Overcoming Floccinaucinihilipilification

Valuing and Monetizing Products and Services

Jon Manning

• Publisher: Pricing Prophets Pty Ltd
• Year: 2021
• eBook ISBN: 9780645044416
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

FLOCCINAUCINIHILIPILIFICATION, the longest "F" word in the English language, is the habit of estimating something as valueless. This book will help entrepreneurs, side-hustlers and small business owners overcome this common mistake when valuing, pricing and monetizing their products and services. A 15-step value-based pricing canvas will help you understand the value you offer your customers. The four value-based pricing methodologies will make sure you get the price you deserve for the products and services you provide.

CHAPTER 1

INTRODUCTION

floccinaucinihilipilification

pronounced FLOX-in-OX-in-ai-hil-i-pil-i-fic-ay-shun

noun: The action or habit of estimating something as worthless

I’ve been looking for the perfect price for 30 years. It doesn’t matter whether I’ve been a pricing manager, a pricing consultant, a workshop facilitator, a keynote speaker, or an entrepreneur, the quest has always been the same.

“What is the perfect price for my product or service?” is a question I would love to be able to answer with laser-guided precision, by finding a price point (or points) combined with a pricing model that maximizes a business’s sales and profit.

Unfortunately, the perfect price is just one of many myths about pricing. By the end of the next chapter, after reading about this and other pricing myths, you will realize the only person who can tell you the perfect price for your product is your customer.

This book won’t tell you the perfect price for your product or service, but it will give you a framework to help you identify and communicate, from the customer’s perspective, the value of your products and services. It will also provide you with four ways to price your product or service on the basis of value. Those methodologies include:

•the price sensitivity meter

•customer value analysis

•economic value analysis

•subscriptions.

ARE YOU PRICING LIKE DENNIS DENUTO?

I’ve been involved in pricing goods and services professionally for around 30 years now. I’ve been fortunate enough to gain experience in dozens of different countries. Along the way, I’ve experimented with a wide variety of pricing models in a range of industries. My advice has been well-informed with the best of theory and practice, and I’d like to think that it has helped businesses achieve their revenue and profitability goals while maintaining their reputational integrity. But two questions always lurk in the back of my mind: “Did I get the pricing model and the price point(s) right? Could I have made more profit with a different approach to pricing, or higher or lower prices?”

One of my most popular keynote presentations is a talk called “Are you pricing like Dennis Denuto?” – a reference to the bumbling lawyer in the classic Australian comedy movie The Castle. Dennis grasps ineptly at whatever facts come to mind, justifying his statements to himself, the judge, and his clients by saying “…it’s the vibe, and…no that’s it…it’s the vibe. I rest my case.”

Sadly, this reflects the approach that many businesses take to pricing. The audiences in my presentations often recognize that their past attempts to grab prices out of thin air that “feel right,” often without rhyme or reason, has resulted in, at best, the wrong choice of pricing model, serious underpricing of their products and services, or both, and at worst, floccinaucinihilification.

This book outlines a framework I have been using and refining for many years in my quest to develop a sustainable, customer-centric and value-based approach to pricing. That framework is the Value-Based Pricing Canvas.

WHAT IS THE VALUE-BASED PRICING CANVAS?

Readers may be familiar with the Business Model Canvas, a popular framework first proposed by Alexander Osterwalder in 2005 and used by many entrepreneurs and start-up businesses, as well as mature and disrupted businesses, to create or fine-tune their business models.

A new business model is created when new sources of value creation (products) are combined with new ways of monetization (pricing models). The Business Model Canvas helps to define such new business models.

A business model includes value creation and value capture

The Business Model Canvas has nine building blocks, one of which is the revenue streams of the business. The other building blocks are key partners, key activities, key resources, cost structure, value proposition, customer relationships, channels, and customer segments. Given the importance of pricing to the success of a business, the mystery that surrounds it, and the Dennis Denuto–style approach that businesses often adopt, a single building block doesn’t seem to do justice to the importance of developing the right pricing strategy.

For that reason, I developed the Value-Based Pricing Canvas: a 15-step framework that will help you recognize the value in a new or legacy product, service, or business model. This also makes it easier to use one of the four value-based pricing methodologies outlined in the second half of the book.

HOW MUCH DOES PRICING MATTER?

Phil is a leadership coach to executive-level managers. When Phil started his consulting career 10 years ago, he was prepared to work 20 days a month. He looked at what his competitors were charging and decided that pricing his services at about 10% below them should help him pick up customers and realize his goal.

Phil soon found himself in a very interesting situation. Firstly, he wasn’t attracting the upmarket clients he really wanted to work with. Secondly, the clients he was attracting were asking him to do more and more work for less and less reward.

Phil sought help with his pricing, which resulted in the development of three leadership coaching packages for his clients. The results were immediate. Some of the packages appealed to the upmarket clients that had, to date, been elusive. Other packages clearly defined what services the clients would receive and put an end to the scope creep he had been experiencing. Not only did Phil’s clients know what they were getting in each package, Phil knew what services he should be delivering. And, perhaps most importantly, Phil’s revenue and profit increased dramatically.

Phil’s experience illustrates the power of pricing. This has been well documented. In their seminal 1992 Harvard Business Review paper, “Managing Profit, Gaining Price,” Marn and Rosario showed that a 1% improvement in pricing would result in an 11.1% improvement in operating profit. This compares to a 1% improvement in variable cost, sales volumes and fixed cost, which typically result in a 7.8%, 3.3%, and 2.3% improvement in operating profit, respectively.

More recently, McKinsey & Company found that, across approximately 1,000 mid-size firms (US$100 million – US$1 billon in 2017), a 1% improvement in price translates to a 6% improvement in profits.

HOW MUCH WOULD YOU PAY FOR AN ICE-COLD BEER?

In his 2015 book, Misbehaving: The Making of Behavioral Economics, behavioral economist Richard Thaler discusses his famous 1985 “beer on the beach” experiment. Thaler asked people what they would be prepared to pay for an ice-cold beer purchased at a five-star hotel at one end of a beach, compared to the same beer purchased from a run-down grocery store at the other end of the beach. He discovered that respondents were prepared to pay a significantly higher price for the beer purchased from the five-star hotel.

Traditional economics assumes human beings are rational. The price they are willing to pay for the ice-cold beer in the two scenarios above shouldn’t change. This doesn’t explain Thaler’s findings.

But behavioral economics can. People act irrationally. Because the context in which their purchase decision was being made changed, so too did their willingness to pay.

Not only is pricing powerful, it is also more art than science. If pricing was a science, we would be able to accurately predict how much a Damien Hirst artwork would sell for at auction. Human behavior and decision-making is both irrational and unpredictable.

WHO IS THIS BOOK FOR?

Over the years, I’ve observed an interesting trend in workshop attendees from larger organizations: typically, 80–100% of them work in companies that have a procurement department. Yet only 10–20% of these organizations have a pricing department or function. Most organizations are more concerned about the price they pay for products or services they buy than they are in the price they charge for the products or services they sell.

Given that pricing is such an important driver of business profitability and success, why don’t companies pay more attention to it?

One reason might be that pricing sits in the “too hard” basket. After all, as Mark Ritson says in Tony Cram’s book Smarter Pricing: How to Capture More Value in your Market, “Pricing is the worst managed of all marketing areas. How prices are decided is often a mixture of voodoo and bingo.” So why invest any resources in it at all?

This book is for entrepreneurs, side-hustlers and small business owners who have heard about the importance of pricing as a profitability driver but haven’t really known where to start. The approach outlined here is systematic, customer-centric, and value-based. It will help you solve two key issues about your pricing:

1.how to identify and communicate the value that supports your pricing strategy

2.how to price your product or service on that basis of that value.

HOW IS THIS BOOK ORGANIZED?

Naturally, I would like readers to absorb the book in the way I’ve written it, from beginning to end. But for those who would prefer to dive into areas of particular interest, here are the options:

•Chapters 2–3: myths o...

Table of contents

• Cover
• Copyright Page
• Title Page
• Acknowledgments
• Contents
• Part I: Why Pricing Matters
• Part II: Value-Based Pricing Canvas
• Part III: Value-Based Price Points