Raise Your Price – Find the Right Customer - By Rick Williams
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Pricing your product is tricky. I will share my experience as board chair of a company when we had to raise prices substantially to make the company successful.
First, let’s review how product prices are usually set.
Auction Pricing: When willing sellers and buyers are competing, the transaction price is set by an auction process – the intersection of where the seller is willing to sell and the buyer is willing to buy. We think of commodity markets for soybeans and art auctions for famous paintings. Home sellers are told that the market will determine the selling price – the value – of their home. If you are building homes or condos, your construction costs are irrelevant to their selling price.
Cost Plus: Many government contracts are sold on a “cost plus” basis – the cost to deliver the services plus a percentage. A primary driver of high healthcare costs in the US is the disconnect between cost and value. Hospitals charge their “costs” – approved fixed prices for an accumulation of services – with no connection to value and without a competitive market establishing a price agreed to by the buyer and seller.
Stable Pricing: You carefully tested the price of your product and discovered where your buyers will buy, and you can make the profit needed to be successful. That is your steady-state pricing. You must keep testing your pricing, but you know approximately the pricing that works for your customers and works for you.
Sale or Discount Pricing: If you are introducing a new product, discount pricing may be required to get the first customers to take the risk of buying something new and different. Your product could be seasonal. Inventory unsold at the end of the season is discounted to get it off the shelves. I often buy ham after Christmas because supermarkets drastically cut ham prices.
Value Pricing: Uber has been so successful at value pricing its ride service that other companies are openly adopting value pricing for products traditionally sold at fixed list prices. Think of hotel rooms and apartment rentals. I was in Coconut Grove, part of Miami, on a Sunday afternoon. With friends, we took an Uber to the Smith & Wollensky Bar on South Beach to watch cruise ships leave the harbor. The Uber cost $25. When we were ready to return, there was light rain, and the Uber fee was $90. I convinced my friends to call a cab. Took a while to get a cab, but the cab’s fixed price was $35.
Value Signaling: The list price of my leadership guidebook, Create the Future, is $35. I have been told that the price should be significantly higher – $50 or $60. The company owner, executive director, or division VP facing a difficult decision will pay $60 for the step-by-step process that will engage their team to help them make the best choices possible. The price signals value to the buyer. The $35 price signals the book is “just another” leadership book. The higher price would signal the guidebook’s unique value to the target buyer. Buy your copy of Create the Future TODAY before the 2nd edition comes out at a higher price! Amazon link is HERE.
My grandmother tells the story of my grandfather going into a men’s clothing store and ordering a white shirt for his business meetings. The clerk brought out a white shirt and said the price was $2. My grandfather told the clerk that he wanted a better-quality shirt appropriate for his meetings as the bank’s president. According to my grandmother, the clerk went into the back room and brought out the same shirt – this time saying the price was $4. My grandfather said that was the shirt he was looking for, and he bought it.
Raising the Price and Re-Launching the Business
When Mitt Romney was Governor of Massachusetts, he appointed me to be Chairman of the Board for the Community Development Finance Corporation (CDFC). Duval Patrick was governor for most of my tenure, and the other board members were mostly the governor’s cabinet secretaries. CDFC was created by the legislature in the 1970’s to be a funding source for businesses in minority and low-income communities that were “red-lined” by the banks. Banks would not lend to companies in red-lined areas of the state.
Red-lining was long gone when I became board chair of CDFC. Banks competed aggressively for borrowing customers in communities traditionally served by CDFC. Banks get the capital they lent out to borrowers from depositors – remember the movie “It’s a Wonderful Life.” CDFC got its capital from the legislature, and its lending was not limited by banking regulations.
I soon discovered that CDFC was charging interest rates on its loans below those charged by banks. The board was told that the only way CDFC could compete with the banks was to charge lower interest rates because it did not offer services the companies wanted from their bank. We were competing against private banks using public funds and charging a lower interest rate. CDFC was trying to be a normal lending bank operating in previously red-lined areas.
I led the board and the senior staff through strategic planning exercises where we looked at what role a company with CDFC’s unique charter could play in the lending market, and what business model was right for the company. Even well-run companies get in trouble. Bank regulators will not allow banks to lend to companies with financial hiccups. CDFC could make riskier loans below the floor set by regulators for commercial banks. Building on their unique capability, we defined CDFC’s customer as a company we believed had good long-term prospects but was not bankable at that moment.
Changing the low loan interest rate pricing business model was not easy. I argued that CDFC should charge interest rates higher than those charged by the banks. Charging a higher interest rate encouraged the banks to be CDFC’s sales force. After CDFC became a high-interest-rate lender, the banks realized that CDFC was not a competitor but was a safety net for their customers who got in trouble. The CDFC’s higher interest rate was also a motivation for a company with a CDFC loan to return to the commercial bank once it could pass the bank regulator’s examination. Banks started bringing to CDFC their customers and potential customers who had gotten into trouble.
Under the leadership of the CDFC board, the company identified an important unmet need in the marketplace – a new mission worthy of the legislature’s support. The Massachusetts legislature created a new charter for the company, folded another quasi-public company into the charter, and gave the new company significant new capital. The company is now called the Massachusetts Growth Capital Corporation.
CDFC – now MGCC – could not have succeeded – perhaps survived – without finding the right customer and substantially raising its prices.
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