101 Ways Pricing Is Choking Your Business
#9: Weak Strategic Price Positioning
My friends have been raving mad about this ‘great car wash place’. I never found reasons to drive my jalopy there until a few days ago when i was in the neighbourhood (not that one!). So i thought why not check it out!. Me and my ramshackle we drove into a wash bay, i got out, threw the keys to the attendant and ordered my usual “hey! i need a quick body wash!” The attendant retorted “boss! what about interior cleaning?”. “Naaahhh, i don’t think it is that dusty” i mumbled back before sauntering into the cafe next door.
Two coffees later and have had enough of this black stuff plus i am getting phone calls to come back home. So i make my way back to the wash bay and the attendant pulls up with my car key. I give the car a cursory glance, whip out my phone, fiddle with keys and pay the bill by mobile money…a full Ksh 1,000 (USD10)!
I get into the car and i met a shocker…all the trash i came with is right where it was, smiling back as if mocking me. I lower my window and wave at the attendant to come “boss! but the car is not cleaned inside!” i shout trying to sound polite. “Yeah! (liked duh) didn’t you ordered for a body wash?” he asks. “Yes i did but then the interior has not been cleaned” i shoot back with a shrill voice. He chuckled then shots back “That is it boss, for a body wash we only wash the outside”. This is not making sense, my mouth is wide open by now. I gather myself, slowly roll up my window and drive away…i feel so robbed.
“Jeez!! what kind of service is this?” i mutter to myself, “is this what my pals have been raving about?”. I drive away seething and feeling robbed. Why you might ask. Well i paid a full US$ 10 for a body was whilst i normally pay US$ 8 for a body wash, interior cleaning inclusive of interior vacuuming!
And that was the last i ever wanted to hear of this ‘great car wash place’. So although this place probably gains new customers every other day, i wonder how many stay after comparing what they are paying vs. what they were paying elsewhere. Their approach to pricing seems to have ignored the dynamics of competition on what is essentially a commodity market. Chances are i missed the gist of their value proposition because i was there for only one thing, a car wash. However i couldn’t help thinking about the many competitor offerings they faced, if their product was differentiated enough to command the premium price?
As your consider where to set your prices, it is imperative to think about who are your peers i.e. comparator products and services that serve as a direct substitute to your offering. These comparator products provide baseline benefits that a customer can get by choosing from someone else and not your products or services. Therefore the value these offerings bring forms the Reference Value — the light grey bar in the fig 1. below. for any price differentiation for your products or services. In my car wash example i could get a body wash, an interior clean and vacuuming for US 8. This was my reference point in evaluating the services i received from ‘this great car wash place’
Next you must identify and quantify the features and benefits in your products/services that will create more value for the customer relative to the reference brands. These are what we term as Positive Differential Value (PDV) drivers — the dark gre bar in fig 1. below. It is these (PDV) drivers that allow you to charge a premium price over competing offerings. In our ‘great car wash place’ example i can only count the few meters of location advantage to this portion of the matrix…now that i google it is not that much and perhaps the presence of a cafe bar (the coffee wasn’t that great either) and free wifi (that i did not use!).
At the same time identify and quantify where your products lack certain features and benefits, these we term Negative Differential Value (NDV) drivers — the red bar in fig 1. below. In our example these negatives include not cleaning the interior, not vacuuming the car and the rude staff (IMHO)!
The sum of the PDVs and the NDVs drivers forms the Viable Pricing Range (VPR) — shown by the green space in fig 1. below. The VPR denotes the range within which you can price your products and services.
When the negative differential is higher than the positive differential value then you should price at a discount vs. the reference products or services. If on the other hand positive differential values are higher than the negative differential values, then you could price at a premium vs. the reference product. Please not i say could because this is not the only condition precedent to premium pricing.
So in our ‘great car wash place’ example, it was very clear to me that their negative differential value was higher than they positive differential value and therefore they need to price at a discount i.e. lower than US$ 8 i pay elsewhere for them to win my custom.
