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Quality Has a Role to Play in Pricing and Should Claim a Seat at the Table

Quality impacts the overall cost of a product and should be part of value-pricing data

Published: Monday, January 13, 2020 - 13:03

According to the Journal of Consumer Research, a high price indicates either bad value or good quality, whereas a low price indicates either good value or poor quality.

At the heart of this dichotomy is the role that quality plays in both the actual and perceived price of the product. To understand how quality plays a critical role in pricing, one must look at the stakeholders affecting the price in manufacturing.

A proper focus on pricing must take into account customers’ perceived value of the product and what they believe that value is worth, i.e., what they are willing to pay for it. Without this, engineering and marketing team members are left to develop pricing from a bottoms-up, cost-plus approach: How much are the raw materials, cost of assembly, cost of delivery, and so forth? Often, marketing simply tacks on a percentage of profit to the order to establish the price. For them the calculation is simple math that ensures they will hit margin goals. However, they are not the folks in the field convincing customers to buy. Nor is the engineering team listening to customers’ objections or value perceptions. 

Value pricing

Manufacturing salespeople operate with an eye toward value and willingness to pay. They are always trying to secure the highest-value deal, while also balancing customer relationships, customers’ willingness to pay, and ultimately, customer perception of quality and value.

It is on this last point that QA/QC leaders play a more pivotal and important role in pricing and price setting. As risk mitigation and zero-defect goals are nonnegotiable, quality professionals in manufacturing still receive short shrift in the pricing conversation. Although quality leaders almost always have a vote at the lean manufacturing table, they are too often relegated to a decision-influencer role, rather than decision maker. In the end, only QA/QC leadership can ensure the company is in regulatory compliance, process control compliance, and still able to hear and translate customers’ issues into innovative solutions, thereby maintaining the company’s strong product image and perceived good value.

Think of the information that a quality department can contribute:
• Information such as quality levels, mean time between failures, returns (and more important, the reasons for the returns), cost to service, maintenance intervals, and so forth all have a direct impact on the actual cost of the product. How much are you paying for warranty service, for instance?

• Also important is how these levels are trending. If they are trending up, not only is the customer’s value proposition falling, but the actual cost for your product is also increasing. A double whammy.

If these metrics are trending down. Your product’s actual cost is also falling, improving the value proposition and potentially putting you in a position to increase (or decrease) the product’s price and maintain a competitive advantage.

• How do these numbers compare to industry benchmarks? This information is great for your salespeople, particularly if the comparison is favorable.

The idea is that if these numbers vary by product family, are trending up or down, and compare favorably or unfavorably to industry benchmarks, product and pricing teams should use these metrics when value pricing and market pricing their products.

By helping both engineering and sales leaders define and articulate the true quality story of the product, these metrics help account for both the bottoms-up pricing and reinforce the value (and quality) positioning to help ensure success for the salespeople. The more they can articulate the value proposition, the easier their job.

After all, customers want quality and will ultimately pay for quality, even as they pursue the best deal possible. For most customers, getting a good deal and great quality is the best possible deal to be had.

Price-optimization technology provides data-driven analytics from which these silos of influence and input can base appropriate pricing strategies. A cloud-based solution that is able to account for several pricing considerations simultaneously, receive data from both enterprises resource planning (ERP) systems that engineering relies on, and sales customer relationship management (CRM) tools that sellers need to manage their process.

Pricing optimization platforms, such as Pricefx, are specifically designed to operationalize a variety of stakeholder inputs that identify ideal pricing per product, and align product cost and product value with customers’ willingness to pay. The end goal is to protect and grow the company’s margin, increase profitability, and close more deals successfully. 

The data powering these systems come from your ERP, CRM, and other systems that bring in customer, product, and transaction history. It is coupled with data from other internal sources, such as cost data, freight, payment terms, and rebate payments, as well as the quality data mentioned above. It is often augmented with competition and market data. 

By bringing this all together in one place and enabling a collaborative platform across sales, marketing, engineering, and manufacturing, pricing optimization platforms can move the needle in the right direction by improving price and profits. These user groups can use pricing optimization software to analyze and optimize pricing, manage list pricing, and negotiate and manage customer and promotion pricing both on and off invoice. 

By embedding analysis and recommending target pricing into these business processes and enabling automation and integration with other systems, companies can unlock the power of price. 

Discuss

About The Authors

Patrick Moorhead’s picture

Patrick Moorhead

Patrick Moorhead has built a diverse 20-year career at the forefront of digital marketing and advertising, with roles spanning national and global leadership positions at agencies including Razorfish and FCB, and senior strategic marketing, sales, and client management responsibilities at Catalina Marketing, Twitter, and most recent as chief marketing officer (CMO) for Label Insight Inc. Currently Moorhead is the CMO at SaaS start-up Pricefx. He is responsible for all aspects of brand marketing and communications, ranging from public relations and press, paid media, event marketing, partnerships, content development, sales messaging and collateral, and social media.

 

Gabriel Smith’s picture

Gabriel Smith

Gabriel Smith is a Six Sigma Green Belt with 20 years’ experience in pricing and the quote-to-cash process. He has been in the price optimization software industry for 12 of those years and worked with leading companies across many industries such as 3M, Seagate, IBM, Emerson, and Siemens. Smith started his career at Cisco Systems where he was part of manufacturing team that structured the sales BOMs and wrote the configuration, pricing, and quoting logic for Cisco’s products. Smith holds an interdisciplinary degree from UC Berkeley focused on the use of technology to gain competitive advantage in the market.