Pricing

At Pricing Gurus, we believe that value-based pricing allows companies to achieve higher profitability and a better competitive position. Some companies disagree with that perspective, or feel they are stuck with cost-based pricing. Let’s explore a few reasons why value-based pricing is generally superior.

I like this definition from Wikipedia – “Value-based price is a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices”, and also the next sentence that describes the reason for choosing this approach –“Where it is successfully used, it will improve profitability through generating higher prices without impacting greatly on sales volumes.”

Defining value is not always easy, especially without asking customers and prospects. The old notion that people buy a hole rather than a drill bit still applies. Prospects consider your product or service because of what it can do for them, rather than the elements that make up cost, such as materials and labor. Value is most clearly seen when the product or service is differentiated. When all suppliers offer essentially the same thing, that’s a commodity market which leads to competing solely based on price. Suppliers can try to reduce costs, or distinguish themselves based on – for example – customer service, but that’s a fragile situation when alternatives can provide the same capability.

How loyal are you to the brand of gas you buy? Most people treat gasoline as a commodity. They might pay a little more for using a gas station near home (or a lot more for filling up where there is little competition), but generally price is a major factor. That’s a commodity.

Setting prices based on time and materials appears safer for the seller, but there are more unknowns for buyers (who might feel cheated if they have to pay for an obstacle that suddenly appears). This situation might occur when there are true unknowns (such as remodeling contractor not knowing what they’ll find behind a wall), or perhaps the seller (supplier) is inexperienced. More experienced suppliers are better able to use value-based pricing because they know that some jobs will be more profitable than others which allows them to predict average cost. Good contract language can minimize risks arising from unknowns or customers who withhold information.

Cost-based pricing can penalize the seller (and indirectly the buyer) by discouraging investment in equipment, employee training or hiring better employees. Why change if you are rewarded for inefficiency? Yet these kinds of investments can increase revenues profitably by supporting higher volume, improve competitive position through higher-quality, and create more flexibility for lowering prices when necessary. An article in the New York Times describes how US companies’ inability to produce the right type of screw is a significant reason for Apple keeping production in China. Lack of investment reduced competitiveness for US companies.

Setting prices based on value means more effort for the supplier, but it’s worth it. Challenge salespeople who tell you that price is the major barrier; research shows that sellers believe price is more important than buyers do. Perhaps some of your most price-sensitive customers are also those who make unreasonable demands, and you’d be better off without them.

Companies can’t always use value-based pricing, or at least with all customers. Government entities often try to force suppliers to behave as if their products are commodities. That’s not always true, such as when price is only one of several things scored in a proposal. And you don’t have to use the same approach for all your customers.

Value-based pricing tends to lead to higher customer satisfaction, better relationships between supplier and customer, and more repeat business.  We’ve touched on a few things in this article – for more information including how to ask prospects about pricing, check out the rest of the Pricing Gurus site.

If you aren’t using value-based pricing now, isn’t it time to consider it?

Mike Pritchard, Pricing Gurus, mikep@pricinggurus.com

References:

https://en.wikipedia.org/wiki/Value-based_pricing

https://www.nytimes.com/2019/01/28/technology/iphones-apple-china-made.html

An article on Dutch ovens in the September/October 2018 of Cook’s Illustrated gives food for thought (pun intended) about the relationship of between price and value. Sometimes higher value for a buyer means paying a lot more money – good news for the seller too.

Dutch ovens (also known as casseroles or cocottes) are multipurpose, with uses ranging from stews to baking. I must admit that reading the article made me realize I’m not exploring all the uses of mine so I’ll probably expand my repertoire.

All the ten models tested were similar in style – large, heavy, round, with a heavy lid and all holding about the same volume. Eight were enameled cast iron, one was uncoated cast iron, and one was ceramic. I don’t want to go into much detail about Cook’s Illustrated‘s perspective on appropriate features and benefits, although I’ll make a couple of comments at the end of the article. The two highest rated products are sufficiently similar in most areas, with significantly different prices, to allow the products to illustrate my points about value well.

Let me be clear. Cook’s Illustrated did not explicitly rate value in their testing and review. In fact, the word “value” does not appear in the article at all.  However, the term “Best Buy” is used only for the #2 product (the Cuisinart Chef’s Classic Enameled Cast Iron Covered Casserole) which is the top of the list of Recommended Dutch Ovens. The only product classified as Highly Recommended is the Le Creuset 7 ¼ Quart Round Dutch Oven which received a perfect score, but costs $367.99 versus $83.70 for the Cuisinart at the time the article was published.

Le Creuset $367.99	Cuisinart $83.70
Cooking ✮✮✮ Ease Of Use ✮✮✮ Durability ✮✮✮	Cooking ✮✮✮ Ease Of Use ✮✮1/2 Durability ✮✮1/2

That’s a huge price difference – over four times as much for the Le Creuset.  The next most expensive is the Staub at $279.99 which is rated a little lower than the Cuisinart. So why do people buy Le Creuset? And how does the opinion of customers and prospects affect how a product is priced?

The impact of brand can’t be ignored

Le Creuset was founded in 1925 and has been making enameled cast-iron since the beginning.  While they have introduced more colors since then, the distinctive flame color is owned by Le Creuset who has kept their focus on enameled cast iron with only a few products in other cooking areas. “Wedded” is a good word to describe the connection as Le Creuset is sometimes written into divorce agreements, and often the cookware is bequeathed to the next generation. Although Julia Child died nearly 20 years ago, she lives on through cookbooks and reruns. Images of Julia’s kitchen show more copper than enameled cast iron, and she wrote “copper pans are the most satisfactory of all to cook with, as they hold and spread the heat well, and their tin lining does not discolor foods.” However, she was also aware of the downsides of copper cookware, particularly lower end products. She also wrote. “With the exception of heavy copper, the best all-purpose material, in our opinion, is heavy, enameled cast iron”. Julia Child is indelibly associated with French cooking, and Le Creuset’s heritage is consistent with that association.

Cuisinart is no new kid on the block either, having been founded in 1971. Memories of how the company got started by creating a new category – the food processor – are less important to younger generations because of Cuisinart’s ongoing product line expansions. Cuisinart added other electrical kitchen devices fairly early, and then expanded into cookware in the late 1990s.  Those changes mean that the association with enameled cast iron is weaker than Le Creuset’s. Additionally, Cuisinart has been through ups and downs including bankruptcy and acquisition so those considering a Cuisinart product might be nervous about purchasing something that has accessories or if spare parts are needed . Although the name Cuisinart sounds vaguely French, the company is probably better known as an innovator than for a  connection with the heritage of French cooking. There has also been little consistency in pricing policies over the years which means that the potential purchaser can be confused about Cuisinart’s positioning.

Ease of use

Cook’s Illustrated is probably using a weighting system to combine their 6 point scales, and they may be using some hidden ratings as well. I don’t want to be too critical of the magazine’s testing and reviews (it’s one of my favorite publications and I learn from each edition), but something beyond the published scores must be used otherwise Crock-Pot’s Dutch oven (with the same total score and priced a little lower than Cuisinart) would probably have been a Best Buy. Cook’s Illustrated favored more comfortable handles, products that weighed less and were shallower, and also light interiors as being better for browning (although they also recognized the value of darker interiors for bread making).

I think that reviews are helpful for people to understand the issues involved in ease of use, to assess what’s important to them, and perhaps to narrow down their choices before visiting a store. Or they may consider some things soon after buying and be prepared to return an online purchase. I don’t find Le Creuset’s ½ star higher rating sufficient reason alone to reject Cuisinart’s lower priced product. But how good the ease of use is for a particular purchaser can be determined fairly quickly.

Durability

The lower durability rating for Cuisinart, my personal experience, and the promise inherent in the Le Creuset brand are what caused me to think about value, and to discuss what it means in terms of these products. I’m a value shopper who will spend more to get a product that will do a better job for me if it makes sense. Pricing Gurus researches pricing and teaches value-based pricing along with other pricing strategies.

To me, and presumably tens of thousands of Le Creuset owners, durability is important. Perhaps it’s just the brand promise but I don’t think so. I own only a few Le Creuset pieces (and I grit my teeth every time I buy a new one because of the price).  None of them is under 15 years old, and I’ve never had to throw one out.

The oldest piece I own, coincidentally, is a variant of the Dutch ovens tested by Cook’s Illustrated – an oval 5 ½ quart enameled cast iron Dutch oven. It’s over 25 years old and still going strong. It’s a little discolored inside, perhaps because I’m not cleaning it properly, but it’s an essential part of my “batterie de cuisine” as Julia might say – something I use often, and more frequently in the cooler months. Lower durability scores in the reviews weren’t just predictions. “But the Le Creuset held up better to the kind of everyday wear and tear not covered in the warranty; the Cuisinart pot chipped during our durability tests, while our winner emerged from testing looking as good as new.”

To turn that comment into something more concrete, I calculated price per year based on the current life of my 25 year old Dutch oven (which I fully expect to last many more years) and an estimated 5 year life for the Cuisinart. The price per year of useful life for the Cuisinart is 14% higher than the Le Creuset (assuming that the Le Creuset stops being functional immediately).  To put it another way, a Le Creuset Dutch Oven that lasts for 25 years is better value than a Cuisinart lasting 5 years and 8 months.

I’m a fan of Cuisinart too, although having replaced a food processor and a coffee maker it’s no surprise to read that Cook’s Illustrated’s experience with chips corresponds with my expectation for shorter lifespan.
There are at least two or three target segments for cookware that can be identified with durability preferences relevant to purchasers.

• Those who place greater importance on long life in cookware and can afford to buy an expensive product. They may be drawn to tradition and avoid what they see as potential fads.
• Those who are more interested in “good enough” and are less interested in having the best. They may be drawn to innovation and think that if something isn’t likely to last as long as traditional options by the time it breaks there will be better products available, or they may prefer to have new things frequently.
• Those who would like “the best” but who are limited by budget. Some will buy one or two expensive products (or acquire them as a wedding gift for example). Others will want or need more items.

Lessons for manufacturers

• Incorporate value into your products and pricing. Look at dimensions of value beyond product features.
• Be consistent in positioning product lines. Should Le Creuset introduce a new low-priced product line? Probably not, at least not unless it comes from a different brand (perhaps a sub-brand) so as not to confuse people.

What could Cook’s Illustrated do better?

• Help readers understand what products they need, and what size. The Dutch ovens tested are for recipes feeding 7 to 8 people. It’s OK to test that size, but some reference to smaller (less expensive) sizes suitable for smaller households would be helpful.
• Stating that a product got chipped during testing is helpful; it would be great if you could tell people roughly how long they could expect it to last. Including durability in a value rating would also be useful. In the introduction page for Cook’s Illustrated buying guides, the first sentence is “We think that cookware ought to be made to last.” Perhaps that philosophy is a little more hidden than it should be. [Update March 6, 2020. Cook’s Illustrated appears to have updated this review, and also incorporated some additional text in related reviews for smaller Dutch Ovens describing more details of their durability testing.]
• Prices have already changed quite a bit for some of the reviewed products since the article was published. That’s not all that surprising, and it might be good to let your readers know the rough timing of sales and the best places to buy for things that change price much. I don’t know what was behind this specific drop, but Le Creuset recently put a smaller Dutch oven (2-3 portions) on sale for 40% off.

Writing about cookware is making me hungry.  It’s time to get some dinner – perhaps reheating something I cooked in a Le Creuset pan and froze.  Then maybe I’ll check out the Chicken Vesuvius recipe in the same issue of Cook’s Illustrated.

Idiosyncratically,

Pricing Guru Mike (Mike Pritchard)

The Methow Valley is a remote area in Eastern Washington State. It’s a destination recreation area year-round, and even more so in the winter when the North Cascades Highway is closed making a circular drive impossible.

The Methow Valley Trails Organization’s pricing offers a number of insights for pricing both services and products.

You can find out more about winter sports in the Methow Valley at http://www.methowtrails.org/ . You can also cheer for two Nordic Skiing Winter Olympians from the Pacific Northwest who are based in the Methow Valley – sister and brother Sadie and Erik Bjornsen. http://nwnewsnetwork.org/post/pacific-northwest-olympians-2018-pyeongchang-winter-games

Pricing Guru Mike (Mike Pritchard)
P.S. I haven’t noticed many locals turning up their noses at mispronunciation, but they appreciate it if you pronounce the name of their home as the “Met” “How” Valley.

Image of Sadie Bjornsen from NW News Network. Other images from Methow Trails.