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Leveraging profit by value-add – pricing in a shrinking market

May 28, 2010
Image of 1970s Charles Atlas advertisement

Charles Atlas - Impressing the girls apparently came easy with the added value provided by Charles Atlas. The swimming trunks cost extra...

Yesterday on A Brand Day Out, we talked about the importance of honesty in marketing and pricing if customer relationships are to be sustained. In a recessionary market, however, an additional problem is created by shrinking budgets; it is incumbent on companies therefore to understand – and convey – their products’ value if profit is to be maintained.

It’s a general rule of the product life cycle (PLC) that there is a shallow growth curve of innovators followed swiftly by early adopters and followers. Following that of course is the plateau phase and then either a decline phase or a decline followed by a lower plateau and so on. For subscription/membership products, this is an issue of product management; for single-purchase products, the PLC  is a source of stress as alternative products have to be produced constantly to moderate the bumps.

Some problem. It gets worse: as economies and populations shrink, so the pressures on revenues tightens. Sales and marketing teams attempt to fight decline by encouraging sales volume via lower price. This may create more sales but often at the expense of lower margin. This creates further stress. Often, the result of this approach is the bizarre psychology of repeating the process in order to grow further volume. Result: even more stress!

In shrinking markets, the value of a product doesn’t decline only the number of people who are interested in the product. So the answer cannot be a price reduction strategy. Instead, the answer lies in exploring the value offered by products to the customer base. If value is understood, then value-add elements can be created. If these elements are effective, an appropriate pricing structure can be developed to drive higher revenues from existing customers.

What value-add strategies can you implement in your product range? Through a process of internal reviews and customer surveys, it is reasonably straightforward to understand why people buy your products and what they use them for. A value-add assessment, however, must throw away internal perceptions based on long-term malaise and instead return to basics:

  • Why did we make this?
  • Who did we make it for?
  • Do they use it in the way they intended?
  • What is the next best product available?
  • Is there a better product than yours on the market and what makes it better?
  • What ways are they using it which is different to what we thought?
  • Does this usage have future potential or is it simply a solution to current problems?
  • Is there a way we can develop the product to improve its usage?
  • What price can we place on this added value?
  • Is it sustainable by renewal pricing/some form of subscription model?

The key to answering these questions successfully is to be objective in approach and to avoid received wisdom. Unfortunately, many companies thrive on received wisdom and group think and it is difficult to advance beyond the opinion of the sales director or, in some cases, the MD. But for value-added strategies to be effective, an open forum of creativity is crucial. An independent but authoritative thought leader may be required.

As with any pricing decision, however, it is important to assess the value to the company of undertaking the initiative. It is all too easy to offer an online version of a print product, say, and to claim that the added value is increased searchability. This may not be something that is valued by the consumer so you could end up investing disproportionate time, money and energy into something of limited value (certainly not a value which would encourage them to pay more).  Additional questions to consider include:

  • Who are your most profitable customers? Understand your customer segments – who are creating the top 20% of revenues per segment (thinking here of the Pareto principle or 80/20 rule). Remember, customers could be direct customers or trade customers who supply on. In this latter instance, of course, you have a difficulty in reaching the “end user”; market research would be required.
  • Where can you plug revenue seepage gaps? Understand per segment the impact of the price waterfall – where profit is seeping away
  • Is there such a thing as a uniform view of your product? Talk with the segments to understand what they are doing with your product, how they use it and what might be missing. Remember, it may be that some products could be providing all that is necessary.
  • What are the cost implications (production/organisational/personnel) of each solution you create?
  • Is sufficient value created in the add-on solution to overcome the costs and then some?

In the end, a value-add solution for a product must be one which is both logical and credible to the customer as well as to you. Trust in marketing is based on a promise delivered with exemplary performance. So, in creating a value-add solution you need to develop an enhanced product which to the customer is worth the money and which to you is worth the strategic effort (investment, higher profits, greater segment profitability).

If a value-add is created which does not add value but merely beefs up a product (and its price) then a customer/value disconnect will occur. This will create loyalty corrosion and you will be back where you started: reducing prices in order to generate revenue.

As always, the customer’s needs come first. Deliver value to customers by superlative performance in excess of that currently delivered, and you will have a stronger product both for your needs and the customer’s. A true win-win situation.

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2 Comments leave one →
  1. jacqui permalink
    March 14, 2011 7:38 pm

    Hi Mike love your blogs all good stuff. Also think you’ve got to ‘catch the curve’ before you hit the product dip over the prod lifecycle, and have planned your extension strategy. Good knowledge of when dips over time occur, and a prod devt team that’s in place to process the next steps. Prod devt team prod experts not yesmen group thinkers and certainly not the sales director (!). All in the planning as you say and market /user understanding. Also user feed back loops – proactive strategies to get feedback / build value added/ get feedback / grown prod life/ etc in a virtuous circle of happy productivity and increased rev. I think though it’s been a long time…

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