Pricing in the 21st Century

The Future of Pricing

Imagine the following scenario:

One of your best customers posts the specs for a large job on the Internet and invites several different suppliers to bid for the lowest price. At a prearranged time, every approved vendor (including you) enters their first price. The customer allows you to see all the bids, but you don’t know who they belong to. Every ten minutes, the customer gives you an opportunity to lower your price. Eventually, when all participants refuse to budge any further, the customer accepts the lowest bid.

Welcome to the wonderful world of pricing in the 21st century.

If you run a business-to-business enterprise, chances are good that this horror show — called “auction bidding” — is already playing at a theater near you. If it hasn’t happened in your industry yet, many experts believe that it’s only a matter of time.

Without question, the Internet and other sophisticated technologies have radically changed the business environment, often in ways we can’t even detect yet. And prices and margins in virtually every industry are facing downward pressures like never before. But will the world of pricing really come to this? Will every industry eventually morph into nothing more than an electronic auction block with the spoils always going to the lowest bidder? That depends on who you ask.

A Divergence of Opinion

We turned to three experts on pricing issues — Vistage speakers R. Sam Bowers and Douglas Gilliss and former Vistage speaker Eric Mitchell — to get their take on this issue. Interestingly, while they tend to agree on the symptoms of the problem and the overall diagnosis, they do not agree on the cure. All three acknowledge that new technology, unlimited access to information and increasing global competition are conspiring to “commoditize” entire industries and force prices into a seemingly endless downward spiral. Their opinions diverge, however, when it comes to the response they believe CEOs and companies should take to counter those relentless market forces.

When faced with constant demands from customers to lower prices, Mitchell and Gilliss support a value-added approach. In essence, they feel that companies can overcome commodity pressures and maintain high margins by finding narrower market niches to compete in and then focusing on adding value to the customer in order to differentiate themselves from the competition. When customers understand the difference you bring to the table, they willingly pay a higher price.

Not so, counters Bowers. He believes that the value-added mindset is a relic of the old economy, that in the new economy the process of commoditization is inevitable and unstoppable — regardless of your product or service. By fighting this process, you only make matters worse by raising your costs higher, which makes it impossible to lower price and still make money. In a world where customers have many vendors they consider equals, says Bowers, the only way to make money is by continually lowering your cost structure so that you can compete on price. Companies that continue to employ a value-added approach will soon cost themselves right out of business.

A Strategic Decision

Which strategy is right for your business? Only you can decide. But one thing is clear — this is not your parent’s pricing world. The days of “price = cost + desired margins” are long gone. Pricing has evolved from a relatively simple tactical activity to a sophisticated decision-making process that involves serious discussions about who you are as a business, who you want to be, and how to best respond to the needs of your chosen marketplace.

To help you sort through this process, we have compiled seven articles in this Best Practices module. In “Basic Pricing Strategies” and “Pricing for Long-Term Relationships,” Mitchell takes a big-picture look at some fundamental pricing issues and various strategies to help you develop strong relationships with customers. In “How to Win a Price War” and “Value Pricing in a Commodity World,” Gilliss presents the value-added approach to fighting commodity pricing pressures. Bowers argues the low-cost point of view in “Pricing Strategies for a New Economy,” “Making a Profit in a Commodity World” and “Staying Vendor-of-Choice in a Commodity World.”

Our goal with this module is not to provide all the answers, partly because we believe the answers are still evolving, but also because (as is often the case) the answers will differ from company to company. However, we do hope to provide enough information so that you can start asking the right questions and feel comfortable tackling the pricing issue head-on before it tackles you.

In today’s environment, few things will have more impact on your company’s long-term profitability than how you price your products and services. Whether you adopt a value-added or low-cost approach, hopefully you will do it as part of a deliberate, well thought-out strategy rather than a knee-jerk response to competitive pressures or changing conditions in the marketplace.