Guest Post by Dan Hodder
We’re all familiar with the cannibalization that occurs when a seller launches a new product, which takes share from other products in the portfolio. This phenomenon is often viewed in a negative light as product managers see volume eroding for current products, replaced by newer products that may or may not earn greater margins. So how do we make sure that this replacement is both profitable and defensible against competitors?
Value-based selling can be an extremely powerful tool when it comes to positioning a high performing, differentiated product in the marketplace. Virtually all of the emphasis in these cases is placed on winning business from competitors. However, value-based pricing can also be used when upselling, or getting customers to move up your product line to a higher value option. When done correctly, this can at once be more beneficial to the customer in terms of their value received, more profitable for the seller, and more defensible from a competitive standpoint.
In most mature product lines, the differences between product grades as one moves up the value scale will largely be incremental. Take, for example, the line of cars offered by any major automotive manufacturer. From one grade to another in the product line, the differences may be as small as leather seats, a few extra horsepower or a couple more inches of legroom. The price differences associated with these grades, however, will normally be larger, and certainly more than the incremental cost of the added features. This is, of course, positive from a value capture standpoint. But this can also lead to lost sales opportunities with customers who are deciding between your mid-range option and that of a competitor. If instead these customers could be targeted with a more attractive than normal offer on a higher value product grade, the opportunity exists to gain higher margins, while also building the customer’s loyalty to a highly differentiated product, thus making the sale and repeat sales more sustainable against competition.
In order to do this type of targeted selling profitably, we must first understand the economic value of the high-end product, referencing the mid-range product as the next best competitive alternative. We must then determine if there is a “price window”, and if so how large between the incremental cost incurred in producing the high-end product, and the incremental value it brings versus the mid-tier. As illustrated in the automotive example, normal product positioning often causes this window to be large enough that the price of the high-end product could be significantly reduced and it would still earn higher margins than the mid-tier version. It is then critical to make sure such a reduction targeted toward a normally mid-tier customer could be fenced off from the attention of those that are normally high-end customers.
By understanding this relationship between value and cost of the various products in our portfolio, we can more accurately target customers with a product and price combination that will both maximize margin and differentiate the value they receive from a competitor’s offering.
Dan Hodder joined Eastman Chemical Company in 2011 as a Pricing Manager for its Specialty Plastics business, focusing on price, volume and margin optimization for packaging, retail and architectural market segments. Prior to joining Eastman, he earned his MBA from the William E. Simon Graduate School of Business at the University of Rochester, concentrating in Pricing and Strategy. Dan also graduated from Northeastern University in Boston and Reims Management School and Reims, France with bachelor’s degrees in international business, marketing and economics