovative or do you copy your competitors?
After more than 300 pricing projects in a significant number of industries, the conclusions are very clear. If you lack innovation you must be better at pricing or you will not make any money. At the same time, if you are innovative, you will drain your profit potential through poor pricing.
How does innovation and pricing relate to each other when it comes to profits? The below matrix is the result of our analysis of completed pricing projects at PriceGain over a period of more than 12 years.
Picture: Profit potential from innovation and pricing
Innovation is mandatory if you want to be unique. It also needs to be a continuous process, otherwise you will gravitate towards a commodity over time as competitors provide the same or an even better value proposition. By innovating your value proposition, your net profit will be much higher than if your offer is more or less the same as your competitors.
What many companies overlook is that pricing can add another dimension to your profit potential. If you use cost plus and you are in a market with normal competition, you can improve your profit by nearly 10 percentage points if you manage to transform your pricing all the way to value based pricing. This is not likely to happen in one move but over a few years it is possible.
Looking at the matrix above, where is your company?
Do you provide a lot of customer value but you complain that you are not paid accordingly? Guess what, you can do something about it. Providing superior value alone does not guarantee better profits, especially if you use cost plus or market pricing. It is even possible that your less innovative competitors make more money than you do since their costs are lower. Are you spending more costs to be better but provide it at the same low price as everybody else?
Are you one of the few that have realized that innovation and pricing are the two most important tools for better business results or does your profit suck? Give us a call or send us an e-mail and we can analyze your situation and determine your profit potential from innovation and pricing!
Av Per Högberg