The ingredients of profit are costs, selling price, and the unit sales volume. They must all be in the proper proportions if your desired profit is to be obtained.
Unfortunately, no one pricing strategy or formula will produce the greatest profit under ALL conditions. To price for maximum profit you have to understand the different types of costs and how they behave.
Up-to-date knowledge of market conditions is also essential because the "right" selling price for a product under one set of market conditions may be the wrong price at another time.
The "best" price for a product is not necessarily the price that will sell the most units. Nor is it always the price that will bring in the greatest amount of wonga. Rather, the "best" price is one that will maximize the profits for your company.
The "best" selling price should be both cost and market orientated - high enough to cover your costs and help you make a profit but low enough to attract customers and build sales volume.
In addition to the physical factors of cost and profit, price is subject to psychological factors, some of which I'm sorry to say are out of your control. The best you can do to have any control here is to do a good job on corporate image and positioning.
If you want to boost your profits here are 10 pricing strategies for consideration:
1. What the Market Will Bear
In markets with little or no competition, companies can easily employ a pricing strategy that optimizes profits - called What The Market Will Bear (WTMWB). As it says on the tin, this strategy sets a price based on the maximum price the market (your customers) will pay.
Particularly with a new product, you will want to realize the highest profit possible in the shortest amount of time in order to recoup start-up costs, but on the other hand you will not want your profits to be so attractive as to entice a ruthless competitor to enter the market and steal your thunder.
This WTMB strategy typically works because those likely to buy a new product are not particularly price sensitive. If there is considerable uniqueness and desirability built into the product brand, your company could employ a WTMWB strategy.
2. Identify underperformers
In good times companies may focus less on indentifying areas that are underperforming because rising profits tend to hide loss-making products. However, it becomes important in a down economy to identify underperformers so you can understand why certain customers or certain product lines might be costing your company money.
3. Use Pricing Analytics
Use a predictive, analytic tool to identify what is likely to happen in the future and to set your pricing/performance strategy to better react to those predictions.
The pricing analytics should evaluate past performance in specific market conditions and suggest what you’ll be able to sell in a particular product line. These analytics will allow you to track prices, goals and performance.
With objective evidence from pricing analysis, it makes it much easier for your salespeople to make a decision on whether a discount is necessary.
Look at a wide variety of direct and indirect competitors to gauge where your price falls. If your value proposition is operational efficiency, evaluate your competitors on a regular basis to ensure that you’re maintaining competitiveness.
4. Provide up-to-date pricing for your sales reps
Having effective pricing software enables businesses to automate the pricing process and really make inroads. With an automated pricing system you can reset prices multiple times per day based on information from the marketplace.
This allows sales people in the field to quote prices to customers from information and updates sent in real-time to their smart phones. The more accurate information your sales team has available, the better it will help when negotiating long-term contracts.
5. Focus on customer satisfaction
A pricing software system with a product analysis tool will boost customer satisfaction and improve efficiency, speed up order processing and help identify substitute product lines that might better fit a customer's needs or budget.
This analysis allows a salesforce to look at the whole picture, rather than just on a transaction-by-transaction basis. This can help identify customers who purchase multiple products across different product segments.
Your sales team will have the advantage of being able to create a 'package deal', a one-stop shop for customers, allowing for up-selling and cross-selling opportunities.
6. Set prices to capture value
Your price sends a strong message to your market and it needs to be consistent with the value you’re delivering. For example, if your value proposition is operational efficiency, then your price needs to be extremely competitive. If your value proposition is product leadership a low price sends the wrong message.
This pricing strategy considers the value of your product or service, as opposed to the costs incurred to create and produce it. You will need to determine how much money or value your product or service will generate for your customers originating from factors such as increased efficiency, happiness or stability - and entails putting yourself if their shoes.
Customers will evaluate a product and its next best alternative(s) and then ask themselves, “Are the extras worth it?" or is the discounted product as good as the "high end" one. They will ultimately choose the product that provides the best deal (price vs. attributes).
A value-based strategy enables companies to:
- Deploy this strategy across a broader range of customers and markets
- Establish value-added supplier relationships
- Extend the life-cycle of existing products
- Capture maximum value of new product offerings
- Identify high value customer segments
7. Create a value statement
Every company should have a value statement that clearly articulates why customers should purchase their product(s) rather than what competitors are offering.
Be specific in listing the reasons to boost the confidence of your salespeople so they can look customers squarely in the eye and say, “Despite the other options available here are the reasons why you should buy our product.”
8. Determine price sensitivity
A higher price typically means lower volume. Yet you may generate more total revenue and/or profit with fewer units at a higher price; it depends on how sensitive your customers are to price fluctuations. If they’re extremely sensitive, you may be better off at a much lower price with substantially greater volume.
Estimate how sensitive your customers are to fluctuations and it will help you determine the right price and volume combination. More importantly, you can estimate how a price change can impact on your profits.
9. Understand that not all your customers are the same
Pricing is the one area of business where companies behave as if all their customers are identical - by setting one price for each product. The key to developing a comprehensive pricing strategy involves embracing (and profiting from) the fact that customers’ pricing needs differ - and setting prices accordingly.
One of the easiest ways to enhance profits and better serve customers is to offer good, better, and best versions. These options allow customers to choose how much to pay for a product – and what will best suit their requirements.
10. Implement differential pricing
Also called discriminatory pricing or multiple pricing. For any product, some customers are willing to pay more than others. Differential pricing is a method in which a product has different prices based on the type of customer, quantity ordered, delivery time, payment terms, location, etc.
In a highly competitive environment, companies need to capture the full value of their product lines throughout their entire life cycle and through multiple distribution channels in order to be a leader. Since pricing is an underutilized strategy, it creates fertile ground for new profits.
The beauty of focusing on the pricing strategies mentioned here is that many of the concepts are straightforward to implement and can start producing profits almost immediately.Be sure to implement these strategies by signing up for BlackCurve - get a 30 day free trial.
The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016
Pricing with Confidence:10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton, 2014
Pricing for Profit:how to develop a powerful pricing strategy for your business, Peter Hill 2013