Set the Margin, Solve for Value.

The following post was originally published in April 2012.

Imagine for a moment what our world would be like if Apple, Harley Davidson, Disney, and Miele competed solely on price.  Would the style, service, and quality of these top brands be what we know today?  Not likely.

These companies have consciously chosen a market position to own, and have engineered their cultures, innovation and design processes, and production systems to garner the maximum share of their chosen territory.  In effect, they set an implied margin goal, determine the most efficient production costs, and ‘arrive’ at a retail price.  If their design and innovation systems (and their knowledge of customer buying preferences) are well-honed, their R&D efforts will have created a product that is ‘infused’ with value triggers that command the resulting premium price.

By contrast, many organizations in the financial services and telecom sectors are leaving hundreds of millions of dollars in enterprise value on the table.  The primary reason?  A focus on ‘market price’ – the relative level at which the competition is selling similar products – far too early in the product development process.  This bias is often justified as prudent risk management in a highly regulated business sector – don’t ‘rock the boat’ and attract unwanted attention – or as a defensive strategy against pricing themselves out of a market in which customers have low barriers to switching.

Our experience suggests that the key to profit optimization is the pursuit of the maximum revenue potential within a product at its highest level of customer benefit.  Said differently, it is about daring to be different even if that means being at the higher end of the price spectrum.  It is about taking a generic product, tripling the selling price, and back-filling for the value gap (as we did with a recurring revenue product and saw consumer response rates soar and post-purchase remorse rates fall sharply).  It is, when all is said and done, about building a strong value proposition that can lead to more customers, spending more, and staying longer.

The Bottom Line

By setting a target margin per customer, net of acquisition costs, organizations are then free to create truly distinctive ‘value’ propositions to command the net required retail selling price.  We refer to it as an attitude of ‘value-based premium pricing’ in which the mantra is ‘Set margin, mind the (value) gap.’  To unlock hidden profit potential in your business, contact Stratum Five today.