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Do Customers Control Pricing?

Strategy

The CEO of a staffing firm asked what I did for a living.  When I told him that I help companies get higher prices regardless of what their competitors or the economy are doing he said “That’s great if your in an industry where you control your pricing.  Our customers control our pricing.”

A few weeks later I saw an article in stltoday.com entitled Could medical pricing transparency control runaway costs?  The article cited the fact that healthcare consumers are bearing more of the cost of healthcare in the form of higher co-pays and deductibles.  The article went on to suggest that United Healthcare’s new online cost estimator could allow healthcare consumers greater control over the prices they pay for healthcare.

Are these new trends in pricing?  Has control shifted to consumers?  These are the questions were going to explore today.

New trends?

There are movements afoot that are driving providers away from their traditional pricing models.     In some instances the change is long overdue.  In others buyers are completely unrealistic in their expectations.

The legal profession is being pushed to a fixed fee pricing model instead of the their hourly rate model.  The only surprise here is that it has taken so long for consumers to press for this change.

In essence, the hourly rate model has basically said to the consumer “You have to take all the risk.  We don’t know what the outcome will be, how long it will take or what the total cost will be, but here’s what you’ll be paying per hour.”  What consumer wouldn’t rail against that kind of arrangement?

On the other end of the spectrum I know of one Fortune 500 company that has demanded to see its vendor’s costs so that they can assess whether or not they’re getting a fair price.  The vendor is also a Fortune 500 company.

That’s over the top.  Why would you want to penalize an efficient company for being efficient?  That’s exactly what would happen if the customer knew the vendor’s costs.  The customer would take the cost and add what they felt was a ‘fair’ margin to it which has the effect of penalizing their more efficient vendors.  That’s crazy.  We need to incentivize efficiency both for our own welfare and for competitive advantage in the world economy.

Has control shifted?

The short answer is ‘not really.’  In the case of the legal profession consumers are simply pushing for more transparency, more predictability in the pricing.  There will still be buyers who will pay multiples over the lowest price alternatives to get the ‘name’ firms, the political connections they have or to create the image of success that comes from using the most expensive firms available.

Similarly, United Healthcare’s push is designed to help consumers become more aware of what their options are so they can make an informed decision.  The consumer will still choose a higher priced alternative based on other factors like speed of access, care and concern of the physicians, nurses and staff, convenience of location and the provider’s reputation in the market place.

It’s no different than buyers choosing Walmart over Nordstrom or vice versa.  Each buyer places a value on the products/services they’re buying.  Some are very valuable to them and they’ll choose the top of the line because it is important.  Others are necessities they’d just as soon avoid, consequently they’re going to choose the lowest-priced alternative.

I’m sure you’re wondering about the staffing company’s CEO’s claim that customers control his pricing.  That’s absurd.

Without realizing it this CEO is, in essence, saying that he doesn’t see the difference between what he’s offering and what his competitors are offering.  If he saw a difference he’d be able to communicate it in a way that would help buyers decide whether or not it was important to them.

Because he can’t see the difference, they can’t either.  That simple reality explains why he feels he’s at his customers’ mercy when it comes to pricing.  Indeed, it’s why any business, in any industry, feels trapped by industry pricing.

The seller doesn’t understand how is offering is different than his competitors or he doesn’t know how to convert that value to dollars and cents.  Either way, the buyer doesn’t have the information he/she needs to make an informed decision.  The result is the consumer pushes for lower prices.

Sellers will control pricing as long as they:

  • Provide value that their competitors don’t.
  • Communicate that value effectively in their marketing materials and sales scripts.
  • Price in a way that reflects that value.
  • Understand which buyers value what they offer and why they value it.
  • Target only those buyers who value what they offer.

Consumers will make their decisions based on the information the seller provides and what’s important to them within the context of the lifestyle they’ve chosen.  It’s their choice where they spend their money, the seller controls the price.

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