Tuesday, March 27, 2007

Pricing to Value and not to Cost

Today's lead article in the WSJ is about a firm's decisions (1) to abandon a cost-plus pricing approach to the sale of the 800,000 parts that it manufactures and sells and (2) to adopt "strategic pricing".

The CEO realized one day, while touring the company's 225 facilities(!) that the company

had to stop thinking like a widget maker and start thinking like a retailer, determining prices by what a customer is willing to pay rather than what a product costs to make.

The WSJ article states that this "epiphany", as the reporter calls it, helped the company's "net income soar to $673 million last year from $130 million in 2002."

Another interesting thing is that the 56 year old CEO had worked for this company for 34 years before he "got it".

I have the same difficulty in pricing. What a cop-out the "billable hour" approach is to the pricing of legal services. But I find it so difficult to shake it.

I also find it interesting to talk to Macon and Walter about the challenge of pricing to value rather than to cost in the work they do. I think they do pretty well with the challenge though. (By "value", I don't mean some sort of objective number floating out there in the ether. I mean what other people are willing to pay - what value the market places on one's product or service. I concede that this can be a moving target.)


Vibesville said...
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Anonymous said...

Yes, I read that article with great interest this morning!