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.”