Think quick…What would you do to improve gross margins at your company?
Did you say, “Reduce costs”?
But what if you could raise prices; wouldn’t that be the fastest way to improve margins?
You’d expect price improvement programs to be as common as cost reduction efforts. But for some reason they’re not. Maybe I can help you change that. Here are 6 ways capital equipment manufacturers can improve pricing.
1. Know Your Value
Like the earth under your feet, prices are supported by the value the customer receives from your product or service. This value must be expressed in financial terms and integrated into your marketing strategy and materials.
Of course Purchasing will always try to commoditize your product. They’ll tell you, “Either one will do. It just comes down to price.”
But if you’ve based your product and marketing strategy on delivering more value than your competitor you can keep your prices up.
Your retort to Purchasing becomes something like, “At the price I’ve offered for my system you’ll make $5M more profit a year than if you go with my competitor. I’m only asking for a $300,000 premium.”
2. Create Frequent Product Extensions
Never let continuous improvements in your product just slide from the engineering lab to your customer’s receiving dock. You deserve to get paid for them.
Bundle these improvements into new product extensions. Each of these product extensions brings incremental value and an opportunity to raise prices.
This works best when each extension can be easily adopted by your existing customers without creating an open selection process. An open selection opens the door to a compettive run-off. I don’t have to tell the direction prices go when that happens.
So don’t make each extension “too new”. It also helps to keep the product name the same, only changing the extension number. Something like RapidWafer I, RapidWafer II, etc…
Create new product extensions every 9 to 12 months and you’ll be able to keep your customers buying from you at increasing prices.
3. Make Sure Improvements are Available as Upgrades
This obvious but often overlooked move lets you essentially raise prices on systems you’ve already sold.
Every time you release a new version of your product make sure as much of the improvement as possible is available to the install base as an upgrade.
For how to price these upgrades, see #1 above.
4. Don’t Kill the Old Product
To protect the price of your new product you need to keep the old product around for a while.
Price your new product so that it reflects the incremental value added. Whenever your customer balks at the price increase, tell them if price is the issue you’d be happy to sell them the old model.
5. Create 2 Price Points
Even when you have a value advantage, some customers will remain fixated on price.
For this reason, always keep a configuration or your product in the offering that approximates the value of the competitor’s system. Every time the customer insists you match the competitor’s price, just wheel out this stripped down configuration.
If they really want the full performance version, they’ll need to step up and pay.
6. Set Different Prices for Different Customers
From a customer perspective, your product’s value is not universal. Some customers will value your product more than others.
Let’s say you made a piece of equipment for applications in both microprocessor and memory manufacturing.
In the memory application your performance is about equal to your competitor’s. But in microprocessors, your system enables higher performance devices. As a result, the microprocessor manufacturer can charge their customers higher prices.
Would you charge both memory and microprocessor companies the same price for your equipment in the example above?
The value proposition is different in different market segments; therefore the same should go for your prices.