In this increasingly globalized world in which we all work and want to succeed, more and more often we find ourselves up against competitors who are very tightly focused on cost and price optimization. For Belgian companies, who have to contend with the notoriously high cost of labor, that can be a problem.
In a commodity market where there is little to no difference between the products, the customer has nothing to base their choices on other than price. Research by McKinsey (REF) shows that there are several strategies that a company can deploy to increase their profit margin. The biggest influence on turnover is price. Increasing prices by just 1% can result in an 8 to 12% increase in turnover.
In cost-plus pricing, you look at the (expected) costs. You add a margin to that, which represents what you want to earn, and vòila, you have a price. Innovation projects often only get off the ground once there is a business case to show that the item to be developed can bring in a certain profit for the company. This essentially means you can demonstrate through several spreadsheets that if you compare all costs with your turnover, there is still a good ROI. What is not taken into account at this point is that costs and turnover are only projected costs and turnover. They are based on various people’s hypotheses and predictions.
In addition to cost-plus, the industry also uses competition-based pricing.
Simply put, this is looking over the fence at what your competitors are doing. If you make a similar product to our competitor, what price do they charge? Henceforth, you look at how your company positions itself compared to its competitor(s) and your price is determined on that basis. This can be very useful when done in combination with the cost-plus exercise.
While the first method focuses primarily on the organization itself, the second method takes account of the wider context. What both methods miss is working from your own strengths. The cost-plus method focuses on your own weakness, i.e. cost. The competition-based approach focuses on the competition and what they are doing. However, the one weapon which Belgian companies have in their arsenal which sets themselves apart from the (Eastern) competition, is a value-driven price. The idea is that we can capitalize on our proximity to talk to customers.
Involving customers in consumer research can, on the one hand, shed light on new features of value elements that were deemed ‘unimportant’ within the company. On the other hand, we can ask the customer what they would be willing to pay for certain features or products. These ‘value elements’ and ‘willingness to pay’ considerations are extremely valuable when it comes to developing new products or services and in defining the right price. This goes for value creation as well as value capture!
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