What methods do you use to decide what you charge customers? Brent Balinski spoke to Christoph Petzoldt, the Australian head of pricing consultancy Simon-Kucher & Partners, about the dos and don’ts.
Gut feel. Cost plus. Competition-based. These are three methods often used by companies to determine how much they charge for what they do or make.
They are all important inputs to the answer, but not the answer itself, according to Christoph Petzoldt, the Australian managing director and a partner at global management consultants Simon-Kucher & Partners.
Such haphazard methods of price setting – the most important profit lever, says the company – are used everywhere. Petzoldt – who has headed the firm’s Sydney office since 2011 – has the impression that pricing has been particularly neglected within the context of Australian manufacturing.
“A reason could be that 20 years ago Australia was a much more protected market and the level of competition – and therefore necessity to invest into capabilities like pricing – was lower than in Europe or North America,” he told Manufacturers’ Monthly.
This has changed significantly since, but the first response to it was “cost reductions and re-organisation” instead of value improvements in products and revenue or pricing measures.
“While many manufacturers did or will not survive this change there are positive examples such as ARB, Centor, ANCA and others which focus on product differentiation and value extraction rather than pure cost optimisation,” he added.
Petzoldt’s firm, established in 1985, has a 33 offices worldwide, 930 employees, and a reputation that has seen it described as “the world’s leading pricing consultancy” by The Economist. It was co-founded by Dr Hermann Simon, also an influential thinker and communicator on Germany’s ‘Hidden Champion’ Mittelstand businesses and the reasons for their success.
Getting to the bottom of it
According to S-K&P’s most recent global survey of 2,000-plus CEOs in more than 40 countries, things are tight. 40 per cent of respondents didn’t improve margins last year, and this year margins are expected to shrink by 0.7 per cent on average.
The right way to set prices, believes the consultancy, is “based on quantified value”, with an application of behavioural economics and – importantly – acting based on a proper understanding of what your solution is worth to a customer.
“Only a few” manufacturers could properly tell what their customers value and what this means in dollar terms.
“Of course the measurement of customer value in a manufacturing environment is more complex than in the consumer space,” Petzoldt explained.
“But with the right mix of transaction data analyses, estimates and customer feedback you can get to the bottom of it.”
This month Petzoldt’s firm will hold its fifth Sydney Marketing & Pricing Strategy Forum, featuring speakers covering local and international examples of “successful approaches to master pricing”.
It includes an overview of “the dos and don’ts” of pricing across different sectors, though most topics will apply to manufacturers.
One highly relevant case study will cover an Israeli crop protection company’s move from generic, commodity products to a differentiated portfolio, and how it managed the shift to include more patented, branded, higher-value products.
The presentation will cover the company’s five-step go-to-market plan, including prioritising target segments, identifying customer needs, developing a set of solutions, a campaign plan, and monitoring.
“As many local manufacturers will face similar challenges this or a version of this process would definitely suit,” offered Petzoldt.
What problem do I solve?
As for what local manufacturers can do to better communicate what their solutions are worth – and thus what they can properly charge for these, the first step is to understand what value is provided and communicate it.
As recommended through design-led innovation approaches (and which sometimes seems basic when mentioned) is a clear understanding of customer needs and what problem is solved.
Products might be over-engineered “at high cost but only limited value-add for customers”, suggested Petzoldt of the wrong approach.
“In other cases there is tremendous product or service value but it is not captured as the cost is comparably low,” he said.
“The better approach is to adjust the innovation process and start with the question, ‘What problem do I solve?’ followed by, ‘How much is it worth to customers to solve the problem?’ and only then worry about how to technically build the product and related cost.”
The 5th Marketing & Pricing Strategy Forum will be held at the Four Points by Sheraton Sydney, Darling Harbour, on October 27. Click here for more information.