Pricing Power – It isn’t what you sell, but who you sell to and why
Pricing power is more often a function of who you sell to not what you are selling. The same item for one customer may be worth 10X more to another dependent on motivation to buy [their why] and how the product or service will be applied and who ultimately pays for the service.
This “36 cubed” market model was developed a number of years ago to explain price variations and potential pricing opportunities at a key account level.
Its power is derived by evaluating how the customer perceives your products and services not how you classify them.
Customers may perceive you to be a commodity provider and thus low-status vendor relegated to the tactical purchasing quadrant. [see the previous post on tactical quadrant dynamics]. Our relationship is highly transactional. The pie is often seen as shrinking and there is great debate about what share of the pie each party will get.
This business is primarily won on price. It is also easily lost on price.
Other customers may see as a supplier – a provider of some strategic importance and being able to offer more than transactional arrangements. You may provide operational reports, technical assistance additional products or services or some form of customisation.
This business is won with a combination of competitive pricing and compelling service/quality offer.
In this customer dynamic, your agreement and value with the customer are deeply integrated with the customer’s supply chain. There is a focus on mutual driving value and sharing of IP to drive cost out of the business but not at the expense of margins for either party. There may be pricing discussions, but they are aligned with mutual goals to grow the pie.
This business is earned by way of value creation and generation of more value working together than working alone or with a 3rd party alternative. It is neither won nor lost on price.
These 3 types of customers, Vendor, Supplier, and Partner come in many shapes and sizes but they can be classified and small, medium and large major accounts using simple distribution curve to work out the relativities and size cut-offs for each category.
You can then classify these businesses as either:
- “Potential” – yet to be a customer
- “Lost to competitor” – we had them but lost them
- “New less than 12month sold” – we have recently won this business
- “Long Term” – greater than 12 months.
Go through and classify all of your customers into one of these 36 market segments or “cubes”.
Now analyse the gross margins for each market segment [or potential gross margins in the case of the potential customer segment].
- How much is $ gross margin opportunity available in the partner and supplier potential segment?
- How much time was spent cultivating this segment?
- How much time was spent dealing the headaches generated by the small and mid-size low margin Vendor grade customers?
- What is the opportunity cost of dealing with Vendor grade customers?
Your pricing power is dependent on who you sell to not what you sell.
PRICING & NEGOTIATION STRATEGY
To undertake professional development of your team please make a booking via the Pricing Insight website to discuss your specific commercial requirements.
For the past 10 years Pricing Insight has worked with a range of Australia’s leading building materials companies to develop effective pricing and negotiation strategies to drive revenue and margin expansion.
These companies include: Adelaide Brighton, Carter Holt Harvey, Capral Aluminium, GWA Doors and Locks, ITW, Liberty OneSteel and Nover Building Products.
We use a range of techniques to identify and generate margins and earnings growth all built from real-world commercial experience.