The July 21st Business Week Blog on
Innovation by Jessie Scanlon described Caterpillar’s roll-out of the new Hybrid
D7E diesel-electric tractor which the company anticipates will be a hit with
customers and enable gains in market share and drive the company’s recovery.
Caterpillar is making a strategic bet that the
strategy will succeed. The payoff of this strategy won’t be known for some
time; however, Caterpillar has spent years working with key customers to
understand their needs and their perception of the value of its large tractors.
Tractors in this size category sell for $500,000 or more and in the case of the
D7E $603,000, a 20% premium.
Caterpillar is basing its pricing and value on the
life-cycle “price” of its tractor instead of the initial price or the product. The
company’s design team has worked with its customers to develop the D7E and
believes that productivity improvement (10%), combined with greater (30%) fuel
efficiency, and lower (10%) operating costs will motivate customers to pay the
initial price premium over competing products. If Caterpillar has accurately understood
how its customers perceive value the D7E should drive market share growth.
Value, the combination of price and non-price
factors comprises a one element of a customer’s purchase decision when
comparing competitive offerings. To justify a 20% price premium a product/service’s
relative performance on the non-price factors must be superior especially for
the most important factors. A review of
MANTIS research shows that businesses with high value gain market share and
those with low value lose share.
When deciding how to position your product two important questions you should consider are:
- How do customers define price?
- How important are the non-price factors to customers where your business has an advantage?
If customers don’t accept
life-cycle pricing and look at initial price your product will be over-priced
and provide poor value. Some examples include; 1) the decision maker is the purchasing
department and is rewarded on negotiating the best initial price, 2) customers agree with
life-cycle pricing but put a lower premium on the benefit, and 3) other cost factors change the economics of the decision lessening the benefits of your product or service. Finally, if
competitor’s match your product your advantage is
dissipated and ability to maintain a price premium lessens.
Businesses that successfully Crack the Value Code will accrue the market and financial rewards and move ahead of the competition. In addition to thoughtful and thorough market research there are tools that provide a framework and insight for measuring Value perceptions.
