On Value and Profitability, the post before this one, discussed value creation and capturing value. Pricing for Sustainability, a post from a year and a half ago, adds to that by emphasizing the importance of pricing in the creation (and capture) of value. – C.H.
Pricing for Sustainability – from 8 November 2014
Frequent readers of the blog know that I like Adam Werbach’s definition: “…being a sustainable business means thriving in perpetuity”. Further, my idea of thriving is to reliably generate a return on capital employed that exceeds the cost of that capital taken across the business cycle, without exploiting anyone or anything.
For smaller businesses, particularly smaller manufacturing businesses, one of the keys to consistent profitability lies in retaining a measure of control over prices. A “measure of control” means offering products that some sufficiently large segment of the market will buy at prices that provide your firm with a sufficient degree of profitability.
In the past, manufacturing managers were conditioned to think of pricing as a function of manufacturing costs – price your product at x% over cost and hope for enough volume. Or, price your product where your competitors price theirs, and hope for enough margin and enough volume. There are several problems with these familiar approaches:
>> Product – Purchasers buy some collection of tangibles, intangibles and perceptions. Tangibles include the goods, the packaging, the documentation and so on. Intangibles include service levels, price, delivery, terms of payment, warranty and more. Perceptions are biases, judgments and expectations, often based on comparisons, rational or otherwise. Purchasers buy the lot – not just the goods, not just the price.
>> Cost – Manufacturers are accustomed to calculating the average unit cost of their products – at least the tangible aspects of their product. However, costs vary from day to day and from manufacturer to manufacturers due to a myriad of factors. Smaller manufacturers know that large manufacturers enjoy higher labor productivities than they do, buy at higher volumes — hence lower prices — than they do, and have better and cheaper access to capital than they do. Smaller manufacturers in developed countries also know that manufacturers abroad – large or small – can produce tangible goods at very low costs. Speaking generally, smaller manufacturers are poorly positioned to be the low cost producer, except in tightly defined market niches.
>> Customers – There is no Customers’ Union, where all prospective customers think alike. There is, literally, a world of prospective customers. Your firm is free to choose to pursue – and tailor your product offerings for — those that you are well positioned to serve.
Your firm’s Business Model relates your firm’s products to its customers and potential customers. In essence, a business model consists of a Value Proposition and an Operating Model. The Value Proposition consists of that collection of tangible and intangible features and benefits intended to induce a defined set of prospective customers to perceive your firm’s offering as preferable to (or, offering better value than) competitive offerings. The Operating Model consists of that set of processes, policies, practices and procedures that allow you to deliver the value offered, while generating a satisfactory profit by doing so. Previous posts to this blog discuss the Value Proposition  and the Operating Model  in more detail.
Business Model Innovation
Markets and the forces that drive markets continuously change in today’s globalized economy. Successful Business Models can be disrupted, and likely will be, sooner or later. New opportunities arise and new potential customers emerge. Where a Business Model is disrupted such that it no longer generates a satisfactory profit, it needs to be reinvented. Where new opportunities arise, suitable Business Models need to be created in order to seize those opportunities. An earlier post to this blog elaborates on Business Model innovation , as does an informative Harvard Business Review article by innovation guru Clayton Christensen, et al .
For Smaller Manufacturers
Price is one component of a Value Proposition intended to induce a defined set of prospective customers to choose your firm’s products, while providing your firm with an adequate profit. It is important to recognize the many aspects of a well formulated Value Proposition, especially the intangible aspects. The perceptions aspects of the Value Proposition are intentions on the part of the producer, to be conveyed through the Operating Model. Of course, the customer (or potential customer) will form his or her own perceptions. The success of the Business Model may well depend on how well the intended perceptions are conveyed.
Thoughtful comments and experience reports are always appreciated.
… Chuck Harrington (Chuck@JeraSustainableDevelopment.com)
P.S: Contact me when your organization is serious about confronting the realities of 21st century manufacturing … CH
This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.
 Adam Werbach, Strategy for Sustainability, Harvard Business Press, page 9.
 Johnson, Mark, Clayton Christensen and Henning Kagermann, Reinventing Your Business Model, Harvard Business Review, December 2008. Reprint R0812C, available for download at: http://hbr.org/search/R0812C/0?refinement=4294841677