Pricing Structure: Case Studies

By Mike Borzumate

One of the most often neglected concerns in business management is the topic of pricing structure.  It is essential that every business leader, whether a product manager, sales executive, or small business owner, understands how to most effectively package an offering and set its price.  The following are three brief case studies of leaders who discovered that the real value in their product structure was not what they expected.

The Manufacturer that Was Really a Consulting Firm

Years ago, I met with a specialty manufacturing organization that produced commercial lighting solutions.  Their products were installed in entertainment venues and theatrical productions throughout the country.  In fact, they were recognized as an expert source for lighting design concepts.

When we met, the company’s leadership could not quite grasp where clients truly found value in the relationship.  Management was myopically focused on selling the lighting fixtures and often did not charge for the extensive pre-sales consulting necessary to design a lighting scheme for a venue.  In a sense, the company was investing tremendous time from highly skilled design professionals in order to win a relatively low margin manufacturing sale.

Subsequently, the company remade itself into a design consulting firm that happens to manufacture what they design.  This relationship structure is positive for both the firm and its customers.  For the firm, they can now charge for services that were previously a sales cost in the transaction.  For the client, the focus is now on the total deliverable, rather than minimal design support in order to sell fixtures.

The Strategic Sourcing Pro Who Was Actually a Design Expert

Retail is a cut-throat business.  Sales volume can be highly uneven, while margins are often compressed due to rising costs that are difficult to pass along to customers.  These issues can be felt even more acutely in a segment with perishable inventory, such as retail floral sales.

One florist I advised was an expert at controlling costs.  She very effectively managed a tight supply chain, closely monitored the perishable inventory, and navigated favorable payment terms to secure substantial discounts.  Unfortunately, she made the mistake of assuming every customer was also as strongly concerned about price as when she worked with her suppliers.

While it is true that some occasions, such as St. Valentine’s Day, often call for a standard dozen roses at a low competitive price, the majority of a flower shop’s high margin business is significantly less price sensitive.  For example, in the situation of a wedding or funeral, the emotional impact of the floral design is usually more important than the exact price charged.  Rather than using raw cost-plus pricing in such circumstances, the florist now takes a consultative approach and designs a complete floral production – allowing for a design expertise premium and thereby delivering a product that better meets the customer’s true preferences.

The Software Subsegment that Acts Like a Utility

The concept of “Software as a Service” has revolutionized the entire IT industry.  Rather than paying a lump sum for a piece of software, creative organizations have crafted software offerings priced like subscription utilities.

This model is gradually being accepted across the full range of software segments, including sales management, accounting, and document creation.  Most experts agree that it is only a matter of time before the majority of productivity tasks can be accomplished using distributed on-line software services.

There are benefits for both the vendor and the customer.  For software developers, recurring revenue streams can be created that smooth cash flow and eventually generate more cash than individual package sales would.  For the customer, IT costs can be spread over many years and easily budgeted.

How can these lessons be applied in your organization?  Are you giving away the real value in your offering, by providing free consulting for which your target clients would be willingly pay?  Are you using a raw pricing method, such as cost-plus pricing, that is suboptimizing the deliverable, leading to clients who spend less while also being left less satisfied by the transaction?  Are there ways to transform your sales into recurring revenue streams, when that model would also benefit your clients?