Mastering the Art of Pricing Based on Value

If you set prices strictly by the numbers – adding a fixed mark-up onto costs – you’re ignoring a key factor that can dramatically improve profits. The missing element is consumers themselves. Stated another way: What are your customers willing to pay you for a kitchen or bath?

Consumer-focused pricing strategies are the subject of The Art of Pricing, an easy-to-understand book by Rafi Mohammed, a director at Simon-Kucher & Partners, a pricing and strategy consulting firm. The author describes pricing as an art, not simply an accounting exercise, that involves understanding and capitalizing on the fact that different customers are willing to pay different prices for the same products and services. It depends on how much they value what you offer.

“The right way to think about pricing is as a series of strategies that serve (and capture different profit margins from) customers with different product valuations,” Mohammed explains.

A few minutes on eBay or at an auction will drive home the concept of what Mohammed calls a “multi-price mindset.” People spend money on different things according to how much they value them. The author relates, for example, how he happily paid $5,000 for a lime green sofa because to him, it was “hip.” Other people (myself included) might pay $5,000 to have a lime green sofa hauled away to Goodwill.

Pricing strategy is all about getting inside the minds of different types of prospects to determine what they perceive to be the best value for their dollar. Never mind that your supplier provides an all-wood hand-glazed cabinet for 10% less than the competition. That’s value in your head, but not necessarily in the customer’s.

“No matter what product or service you sell, every pricing decision you make should be based on the value the customer places on your product,” Mohammed urges.

KNOWING YOUR CUSTOMER

Mohammed describes a neighborhood restaurant trying to decide whether to charge $18 or $30 for an entrée. The problem is, that’s the wrong question to ask. The question should be: What are my customer segments and how can I serve them with a variety of pricing?

The restaurant might have early-bird specials, a limited offering of menu choices and dining times. But they attract customers who are willing to make the trade-offs and, in doing so, bring more profit by increasing volume during a down time.

Do you have the equivalent of early-bird customers? During slow times could you offer a limited selection? A few popular door styles in a line you can work with easily, efficiently and reliably? Could you offer the package between Thanksgiving and Christmas? Or during the Fourth of July week? Or the first two weeks of January?

This is not taking jobs below cost to keep the doors open. It’s serving a new market segment who might not pay as much as others, but who can profitably smooth out the cash flow between bigger jobs.

“Won’t all of my customers take advantage of this?’ you may be thinking. No, because not everyone will place the same value on this offering, or be willing to make the same trade-offs.

At the other end of the spectrum, a restaurant might have a private VIP room, where customers go for a tasting menu and personal attention from the chef. This consumer segment is willing to pay more because they value the experience.

Following this logic begs several questions: Are you the name designer in your firm? Can you command a premium if customers insist on working only with you? Can you put together a super deluxe experience package that includes hand-drawn and colored presentations, a chef preparing dinner for friends in their new kitchen, and one-on-one “training” in operating new appliances?

If someone is asking for you personally, they are telling you they value you. As Mohammed observes, “You’ll make higher profits from the customers who value your product the most.”

A restaurant might have customers celebrating a birthday or anniversary who splurge on vintage Bordeaux and filet mignon. You have customers in this segment. Is the husband buying this as a “present” for his wife after getting himself a toy? Is the family remodeling in anticipation of a wedding? Is a husband remodeling for a new wife? Is a woman splurging after a big bonus? This segment places a high value on a new kitchen or bath. Your pricing should reflect that.

A restaurant might have special pricing for another segment: senior citizens. Similarly, you might have a special “home resale” package for people redoing a kitchen or bath in order to sell a home in a cooling market. You develop a basic package of cabinets and countertops for a segment that values it not for personal use, but for what it can contribute to their financial goals.

You might have customer segments that value peace of mind, or service, or convenience. For them, you can develop a package of extended warranties; or have a full-service plan for selecting and supplying all additional products such as tile, wallpaper, lighting or flooring; or charge more for someone who values the convenience of meeting evenings or weekends when you are normally closed; or have a concierge service for homeowners especially sensitive to the hassles of remodeling. In that last example, you’ll clean out and pack up their current kitchen, take the castoffs to Goodwill, provide maid service after the project is completed, and put everything back in the new kitchen.

Such segment-focused pricing works especially well in most parts of the kitchen and bath industry because our product/service mix is not “transparent” – that is, easily comparable.

HANDLING REFERRALS

Some of Mohammed’s advice may go against the grain of how you’ve always thought about pricing. Take referrals, for example. Mrs. X has been referred by a good customer, or an allied professional, and seems enthusiastic about working with you. Do you trim your prices a bit for “good will,” assuming she, her friend and the allied professional, will all be appreciative and refer others? Not necessarily.

Mohammed calls good will “one of the most overrated words in pricing,” saying, “(it) may make you feel better but it doesn’t ensure customer loyalty. Instead of offering goodwill discounts, think of your best customers as prime targets for collecting additional profits.”

The referral customer assumedly places a high value on your products and services. The same principle would apply when a customer comes back for another project.

In a business like ours, with an infrequent purchasing cycle, price does not play much of a role in repeat business. “I’m not going to get my taxes done more than once a year, even if my accountant is cheaper,” Mohammed points out.

Mohammed admits, “Managers are often uneasy…because they feel they are taking advantage of their best customers, and this uneasiness prevents them from using a multi-price mindset. As a result, they forgo hidden profits.”

Instead, he encourages kitchen and bath design firms and others to “stand up and charge prices that reflect your value…you have to make peace with the idea that you can be a nice person and still charge the prices that you rightfully deserve.”

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