Companies exist to create value for customers. Customers only buy when they think the value they will receive exceeds the price.
Stop and think about those first two sentences. They’re the foundation of what is to follow. Customers buy value. Companies create value. Pricing puts a number on the transaction. The price must be lower than the customers’ perceived value for a transaction to occur.
For new products, pricing is usually an afterthought. The first time you price the product is after it has been developed and when it’s ready to market. You likely had a target price in mind during development, but it was little more than a guess. Then, after marketing and selling the product, you might tweak your price up or down, testing to see the effect on profitability. But little is done to understand the value buyers perceive.
For large transactions, price is used as a negotiation tool. We want to win the big deals, and even the small ones, when procurement threatens to buy from a competitor. When the response to, “We need a better price, or we’ll buy from your competitor,” is a discount, you aren’t focusing on customer perceived value.