Price value: Discover whether it is true that prices really are relative?
Price value: Are prices really relative?
Written by Joanna Wells, Author of TeamBuilder360 and Director of Taylor Wells
A classic tenant in pricing literature is that humans are not great at discerning value regarding prices. As Oscar Wilde paraphrased once “I do not care which shoes are cheaper, but I want the more expensive ones”.
In a B2B industrial environment we can see the relativity of prices (price value) also – I want to give a real world example below which I think highlights a couple of issues in this price value regard (I have changed a few details to protect a certain regional business model!).
We have a B2B industrial market selling services by a unit. The cost base (external) is different in each geography but the cost to serve is the same. All businesses claim to follow a cost plus approach and complain about extremely intelligent procurement professionals bashing them everyday. The example is as below:
|State||External cost||Cost to serve||Sell price||Actual profit per unit|
|Note: price in USD$|
It is important to note that regional buying differences should not make much of a difference as the product was procured on a national basis.
It was clear that when the unit price cost base was lower, the profit margin tended to be higher.
Price value take aways?
I have to be honest and say I am not fully certain why this should be so but am interested whether any of my readers have experienced similar?
- I assume that as the price is lower in Idaho and DC, the buyer spends less time looking at it.
- They are unaware as to the cost base and so spend most time pushing down the higher rates
- Is there an element of “free riding” by the cheaper states – i.e. pushing through higher rates as their state is smaller – less attention payed to Idaho and DC.
Implications for price value
- Even when the business thinks it operates a cost plus – does it really. What else is at play in the pricing structure?
- Clear implications for optimisation i.e. making the profit on the tail of services
- Are we presenting prices correctly to the customer – would more or less info on the cost base help or hinder a price rise?
- I suppose people have to be compensated for living in Idaho!
Are prices really relative is written Joanna Wells, Author of TeamBuilder360 and Director of Taylor Wells
Taylor Wells is a specialist advisory firm that has developed a search, evaluation and recruitment process in the field of pricing recruiters, commercial and analytics. Our business was started after identifying weaknesses in the traditional agency recruitment model. Our purpose is to support management and HR to eliminate the risk of a bad hire. Our workshops and diagnostics ensure pricing or commercial teams are deeply engaged with the sales and marketing teams to achieve greater levels of margin and earnings growth. We have developed our own digital platform to identify and evaluate talent and we partner with subject matter experts to help us operate efficiently.
BA/ MA Psych. CANTAB, Msc Org. Psych, Dip.Couns Psych
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