Selling: How smart are your reference prices?

Many customers ask for a reference price List to be attached to a contract in the event that they need to call-off additional products or services through the life of a contract.  Often these lists are supplied simply to conform, rather than as a way to gain commercial benefit. Here we will look at the multiple uses for a Reference Price List (RPL).

Used smartly, a well-constructed RPL can have a multitude of uses and benefits that will help you better understand your markets and the pricing levels you need to bid at in order to win.

Let’s start by highlighting the key phrases: “Used-smartly”, and well-constructed” that jointly drive better market understanding and pricing decisions. We will start by looking the construction of a RPL.

Frequently RPLs are constructed in one of two ways. Take the manufacturing cost and multiply it be a factor that will always result in a value greater than anything we will bid competitively at; or take the best price you’ve ever managed to sell at and add some more. The problem with both approaches is that there is no logic to explain to a customer, or consistency over products, geographies or time.

If our RPL is too high, we will find ourselves discounting it heavily if we were in a competitive situation. This not only makes us look less credible, but also can be as insulting the intelligence of your customer were they to buy anything at the RPL price. The end result; such RPLs are consistently negotiated even when called-off. There should be no reason why we cannot explain the RPL logic to a customer!.

The solution to this is to build a RPL database that is used for all pricing decisions, as well as market assessments and competitor benchmarking.

So what is a “well-constructed” RPL? It is one that can be used at HQ, region and/or local level; that takes into account market variations, as well as individual product/service competitive differentiation.

For some businesses, the starting point may still be the manufacturing cost of its products, multiplied by a factor X to reflect the best achievable price. For others where the relationship between cost and price is less relevant such as software, it may be better to start with market prices. Regardless of your starting point, the reference then needs to include a factor that reflects competitive differentiation, and value, as well as the development cost. A new product that required a significant investment to develop must enjoy a premium over a “me-too” product. The ratio between your cost+ starting point and the differentiation element will be a function of how sensitive your markets are to differentiation. Many companies fall into the new technology trap, whereby they develop offerings that may be new to them, but not to the market, but still expect a price premium. Depending upon your product mix therefore, you may want to categorize your products by differentiation, which will logically decrease as the competitive advantage decreases over time. Equally, cost inflation may be important to include for some offerings.

Once a global RPL has been constructed, it is advisable to identify different markets that enjoy different levels of pricing in general. This could be geographical or by customer type. You may consistently sell B2B products for more than B2C sales for example. The ruling logic being to keep discount rates applied against the global RPL as constant as reasonably possible. You don’t want to offer 80% in one market and only 15% in another for the same product.

So now we have a database of prices that have a relationship to product and development cost when relevant, reflects differing market levels, and at an item-level reflects its competitive differentiation. How are we going to use this “smartly”?

This requires a change in the way many companies view pricing and market assessment. What we now have is a coherent market reference from which we can discount an item to establish a price. We also have a way to create an “effective discount rate” (EDR) when we compile multiple line items into a single offer. Similarly we now have a way to back-engineer a competitor’s offer to an equivalent EDR, which we can use for benchmarking purposes regardless of the composition of an offer.

We can use this EDR to compare markets and to further calibrate or RPL. We have therefore generated a way to overcome our eternal challenge of benchmarking for dissimilar offers.

Naturally this all more complicated to put in place than it sounds here, however if you are interested in this approach, contact us through the enquiries link, and we will love to talk you through the concept in more detail.