Whether you are an employee or a business, your value in terms of compensation for services (or in the case of businesses, products and technology) is what you can convince another entity (person or organization or business) to pay you. I have seen highly qualified, experienced individuals who take a job for below market wages. I have seen a person with no experience, no credentials (e.g., degrees, certifications) get paid six figures. The same happens with products and services in the marketplace. If the customer values what you are selling—and you do too—the price is going to be higher than if you are not confident of what your product or service will do for the customer.
In the past year I have watched several companies prepare to take their new technologies into the marketplace for the first time. One technology (Company A) enables the companies that purchase it to extend the life and use of existing multi-million dollar equipment, increase the quality and number of units they can produce by 20 percent, an increase in productive capacity that would normally require at least a $10 million dollar investment in an additional production. If you owned Company A, what would you price a technology that enabled your customer to avoid a $10 million capital investment but still produce and sell 20 percent more product? Would it surprise you that the technology is being sold for less than $250,000 per unit?
Another company (Company B) has been testing its products with clients for the past year. The product is a result of a leap in technology application that has not been seen in over a decade. The customer is projected to need at least $1 billion in the next three years of the new product to change over their operations to the new technology. The “old technology” had a total cost of operation of at least $100,000 per user group. The new technology averages a cost less than 10 percent of the old technology. What is the value to the customer? How would you price this product? Company B is pricing their technology at one third of the “old technology”. This pricing strategy reflects Company B’s understanding of their technology cost structure and the customer’s need to substantially decrease investment costs per user group. What does this strategy do for Company B? It provides acceptable profit and enables them to increase the number of units being sold! The customer can now afford to deploy the technology in every user group if they so choose.
From experience, I know companies that achieve a maximum return are those that can connect their technology, product, or service to what the customer values. If you can make the life of the customer easier, reduce costs, reduce the time it takes to do a job, improve safety, and change the life of the customer, then you are able to set and obtain a price for your product that recognizes the “full value.”
Company A has been essentially “giving away” the value by underpricing what the market and customers are willing to pay. This company, which has a limited niche market, will run out of customers in fewer than five years. The technology that they enhance already has other newer technologies being developed. Right now, the current market would have accepted a price at least twice what they are charging. They have undervalued the technology and limited the return on investment. They will need a new product/technology within five years or will cease to exist.
Company B is at the point of moving from a prototype product into a commercial product. The commercial production will require significant investment in infrastructure and intellectual property protection, as well as sales and support, training, and other support staff. Things like warranties, product liability insurance, and costs will push the costs up, but they will mostly be offset by volume efficiencies. The bottom-line for Company B: If they want profitability, then the customer is going to have to value what they are selling and Company B will need to get the price just right to maximize sales and return on investment.
Here is the key question for you and your business: are you maximizing the value your customer perceives for your product, service or technology? Are you maximizing your return on investment by generating a profit? If not, you need to look at your value message to the customer and your pricing strategy.
Author: Lea A. Strickland, MBA CMA CFM CBM GMC
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