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The First Principle of Pricing

(360 words – 3 min)

I have a ton of thoughts swirling in my head that I want to organize and put on paper to communicate the power of value to people outside of pricing.  This may be the organizing structure to my next book: Invincible Profits: How to Lead a Value Revolution and Dominate Your Market. 

When I boil pricing down to its essence, it always seems to come back to this one statement:  

Buyers trade money for value.  

As pricing people, we know this.  But this applies to the entire business.  We are in business to make money, which we do by providing value to our customers.  

This short sentence has three keywords:  Buyers, Money, and Value.  

Buyers:  Each buyer is unique.   Different buyers value our offers in different amounts.  We need to create strategies for groups of buyers, not all buyers at once. This is market and price segmentation.  The better we understand and segment our buyers, the more value we can deliver and the more we can be paid.  

Money: This is what we want more of, and buyers want to keep it for themselves.  This is a zero-sum game, meaning the more we get, the less the buyer keeps.  Buyers never WANT to pay more, but they are often WILLING to pay more.  We get the buyer to pay more when we understand their willingness to pay.  We set prices for different segments, products, and situations. We choose pricing models that capture more of the value we deliver.  

Value:  Value exists in the mind of the buyer.  What the buyer believes is what drives their willingness to pay.  They consider inherent and relative value.  They want emotional value and utility.  But they rarely realize our full value without our help.  We must create value-optimized products for individual segments.  We need to communicate our value to them using marketing and sales.

As I think through the many concepts and tools we use in pricing, I see how they fit under one of these three keywords. 

Does this resonate with you?  Do you think it would resonate with your CEO?  

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