Price IncreaseI’ve yet to find a firm (exclusive of the sales force) that believes it’s overcharging for the value provided. In most cases, it’s just the opposite; firms charge too little relative to the value they create. Leadership generally senses this, but doesn’t know what to do. After all, they can’t just raise their pricing in the current market, right? Effective segmentation is the tool for doing exactly that.

No customer welcomes a price increase, but in many cases it’s possible to capture more of the “money left on the table” (“buyer surplus” to economics geeks) without hurting your relationship. You do have to be careful, but getting impressive results is not magic.

Writing in the WSJ, Kusam Ailawadi and Paul Farris, offer up some suggestions for “How Companies Can Get Smart About Raising Prices“. They subtitle their article, “How marketers too often do precisely the wrong things, alienating customers and getting little return” which is really the crux of the problem. While Ailawadi and Farris make valid points, they relegate the most powerful thought–re-thinking your segmentation–to the end of their list where many people will miss it.

Pricing is an information challenge

The real root of nearly all pricing issues is a lack of understanding about how and why customers buy. Not to over-simplify, but in the end value and emotion drive the decision process. If your potential clients anticipate high value from your services (business value created less cost of acquisition and use) and a strong relationship (which creates confidence), then you’ll win more than “your share” of contracts. The problem is, most of us are far better at understanding what we think should provide value versus what our customers actually see as our value. While most of the executives I work with accurately sense the overall level of value, they often are blind to the specific sources of value as seen by those who buy their services.

Understand the customer-eye view

Re-thinking segmentation should top your list of marketing to-dos, not come after you’ve tried other things. For the professional services and software firms I assist, better segmentation generates an enormous impact in what they charge and with whom they work.

The process of uncovering how you create value is the foundation of segmentation–that is, being able to divide your target audience into relatively homogeneous sub-groups that can cross-reference each other. Adjusting your message to each segment is Marketing 101, but adjusting your offerings and prices takes a bit more skill. Understanding the customer eye view of how you create value is a prerequisite, but totally worth it.

Creating new products and price points out of thin air

Tailoring your products and services to perceived value is easier than ever with the huge growth of services as a component of product offerings. Next to services, software is the champ for easiest to segment. While offering more functionality is easier than taking something away, volume licensing plus a bit of creativity can accomplish remarkable feats. Even premium providers can breech mass markets with minimal impacts on their cash cows with skillful arrangement of functionality and license tiers. This article from the Professional Pricing Society’s The Pricing Advisor tells how one Fortune 50 software publisher did it.

More granularity is not always better. Sometimes simpler is better. By understanding buyer behavior, I helped boost the average selling price (ASP) for volume licensing for Adobe’s (then $200 million) Education business by 20% with no drop off in unit sales by collapsing five license tiers into three.

Even traditional products encompass a wider range of options than most people think. Early in my career I was product manager for heat-shrinkable tubing at Raychem (now TE Connectivity). We often sold tubing made from the same polymer compound and manufactured on the same line–often in the same batch–for prices that ranged up to a 400% spread. Each tubing product was sold to a demanding specification for physical properties. We simply QC’d the final product to only a single specification. If a customer needed higher performance, they needed to buy the right product. Implications for product failure in high-performance applications meant we still provided value even at the much higher prices. And no, none of these products were under patent protection at the time.

What’s stopping you?

What would you need to know to raise prices in specific segments today?