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Customer service delivery systems are an important part of every business as they represent the offerings your customers can take advantage of when they deal with your company.

“What is a customer service delivery system?” you may be asking. No, it isn’t transportation.

A customer service delivery system is how your customers can choose to interact with you when they are conducting research on buying products. They can walk in, call on a telephone, or even use the Internet.

The interesting thing about each of these delivery systems is they each have a differing operating cost associated with them. This should allow you to have a variable price based on the operating cost of the delivery system employed, shouldn’t it? So why don’t you do that?

Customers Notice

I hope you think this is a good question because it is becoming increasingly obvious as consumers of all classes and kinds make their purchase decisions based on the price of the product, the quality of the product, and the level of service they receive from their prospective supplier.

And if you don’t believe me, think back on some new businesses or business processes in place in the United States that didn’t exist all that long ago. Look at Amazon delivering books and other products. Look at the iPhone and the iPad. Look at Cisco systems and wireless technology. Those are all transformational changes and delivery systems.

They are also good examples of strong businesses that took over from other strong businesses that didn’t change fast enough. Or perhaps the companies and products that were seriously impacted didn’t adapt to what their customers were telling them.

I believe your customers are telling you this same thing today in how they buy and research their buying decisions.

So where does price fit into this scenario? It’s right up there front and center. Let’s study the price from a few different perspectives.

Increasing Across the Board

Take the top-down view. What about an increase across the board of 1%. A recent McKinsey study said that if all companies in the S&P Global 1200 were to raise prices just 1% and if demand remained constant, operating profit would increase by 11%. This is an illustration from the book The 1% Windfall by Rafi Mohammed.

Imagine that impact from a 1% price increase. Well of course it’s not that simple. It rarely is ever that simple. Perhaps your prices can be increased by 1%—but perhaps your prices are too high. This is where the work comes in and why we rarely see the kind of pricing we should see in the market. It’s too much darn work.

Convenience-Store Approach

Let’s look at a market-segmentation approach to pricing. Identify the most competitive parts in your market and the price points they require, perhaps a 30% decrease in price. It sounds crazy, but let’s decrease these parts by 30% and pay for this decrease by increasing all the other parts.

Does this sound familiar? This is the foundation of businesses like 7-Eleven and many other convenience stores. The items that draw people in have very sharp prices, while the others in the store are higher and pay for those lower special prices that attract people in the first place.

This is also the strategy behind companies like NAPA, but with a different twist to it. They will only sell some of the parts that customers require but they are the fast-moving, regularly-changed parts. Their pricing reflects a similar philosophy.

So go back to our example above. Say that 5% of your part numbers are competitive and that these represent 5% of your total parts business and you dropped the price by 30%. How much would you need to increase the remainder of the parts you sell to pay for this decrease? The answer is 1.5%. Go ahead, work it out. The prices on 95% of your parts business have to increase by 1.5% in order to pay for the decrease of 30% on the 5% of the parts business that is competitive.

The Win-Win Situation

There is another view on pricing to be considered. The profit of the parts business is critical to the success of your overall operation, so we need to be careful about what we do to it. A typical parts business in the capital equipment industries has an operating expense of 10% to 12% of parts sales. When you consider the skills and expenses of the parts personnel required to help a customer determine what they need, it is substantial.

Well, what about the customers who don’t require that assistance? Should they pay the same price when they don’t require the same support and the cost structure required to provide that support? I don’t think so and I don’t think you do either.

So what is the change in the cost? It can be as high as 5% of parts sales, taking your operating costs from 10% to 12% down to 5% to 7%. That means you can reduce your selling price by 5% and maintain the same net income for the parts business. Your customer gets a better price and you continue to make the same amount of money. That sounds like a winwin to me.

This takes me to the place I want to take you. Please consider what is normally called value-based pricing. This isn’t about the lowest price, nor is it about the highest price. It is about the customer being able to buy the highest-value product or service for the lowest possible price. Making that determination is not simply following the suggestions of your suppliers. It is about knowing your customers and your competitors and making decisions that apply properly to your business and theirs.

This is where the rubber meets the road. Don’t forget the 1% opportunity we exposed at the beginning of this column. It’s there for the taking if your do your homework. Good luck.