This issue features an article by Tim Matanovich that continues on our theme of “adding value.†-DPM ---------------------------------------------------------------------------------------------------------- Pricing Services vs. Pricing Products¹ Don’t buy into the duality myth. Focus on value to the customer. During seminars, speeches and workshops I get the same question over and over and over again. “What about pricing for services?†In other words, how is services pricing different from product pricing? In my experience working with dozens of companies in both product and service sectors worldwide, I have found no fundamental difference in service and product pricing. While I agree there are points of distinction in implementation, at the core there is no difference. Are you selling what the customer wants? The question concerns me most when it comes from traditional product manufacturers, who come from a product orientation. Case in point, in the mid 1990s, Volvo launched a truly revolutionary heavy duty truck product. Trade journals and the public press acclaimed the product. Business week named it a product of the year. At the time of the launch, competing manufacturers were literally shaking in their boots, expecting the worst. Volvo had a shot at doubling their North American market share with a premium priced product. It could have been a financial windfall. Yet 3 years later the firm had gained little share and experienced the same price pressures it had prior to the launch. What happened? In this case, the primary concern of buyers was uptime. When a truck runs it makes money. A truck in a service bay is useless. Sure the firm set a new industry standard for the product, but it’s reputation for service quality and parts availability were atrocious. And when it comes to uptime in this industry, product quality takes a back seat to service quality and parts availability. Perhaps the greatest single product launch in the history of this industry turned out to be a dud. Remember, remember, remember … customers don’t want to buy our products or services. Rather, they want what our products do for them. They want benefits and value. They don’t really care whether it is a product, service, science or magic. At the end of the day, in the Business to Business world customers want growth, lower costs, earnings and the feeling they made the right decision. In the Business to Consumer world, customers want to feel special, empowered, connected, smart and stylish. Focus on solving the customer’s problem, not your own. But we’ve heard the same mantra for the last 20 years. What’s the problem? In part it has to do with our self definition. We think of ourselves as being in either a “product†business or a “service†business and we get stuck. Let me suggest an alternative. Ban the words product and service from your vocabulary. Substitute the word “offeringâ€. When you think about products and services, then, they are simply dimensions of the offering. Look at the GE Power Systems business. The business goes back as far as Edison himself. The product, turbine generators, has remained virtually unchanged for over half a century. Yet despite a slow global economy, this business unit is experiencing record revenue growth. Why? Because they have customized offerings for target segments. They are focused on maximizing value for the customer rather than maximizing product sales. They will sell you a generator, sell you power by the hour, or a host of options in between. They focus on the customer’s problem, not their own. Can you put a dollar figure to the value-add of your offering? But shifting vocabulary from product to offering is only the first step. Business leaders must also discipline themselves to walk the talk. The value of the service component of the offering must be measured and dollarized in the same detail as core product benefits. For example, one of our manufacturing clients has worked for over a decade to make pricing excellence the standard in the firm. Managers at this firm can do value-in-use analysis in their sleep². At a recent seminar at the firm, one manager bemoaned the price pressure he was experiencing in one of his product lines. When we explored the problem in more detail, he explained that service was the key distinction between his offering and that of the competition. Yet when I asked him to tell me the dollar value of that service to the customer, he was unable to do so. In a firm noted for product pricing excellence, when it came to services even the most fundamental value-pricing tool remained unused. It is no surprise he could not tell me what price premium that service could command in the marketplace. To be fair, however, service firms may be no better than manufacturing at dollarizing service value to customers. A B2B financial services client, the leader in their industry, has historically been able to command a 30% price premium. Currently, however, the firm is losing share rapidly and experiencing price pressure in its flagship product line. Why? Profiling the competition using factors that drive the purchase reveals a very simple answer: their offering is simply not as good as the competitor’s. The firm is now scrambling to catch up. But even with their current efforts there are two deeper issues that need attending. First, let’s say their current efforts yield competitive parity. How does the firm discover incremental value to justify its price premium? One answer is to learn the economic impact of the offering on the customer’s costs and revenue stream. That is, dollarize the value. With an in-depth understanding of the customer’s business economics, the firm is in a position to deliver enhancements that really matter. This information is especially vital in a challenging economic environment when the pressure is on to cut costs. To quote Scott Metcalfe at Ondeo-Nalco, “You want to command a higher price? Give the customer something of real value, not some rehash of the same old story.†The second issue is: Why did it take market share loss and price pressure for the firm to recognize the problem? After all, value problems in the marketplace often precede price problems by months or even years. The answer is that the firm did not have an early warning system in place for monitoring the value of its offerings relative to competitors. This kind of early warning system is essential whether you define your business by products, services or offerings. Get customer feedback on what they perceive as value. In the electronically lubricated markets of the 21st Century, where comparisons of offerings are only a mouse-click away, we believe it is absolutely vital for the firm to actively engage customers in an ongoing dialog about the value of products and services. Further, that discussion must be more quantitative than ever before, and based on direct comparisons of competing offerings. That kind of pricing intelligence will be a source of power in negotiating with ever more sophisticated buyers who are increasingly inclined to pay only for performance. In sum, don’t buy into the product-service duality myth. Rather, when it comes to pricing, focus on the fundamentals first. It’s not magic. It’s not rocket science. It’s just the work required to price for value. Begin by asking yourself these questions: Ø What dimensions of the offering best explain differences in willingness to pay? Ø In estimating value to the customer, are you treating the product and service dimensions of the offering equally? Ø Do you have an early warning system in place to draw attention to value shortcomings? Ø Have you dollarized the value? Ø How are you engaging your customers in a dialog about value that will be beneficial to both of you? ¹ Tim Matanovich is General Partner and “The Pricing Guy†at Market Leaders Group LLC ² Value-in-use analysis is a process for estimating the economic value of an offering to a target customer, relative to the next best alternative (competitor). VIU is frequently used as the foundation for value based pricing decisions. ____________________________________ | 