What is price based on?
Hermann Simon in Confessions of a Pricing Man indicates it is, “value to customer.”
Simon further elaborates, “The price a customer is willing to pay, and therefore the price a company can achieve, is always a reflection of the perceived value of the product or service in the customer’s eyes. If the customer perceives a higher value, his or her willingness to pay rises. The converse is equally true: if the customer perceives a lower value relative to competitive products, willingness to pay drops. “Perceive” is the operative word.”
Value: Second-Order Effects and Tangible Benefits
Value to your customer is complicated. Managers frequently fail to truly understand and quantify how value is inextricably linked to outcomes: second-order effects and intangible benefits. Simon offered this example to understand the power of second-order effects: Imagine that you work in the air-conditioner business. Your company designs special air conditioners for heavy trucks, the kind that logistics companies use for long-haul traffic. When asked about the quality of your product—what makes it good—you could pull out a spec sheet and tell how fast it cools, how intuitive it is to use, and how quiet it is.
When asked what really determines the value of your product to your customer, the trucking company, and how much that value is, what would you say?
Curiously Simon notes that when he asked this question to a company that really does make this product, they shook their heads and shrugged their shoulders. They didn’t know either.
The company commissioned an occupational health and safety study which documented two things that determined the value of the air-conditioning devices: they reduced the number of accidents and the number of sick days.
Simon notes, “This is a common example of a second-order effect. By keeping the drivers cool and comfortable (first order) the product showed its true value by keeping them safer and keeping them healthy and on the job (second-order effect). Noticing the subjective improvement in driver comfort was easy, but this soft factor is hard to quantify. What a logistics company can measure, though, is its savings from fewer accidents and sick days. These hard benefits far outweighed the costs of equipping their trucks with the air-conditioning units. The manufacturer used the study to support its value communication in its negotiations with customers.”
The key lesson is that it pays for top managers to make a strong and serious commitment to better pricing and to invest time and energy into this endeavor. This sparks a positive spiral, as higher pricing power leads to sustainably higher prices and higher profits.
Positioning Systems Customer Example
In December or 2015 P&L Technology invited Positioning Systems to facilitate their Annual Planning meeting in an effort to implement changes in their planning, strategy and execution.
A major bottleneck in their business was customer support. Every day their customer support would receive an influx of calls from their customers. In December that number meant that at the end of each day 500 customers were in the que, awaiting call backs for service/support. The President, Phil Lieber, would receive calls from customers complaining about their poor turnaround time, sometimes multiple calls each day.
In order to achieve their growth objectives, the leadership team realized they needed to measure productivity, especially in the customer service area of their business.
P&L determined their One Thing for 2016 would be: Do What You Say You Are Going to Do. They determined their Critical number to measure achievement of this objective would be Average Resolution Time. To ensure they wouldn’t burn out their employees and customer they chose NPS Score, and eNPS scores as their counter balance.
At the same time, we set their first quarter objectives. Accountability still was the focus, their One Thing remained the same: Do What You Say You Are Going to Do. The metric for achieving this? Everyone in the company would have a daily metric to report on in daily huddles. It was a challenging goal since employees weren’t used to measuring their performance. To balance this the one question eNPS score would ensure employees were willing to recommend the company as an employment opportunity to their friends.
By the end of the first quarter every employee reported a performance metric in their daily huddles. More importantly the number of customers waiting at the end of each day had been reduced from over 500 to less than 100. The counter-balance number, eNPS was a remarkable 61%. eNPS is frequently much lower than NPS scores. This score would put P&L in the top scoring category for any business nationwide in terms of employee morale.
P&L’s success continued. First quarter success rolled over into the second. The NOC (P&L’s name for their customer call center support area) reduced the calls 50% to less than 50 in que.
The reduction in their que allowed them to raise pricing on their customer service offerings. More importantly in June Phil Lieber and their board of directors accepted a very attractive offer to be purchased by a large technology firm.
The words of CEO Phil Lieber reflect not only the work that Positioning Systems and the Gazelles Scaling Up tools were able to help them achieve, but also the influence of pricing and value can do to make your business much more valuable.
By the end of the first quarter the results were nothing short of amazing. The NOC, (P&L’s name for their customer service call center) had reduced it’s customer back up calls from over 500 to less than 100. The counterbalance (eNPS) score stood at 61%. eNPS scores for employees tend to be far below NPS scores with customers. This number would put P&L in the highest ranking of companies for employee morale.
Positioning Systems and Scaling Up have been instrumental in turning around our customer service area. Since doing our annual plan in December of 2015 our customer service call center has dramatically reduced the number of open calls as well as the time taken for call resolution. I used to receive a number of calls daily from customers complaining about our customer service. I can't recall the last time I've had a phone call from a customer. With the improvements in responding to customers we raised our monthly service prices which was an obstacle we were afraid to do. Again due to the improvement in our call services we have not received one pushback from a customer regarding our increases. This improvement has had such a dramatic effect on our business that it made us more attractive to a large Technology company. The work we did with Positioning Systems' Doug Wick in Scaling Up was instrumental in making the business much more attractive leading to the sale of P&L Technology in June of 2016.
The investment we made in bringing Doug to the team at first seemed high, but the pay back has been a number difficult to calculate even though Doug says everything can be measured. We did sell and our multiplier was on the very top end of the ranges for our size company. If you're looking to take your company to the next level do not hesitate, hire Doug now! If you would like to ask me any questions, please feel free to contact me personally!
Phil Lieber, CEO P&L Technology
Are high prices or low prices better for the profit and the survival of a company? We’ll explore this question and some examples of companies achieving remarkable success with the low price concept next blog.