I remember a college class I took years ago on pricing. After dividing up into two different teams, each were given the exercise to determine the price for a revolutionary new mining drill. Both groups had access to the professor for questions and answers, the drill semantics, cost information, and any applicable outside resources to complete the project (we used the library back in my day).
Group One’s Approach:
The team completed a thorough cost review of the drill. They noted the manufacturing specifications, the ability to drive cost down over time (including amortization), and tallied up every conceivable cost accounting element to complete the product. Research and development. Drill setup costs (white glove approach). Corresponding travel and delivery. Then, they added 25 percent on top of the total costs.
Group Two’s Approach:
Here, the students took a far different approach. They reached out to the end users of the product and asked a number of open-ended questions. In the end, they cared little about their internal costs. Focusing on the time savings of drilling faster, safety benefits to the workers, insurance savings, and less idle team as the new drill didn’t break as much, their product cost four times that of the first group. By taking the time to use the drill in a business setting (or at least think about the end-user), they were able to capture much more value. Or discount more in the future depending on the perceived customer value. And once a price is framed to a client, it’s so hard to go back again.
Notes:
- The picture is taken from the inside of an Aldis grocery store chain. I love how they price because they’ve looked at every aspect of the value chain. Type of product. Store size. Employee count. And they’ve set the price accordingly to meet that brand image.
