Products Vs. Solutions

The McKinsey Quarterly has an article (free registration required) on selling solutions instead of bundling products.

Selling solutions creates opportunities for value-based rather than cost-plus pricing. To start with, a solution creates extra value, and though the seller must decide how to share the pie with the customer, the pie is larger. Second, solutions are integrated, so it is hard for the customer to choose only parts of the offering. (Sometimes the seller realizes it has been marketing a bundle rather than a solution when the customer disaggregates the package and gathers competitive bids.) Finally, because the solution is customized, competitors find it difficult to bid against it or even to compare its price and features with those of their own products.

But solutions providers can easily miss such pricing opportunities. The commodity chemical vendor that provided technical services along with raw materials captured six additional points of margin over its old product business, but a diagnostic showed that value-based pricing could have realized a further seven to ten points of margin. Before setting prices, companies should tap the knowledge of their technical and operational people and of their customers to understand the total economic impact of their solutions.

Interesting ideas, but I don't think they are applicable to all industries. It shows the importance, however, of thinking differently about how to sell and price your products. A change in prespective can lead to increased customer value, and increased profits.

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