Market-Driven Pricing

Why the Right Price is a Market-Driven Price

Market Driven Pricing

Jim Hlavacek, a fellow (and former) marketing professor at Case Western Reserve School of Management, is one of the most brilliant people with whom I have ever worked,  Jim also taught at Wake Forest. He resigned from teaching because couldn’t afford to pass up the incredible fees he earns consulting for 3M, Unilever, J&J, Parker Hannifin, etc. Jim’s been a director at companies the likes of Nucor and over many years had produced an annual conference at the Plaza in New York City that drew dozens of Fortune 500 CEOs.

He inspired me to enter the consulting profession and to write management books. I’m grateful for the opportunities to collaborate with Jim, to speak at conferences with him and especially for his inspiration and friendship over four decades.

Jim has also written a handful of popular books including Market-Driven Management. Jim’s co-author Chuck Ames was a founder of Clayton, Dubilier & Rice. That book is where my pricing story begins.

Distributors typically lack a clear-cut pricing strategy. Asking the sales team about their company’s pricing strategy often produces blank stares. They frequently don’t know what it is and many simply say that their company doesn’t have a pricing strategy. The sellers will concede privately that their personal pricing strategy is “meet the competition” or even “beat the competition”.  One of the most popular approaches is “cost-based”, i.e., punch the cost into a calculator and “divide by .8” (20% margin), etc.

The purist’s pricing strategy is value-based, not a direct function of product cost. Ideally the price should reflect the value the customer receives from the product and service bundle provided by the distributor (including the sales rep). What problem was solved? How did the solution improve the customer’s service and bottom line?

Back to the Jim Hlavacek and Chuck Ames book. In the real world, where we face competition every day, the right price is a market-driven price. How does our value proposition measure up to the competition and what is it worth to the customer? That is a key to the riddle of why we shouldn’t charge the same price to every customer who buys a particular product or apply the same margin to each item we sell to a specific customer.  As distributors competing to be distinctive and to be profitable the best pricing strategy is not to maximize prices or to sell at the lowest price.

Distributors who jump into “strategic pricing” projects should be thinking about the real goal: market-driven pricing based on their distinctive value proposition and overall company strategy. You cannot achieve that without understanding the customer’s needs, your customer profitability and your cost to serve.