Tom Nagle presents the argument that there has been a shift in how prices are set, from using pricing policies to the customers setting Prices, a trend that started in the eighties and which he refers to as negotiated pricing. He says that on the part of managers, who were only interested in profit margins however minimal, this was a wrong move.
To determine the price for the customer, it is imperative to understand how much value the product is to the customer. With this value in mind, one can set a price with confidence that the customer who also appreciates the value of the product, will be willing to pay for it. Naggle points out that a seller should not be cowed into negotiating large discounts that do not reflect the true value of the product because once this happens, a wise customer will keep pushing this advantage. The seller should state firmly that his/her pricing is fair and that it is worth paying for what he/she has to offer. Another suggestion Naggle offers to deal with customers is ‘unbundling’. This is stripping the product of features that customers supposedly dismiss as not being important, and then offering the same product at a lower price. However, Naggle notes, there should be different pricing systems for different quality goods and different price valuing systems for different customers depending on size of purchase, commitment and service requirements. Naggle’s last recommendation on dealing with pricing is being able to turn down a deal that asks for too large a discount or that simply does not reflect on the value of the product.
Naggle further recommends that sale persons should be motivated by being given incentives. Naggle outlines a couple mistakes that companies should avoid such as discounting the price increase by giving a smaller price increase to those who buy in bulk, discounting for buyers who purchase greater volumes, undermining the importance of value over volume, signing contracts which strongly favor one side and lastly determining price by looking at the performance of a product. Naggle concludes that the fundamental principal remains understanding the true value of the product offered, and then ensuring that the customers appreciate this value as well so that they know what they are paying for and do not hesitate to pay for it. Price negotiations results in loss of sense of value of the product, argues Naggle, and that it also undermines the importance of pricing.
There are companies that have successfully used the approach of understanding the value of their product and setting their prices accordingly. Sears is one of the companies that opted to go down this road with very profitable results. By raising their prices by just one per cent, there was a corresponding 100% increase in profits. Sears did this by streamlining their supply chains, cutting down on the number of warehouses, and moving them closer to manufacturers. There was also closer monitoring of the flow of goods.
Sears competition is other large store chains such as Wal-Mart. Since it has been shown that it is better to stick to pricing policies that reflect value, the best strategy that Sears could apply to ward off competition would be to ensure delivering quality products so that customers do not run to the next supplier with greater discounts, despite their seemingly higher prices.