Guest Post by Chris Provines, Founder at Value Vantage Partners
The post below is a response to an interesting question sent to our pricing experts.
Q: The marketplace I compete in uses discounting to create value for the end user. Typically we price our solutions fairly and rarely discount. We explain to prospects that not only our products have integrity but also our pricing. We don’t want one user to pay X for a solution and then hear that someone paid ½ X down the street. We do offer discounting but only in the 5% – 15% range while our competition offers 50% – 65% discounts to match our retail price. How would you address this scenario?
Chris: This is a great question and I will try to answer it from multiple perspectives. Since my focus is business-to-business (B2B) pricing and value communication/negotiation, I will answer the question from a B2B perspective. There are a lot of factors that come into play when thinking about the discounting strategy and the right pricing structure for your offering.
First, it’s important to understand the difference between value and price. Earlier in my career, I worked in a key account management organization. The key account executives would always say: “we need to give the customer more value.” I learned that this was code for we need to discount more. Value is expressed in monetary terms and is what the buyer firm receives in exchange for the price paid. This means that raising or lowering the price of the offering does not change its value. Changing the price only changes the buyer’s incentive to purchase (1).
One way to think about discounting is to look at it from multiple perspectives. Here are some perspectives:
- Buyer behavior:Business buyers are increasingly oriented towards negotiating discounts. Professional buyers have been conditioned by suppliers to expect to receive more discounts as they buy more from you. This only goes so far. If your discounts are beyond a certain level, let’s say 50%, then the discounts start to lose credibility. If your customers’ buying behavior is conditioned to receive more discounts for doing things, then not offering a range of discounts could be a problem. Back in the 1990’s Johnson & Johnson introduced bare metal stents. This is a tiny metal scaffold device that is inserted into a heart attack victim’s coronary artery to open it after a blockage. It was huge medical advance. At launch, J&J decided not to discount the technology. This meant that a small hospital that purchases 100 stents a year received the same price as a large hospital that purchased 1500 stents a year. The hospital customers had been conditioned by suppliers to expect volume discounts. Since J&J did not discount, this created a huge uproar with customers. The discounting strategy was one of many factors that helped to contribute to J&J losing the bare metal stent market (2).
- Customer value:Different customers place different value on your product or services. This could be due to differences in the customers’ business, processes, skill levels, or other factors. By having a narrow discount structure, you potentially limit your ability to vary the discount level to better match the different value derived by customers.
- Drive Right Behaviors:One of the goals of designing a discount structure and strategy is to drive the right customer behaviors. This could be to create incentives for the customer to reduce your cost to service. For example, if your business provides expensive services or support, you could provide pricing incentives for customers to not over consume services. Alternatively, driving the right behaviors could be focused on creating incentives for the customer to buy more from you. By limiting the range of discounts, you potentially lose some flexibility to drive the customer to behave in ways that help you earn more profit.
The question started out by talking about integrity in pricing and discounting. I think this is a great point. At the end of the day, you need to make sure that your prices are logical, defendable, and allow you to achieve your business objectives. There’s no right answer. Each situation needs to be analyzed and understood. However, thinking about the points above should help you in deciding the right discount strategy and structure.
Mr. Provines is Founder at Value Vantage Partners, and is an accomplished executive, business advisor, and adjunct professor with broad global experience in Fortune 50 businesses. His experience includes global leadership roles at Johnson & Johnson and Siemens in commercial excellence, strategic pricing, account management, procurement, and business improvement. As an advisor, he helps businesses grow profits through smarter pricing and commercial execution. He is also a top-rated instructor teaching marketing and sales teams strategic pricing, selling and negotiating value, and value discovery. He is the author of two books, Strategic Pricing for Medical Technologies and Selling to Procurement. For more info, go to ChrisProvines.com.
(1) Anderson, J., Thomson, J., Wynstra, F., (2000) Combining value and price to make purchase decisions in business markets, International Journal of Research in Marketing, Volume 17, Issue 4, Pages 307-329
(2) Finkelstein, S., (2003) Why Smart Executives Fail. Penguin Group. New York, NY