While working in the Flight Operations department of Air New Zealand back in the 1990s, I was fortunate enough to spend four weeks at Boeing in Seattle on a 747 aerodynamics course. The room was full of highly-qualified aerodynamics engineers (yours truly was the only one in the room who didn’t have an engineering degree) and the course was run by a guy from Butte, Montana by the name of Al Ginter.
He was, as I recall, a paid-up member of the National Rifle Association and he played a big part in designing the B29 bomber. He was one of those guys who really (and I mean really) knew his stuff and he often used stories to make a point. So I am going to do the same in this column by borrowing one of Al’s stories to make a point.
When the Learjet was in its infancy, there was a spate of crashes that had air accident inspectors baffled for a time. It was eventually determined that the crashes were caused by the aircraft entering into a flight regime known as “coffin corner”, where the stall speed was separated from the mach overspeed by only a few knots; with those speeds being determined by altitude, aircraft weight and position. In such a situation the pilot would lose control if he or she slowed down or if they sped up and, while it was possible to get out of such a predicament, a number of pilots made mistakes in doing so and, along with the passengers, paid the ultimate price.
Which brings me to the topic of pricing. As I have touched on in previous columns, the way in which product and service pricing is managed in the reseller community tends to be less about science and more about “cost plus” or “competitor’s price minus”.
Neither of these is a bad way to determine pricing, but both put the reseller in danger of moving into their own “coffin corner” where they can’t increase prices due to competitor pressure and can’t decrease them due to the impact such a move would have on their business.
It is difficult not to be drawn into commodity pricing models when what you’re selling is a genuine commodity, but in those situations where there is some way to differentiate your offering it’s vital that you apply as much science as possible when it comes to determining pricing. Which brings me to another story...
There once was a small New Zealand-based software company that created a clever application designed to help a large number of organisations. The application had worldwide applicability and it wasn’t long before it was sold into some very large marketplaces.
It became quickly apparent this company’s business and staffing model couldn’t survive the huge spike in enquiries and the implications of selling a large number of their applications. So they put prices up and not by a few percentage points but by several hundred of them. Sales enquiries plummeted and installations and support requirements plummeted accordingly, but revenue and profits soared.
Then there are the people I know who had an analogue security camera system installed in their home. The company installing it had staff who were prompt, courteous, highly-skilled and made – by my estimate – a margin of at least 200 percent on the deal. I know my friends were happy with the end result and I am pretty sure that the security company weren’t too upset about it either.
The above examples partially prove the point that much of a customer’s perception of the value or quality of a product or service is influenced by the price they are being asked to pay. I’m not suggesting you should double or treble your prices overnight, but have you ever audited your pricing strategy to determine if there are products or services that you price on the basis of “cost plus”, which customers might view differently if the prices were higher than they are currently ? If not, chances are your company is playing in a pricing “coffin corner” so now might be a good time to check that there’s a qualified and experienced pilot at the controls.
Brett Roberts is a partner at business strategy consultancy Business IQ and Microsoft’s former CTO. He can be contacted at brett.roberts@businessIQ.co.nz