Breaking bad aftermarket myths: Reconnecting price to profit to culture

Feb. 21, 2017
Too many companies are shortchanging their profit potential by incorrectly pricing their products and services. By setting prices relative to what consumers value, not off cost, companies are better positioned to generate windfall profits for the long run.

Too many companies are shortchanging their profit potential by incorrectly pricing their products and services. Rafi Mohammed, author of The 1% Windfall, proposes an alternative to mark-ups, price matches and margin holds.

By setting prices relative to what consumers value, not off cost, companies are better positioned to generate windfall profits for the long run.

Mohammed’s value-based price strategy merits exploration. He identifies and dismantles five common myths that managers have perpetuated into a pricing disconnect.

In the book, he anticipates that naysayers will challenge that value-pricing does not apply to their company. In fact, however, The 1% Windfall relates to all companies in all industries, and I firmly believe that this certainly includes auto parts stores and manufacturers.

Myth #1: Set prices on how much something costs

When setting prices, managers should identify with a value-seeking customer rather than enacting a sweeping price change. Mohammed suggests that to capture value, managers should determine how much more a customer is willing to pay for a product or service by comparing one item to a superior alternative by price, quality, or both to satisfy what perceived value is.

For instance, city street vendors hawking umbrellas at the first hint of rain see no profit incentive to sell an umbrella based off unit cost, says Mohammed; otherwise, they’re leaving money on the table. They identify with a consumer’s willingness to pay a wee bit more for the value of rain protection over getting soaked when nothing else is readily accessible.

Let’s relate value-pricing to the auto care industry by my own standard as a former buyer. I might target seasonally sensitive products, such as ice scrapers before the big Nor’easter, or pair related add-on sale items like battery protectors with a car battery replacement.

Service can be a viable differentiating factor when several competing retailers offer identical products. Compared to product, service is more difficult to quantify and easier to verbalize. Rather than vaguely trumpeting that “we sell auto parts to our customers at an affordable price,” cite concrete differentiating traits, like “all of our ASE trained, solution-minded employees are proud to sell American-made and factory-grade products.”

Both value-based price examples pave the way to breaking myth #2.

Myth #2: Expanding market share requires slashing prices

To recapture lost market share, conventional wisdom holds that wholesale discounting is the only way to become the industry leader. Mohammed rejects the notion of a one-price-fits-all approach for every customer segment.

Every customer’s price needs are uniquely different from the next. He notes that many companies have traditionally invested money into product design, marketing and distribution, but stop short on a comprehensive price strategy.

Why give the farm away? With value-based pricing planted into fertile ground, Mohammed offers a three-stem blossom strategy where it is possible to serve as many customers as possible at multiple price levels. When executed properly, all three stems deliver a unified outcome: higher profit dollar income and expanded market share. (For clarification, below I use generic examples and common practices that your business may already be using.)

• Stem I, which is named pick-a-plan, lowers barriers to purchase. It opens the door to new customers of varied spending budgets, and it widens flexibility for different price plans for those who choose to opt out of an outright buy. Some may elect prepayment, flat rates, payment bonus or financing. This growth strategy provides “a pricing plan that satisfies a key need of an underserved segment,” concludes Mohammed.

• Stem II, which is called differential pricing, recognizes that some customers are willing to pay more than others for the same item whereas some may deem it too costly. To unknot this Catch-22, Mohammed suggests erecting hurdles that price-sensitive customers agree to clear through rebates, coupons, season-end price cuts and product pick-up. Even though hurdles can do only so much to segment the discount-seekers from the full-paying account base, a seasoned salesperson may consider providing the latter additional privileges or rewards to reinforce the value they are getting, like unlimited educational clinics, on-demand customer service or special credit terms.

• Stem III bridges the gap between pick-a-plan and differential pricing with versioning. Versioning addresses customers’ unique needs with a stripped-down, premium, and custom-made version modeled on the original product. Bundled product, complete assemblies, priority delivery, make-to-order, business consulting and so forth command the highest price for premium or custom-make demands. Conversely, as the adage goes, “you get what you pay for” for customers who pay the bare minimum. They should expect a bare-bones product with no bells and whistles attached. The psychology, of course, is to make it known to the discount seekers what they are missing out on when they forego the premium tier.

Myth #3: High-volume customers are always entitled to the lowest prices

“Why give away money unless the customer asks?” Mohammed asks. Sometimes salespeople feel guilty for withholding discounts. But they shouldn’t if they can verbalize the company value. Otherwise, doling out repeated discounts and price overrides conditions customers’ expectations that a lower price is always around the corner.

Instead, reward them with events, training clinics, business education and greater access to management. If they push for a price cut, hammer out an incentive of increased unit and dollar purchases in exchange for a price break that is mutually beneficial.

Myth #4: Discounts are the gateway to premium product sales

Discounts on products as a trial-period inducement are toxic to profits. They set a poor precedent because it is that much more difficult to convince someone to pay the original higher price for future purchases. Consider handing out sample packs, offering coupons, or promising a money-back satisfaction guarantee. These examples demonstrate a win-win to give customers a taste of that product while enhancing the full price value in their mind.

Myth #5: Higher operating margins equal pricing superiority

Pegging price fluctuations to operating margins convolutes the success of pricing initiatives and misses real profit revenue opportunities. Quite simply, recognize how much profit dollar revenue is being taken to the bank.

Final thoughts on company culture

Mohammed dedicates the last 85 pages to how to execute a pricing action plan. Senior management (or company ownership) often overlook the importance of creating a culture of profit by getting buy-in and articulating price-value from within the company ranks, but inspiring everyone about how the price strategy ties into the company’s value proposition is Mohammed’s underlying theme.

From personal experience, I’ve seen promising strategies fizzle because management excluded the frontline employees from being involved from the outset. Salespeople, counter people, delivery drivers and even receptionists, who have the most customer contact, deserve to know what the pricing strategy consisting of pick-a-plan, versioning and differential pricing means.

Employees of all stripes are in the best position to educate customers. Without the confidence and the evidence to talk about why our company was rated # 1 by the industry trade magazine” or “our company has 98 percent product coverage,” the urge to discount, make price overrides or talk someone into product downgrading is too great.

For companies seriously considering which pricing strategy to create, The 1% Windfall offers a catalyst for conversation. I have given a few generic examples, as Mohammed does in his book, to set the stage for redefining company culture where all employees can get a jumpstart by stepping into their customers’ shoes. Ultimately, you will gain many benefits from reading this thoughtful alternative to your company’s current pricing structure.

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