Tuesday, September 02, 2003

Solution Selling and Pricing
Pricing is a much ignored area in business. Marketers certainly spend a lot of time on pricing, but the strategic impact of pricing is inextricably linked with value and the structure of your value chain.

In my last blog, I write about the difference between tactical use of pricing and strategic use of pricing. Tactical pricing is often used to get short term sales. Strategic pricing is about gaining not just short term revenues, but positioning your value proposition to build a loyal customer.

There's another part of pricing that worth considering as well. That's solution selling. Examples abound and in a complicated world, solution selling addresses a big problem for consumers. The explosion of choice and increasing complexity of products leads to uncertainty and perceptions of risk. If a digital component in a car or electronic appliance fails to work, the entire investment in the product is typically lost. And while products with microprocessors, software and signal processors may be attractive, it is impossible for consumers to know in advance the stability or reliablity of such engineered products.

Take cameras. In my career as a photographer, it has been exceptionally rare for a camera to have a mechanical defect. It just wasn't really an issue. In contrast, I took out a four year warranty on my first digital camera (which has produced the best pictures, I have ever taken) and I needed to use the extended warranty this past month just prior to the warranty expiring. My most recent notebook, a marvellous three year old Thinkpad T-20 from IBM has had to go back twice to IBM. My last cell phone had to be replaced under an extended warranty. And many high end luxury cars incorporate service into their price. They are selling transportation of high reliability. By incorporating service and extended warranties into their product offering, they are simultaneously insuring that owners maintain their cars and delivering what customer actually expect - hassle free ownership.

But the trend is even greater in information management. Organizations cannot keep up with technology, so they are forced to move in the direction of (1) purchasing packages from suppliers that anticipate their integration needs, (2) outsourcing parts of their business, (3) out-tasking highly specialized tasks where they lack expertise, interest or economies of scale, and (4) strategic partnering.

What this means for startups is that in many areas, the old strategies no longer work in the same way. Service based launches will often be more successful than product launches. And the type of distributor you need will alter because the method of selling software may have such a high service component. And your pricing strategy has to be different too.

The good news is that services based launch strategies can both reduce risk for buyers and make it easier to sign up customers.

Alistair Davidson

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