Quick guide to intelligent pricing structures that create win-win scenarios for buyers and sellers
August 23, 2023
Business executives are very aware of our current market reality.
For the small business community, “broken supply chain” is an all-encompassing term for market conditions that make it extremely difficult to navigate your business. It refers to an inconsistent or absent delivery of products or services that are needed to do business effectively in the marketplace.
For the small business community, “broken supply chain” is an all-encompassing term for market conditions that make it extremely difficult to navigate your business. It refers to an inconsistent or absent delivery of products or services that are needed to do business effectively in the marketplace.
The inconsistent nature of this phenomenon means higher costs, disruption to pricing structures, and reduced profitability, all to varying degrees.
Because of this, an understanding of pricing strategy and, specifically, how it can be strategically implemented for your firm’s benefit, is critical for the ability to thrive (or perhaps survive) during these unusual times.
Because of this, an understanding of pricing strategy and, specifically, how it can be strategically implemented for your firm’s benefit, is critical for the ability to thrive (or perhaps survive) during these unusual times.
In any typical historical market, the customer always pays less than the value they perceive, Sometimes they even pay a great deal less.
There are two causes for this.
- First, the seller has set the price of their product or service too low because he or she did not understand (or often even tried to understand) the value the customer perceived.
- The second cause is competition. If your product or service is undifferentiated, your dumbest competitor will set your price. The dumbest will not focus on customer value and will price too low, destroying the market in the process. Thus, differentiation in the form of a unique customer value proposition provides protection from competition. Thus, a combination of customer value and differentiation provides the seller the opportunity to extract the value needed to thrive.
The Foundation: An Intelligent Pricing Philosophy
A good pricing philosophy must incorporate the customer’s perspective as well as the dual nature of customer-vendor relationships. These relationships have a cooperative component and a conflict-ridden component.
The diagram below is a picture of a “real income statement” that attempts to capture this whole relationship. It has three horizontal lines. The top line is customer perceived value. It is the total worth to the customer of all tangible and intangible attributes of the product/service. The lowest line is our firm’s cost to provide our product or service.
The range or area between the cost line and the customer value line defines the “Zone of Possible Agreement” (ZOPA). The customer will not pay more than the perceived value. And the supplier should not knowingly sell below cost (on a regular basis). Price moves in the ZOPA range. Raising the price increases the seller’s profits and decreases the customer’s benefit. The seller’s profit is the driving force to sell, and the customer benefit, the driving force for the customer to buy. As the price goes up, the sale becomes harder, and vice versa.
Setting price in the ZOPA is only a small part of the total pricing decision. But most managers focus on the zero-sum game in the ZOPA and argue about how to balance supplier profit and customer benefit on the price pivot point. More important, however, is how to expand the zone of possible agreement by increasing perceived customer value and/or decreasing costs. Taking this approach increases the spoils for both buyer and seller and turns the zero-sum game within ZOPA into a “win-win” situation for all parties.