Charging a Premium for Reliability
You charge a higher price for a more reliable product if reliability is perceived as a benefit by the customer. But how do we to make a customer perceive reliability as a benefit?
To begin with let’s revisit the definition of reliability: It’s the probability that a product performs its intended function for a stated period of time under specified operating conditions. Now the very usage of the word probability clearly explains that there is a good chance that a product will fail to perform its stated function. The definition also emphasizes the need for a clear-cut establishment of the intended function along with the time frame and operating conditions. The definition may be as simple as: Each time the button is pressed the letter “A” is displayed on the screen. The operating condition could be the minimum and maximum pressure level, power input parameters etc. The time-frame is often denoted as “warranty/guaranty” period.
A failure in the above instance would be: Letter “A” not displayed on the screen despite operating conditions being met.
So to establish your products reliability it is important to communicate how good your product is in performing its intended function. To position reliability as a benefit to the customer you also need to explain what happens if the product doesn’t perform its intended function. Over the years companies have indeed communicated innovatively the importance of reliability. An example would be the 2001 minimalistic ad by Durex:
For Durex the work was tad easier than the rest. A condom is used once only and its expected function is to provide protection during its usage. If there is a failure the consequence could be dire! Most customers understand that and thus would not prefer to take a risk. It is similar for a lot of other products too that directly or indirectly impact health and wealth– thus there is not much challenge in charging a premium for a better quality mineral water, medical implants, security systems etc. The customer here buys the product to use it. If the product is reliable then he can use it without much worry. Thus reliability is indeed a benefit worth paying for.
However the challenge lies in selling reliability for a premium in the B2B environment. The reason is simple: The B2B customer is not the end user. For them reliability thus becomes a matter of strategy – should we ensure all our components are highly reliable and in the process create reliable more expensive end product or should we concentrate on creating the product at the lowest cost and be the cost leader in the end market?
If the customer’s strategy is to choose the latter then it gets even more difficult to sell a more reliable solution for a higher price. Even if the customer chooses the former option the job of the supplier gets no easier. Whether reliability in such a case is a benefit worth paying extra for again depends on what the competition looks like. The question’s then become: What level of reliability is offered by the competitor’s solution? In case the level is not much different from competitor to competitor- reliability for that particular product becomes a commodity feature (something you can’t charge a premium for). However if there is a stark difference in the reliability levels then we can sure try a strategy for selling reliability on value. Proposed process for doing the same is as follows:
- Segment – Have 2 variants: One with higher reliability and one with reliability as the same level as competition. It’s highly possible that the product you sell has multiple applications and are used by customers from different industries. Not all of them value reliability. Segmenting helps you address the differentiated need better. Most chip-makers thus have chips in 2 variants: standard and hirel (high reliability).
- Quantify – Simply stating- my product is priced higher as it is more reliable – may not work. It is better to use numbers. For example stating : Our competitor’s product has a MTBF (Mean time before failure) of 2.2 years while for our product the MTBF is 7 years, may be more effective (only if the average life of the end product is greater than 2.2 years and less than 7 years). However if the average life of the end product is 1 year then the above argument may not work at all.
Thus is important to use a metric that makes the customer understand the utility of buying the more reliable product.
- Identify your NBA (Next best Alternative) – You may have segmented well and found the customer who agrees to pay a premium for your more reliable offering but you are still not done till you convince him on how much premium is worth paying for the more reliable product. A customer in the B2B world, who is willing to pay premium for reliability – didn’t wake up to the need based on your sales pitch. In all probability he has been addressing the problem of reliability for ages using other techniques (e.g. a failsafe circuit ). Your more reliable product appeals as he can reduce his spend elsewhere. Thus it is important to understand what other options your customer has. Premium for reliability should not exceed the cost of the other options.
At the end let’s get back to the initial question – How to make a customer perceive reliability as a benefit? In B2C environment educating the customer on the troubles of a non-reliable product does the trick. In the B2B environment the benefit has to be established by positioning reliability as an unique value driver – that helps the customer save money elsewhere or helps them make money better.