You've probably worked hard to gain a competitive advantage through various means - cost-cutting, outsourcing, process re-engineering and adopting innovative technologies - to name but a few.
However, have you been so busy innovating and implementing other strategic policies that you have ignored the very important topic of pricing? If so, you are taking risks with your bottom line and failing to take advantage of the enormous benefits that an innovative pricing policy can bring.
So, are you a dummy or a genius when it comes to pricing your products? If you answer "yes" to any of the following questions I'm afraid it could be the former!
Do you base your prices on costs, not customers’ perceptions of value?
Prices based purely on costs invariably lead to one of the following two outcomes:
- If your price is higher than the customers’ perceived value the cost of sales goes up, discounting increases, sales cycles are prolonged and your profits suffer.
- If the price is lower than the customers’ perceived value, sales are high but you are leaving money on the table and therefore not maximising your profits.
Do you base your prices on what the market will bear?
By resorting to “marketplace pricing,” you are accepting the commoditisation of your product or service.
Marketplace pricing is a graveyard for companies that have given up, and where profits end up being wafer-thin. Instead of giving up, your management team must find ways to differentiate your products or services so as to create additional value for specific market segments.
Do you have a uniform profit margin across different product lines?
Some financial strategies support a drive for uniformity, and companies try to achieve identical profit margins for disparate product lines. The golden rule of pricing
For any single product, profit is optimised when the price reflects each customer’s willingness to pay. This willingness to pay is a reflection of his or her perception of the value of that product, and the profit margin in another product line should be completely irrelevant.
Do you fail to segment your customers?
Customer segments are differentiated by customers’ differing requirements for your product. The value proposition for any product or service is different in different market segments, and your price strategy must reflect that difference.
Your price realisation strategy should include options that tailor your product, packaging, delivery options, marketing message and your pricing structure to specific customer segments, in order to capture the additional value created for these segments.
Are you holding your prices at the same level for too long?
Perhaps you fear the gasps of outrage that a price change will bring - and put it off as long as possible. However, savvy companies should acclimatise their customers and their sales teams to frequent price changes.
Markets can change radically in a short period of time and it’s important to recognise that the value proposition of your products changes along with other changes in the marketplace; you should adjust your pricing accordingly to reflect these changes.
Are your salespeople incentivised strictly on revenue?
Volume-based sales incentives create a drain on profits when salespeople are compensated to push volume, even at the lowest possible price. This mistake is especially costly when salespeople have the authority to negotiate discounts.
They will almost always leave money on the table by selling lower-priced products and dropping prices to clinch a deal.
Do you change prices without considering your competitors’ reactions?
A pricing strategy cannot exist in a vacuum and must take into consideration anticipated competitive moves. When making price changes, it’s important to take into account not only likely competitors' pricing changes but to also make an objective assessment of your competitors' products or service quality.
Do you spend insufficient resources managing your pricing strategy?
The three basic variables in a company’s profit calculation are cost, sales volume and average price. Most management teams are quite comfortable working on cost-reduction initiatives, and they have some level of confidence in growing their sales volume.
Have you established internal procedures to optimise prices?
Perhaps your pricing meetings are rather hastily convened and any price setting becomes a last-minute affair. Does that sound familiar? More and more companies are therefore building pricing teams.
These pricing teams effectively act as internal pricing consultants and are the "go-to" guys on how to apply pricing concepts; they understand both the pricing systems used within the company, the corporation’s objectives and how pricing contributes to achieving the required goals.
Pricing touches on almost every department within a company - it certainly effects sales, marketing, and finance. A pricing team can balance all of these departments' interests in creating company-wide pricing processes and systems.
Are you still using Excel to manage your pricing?
However good you think your current system of price management is, there are serious flaws involved if you are still using Excel. Errors can seriously eat into your profits.
Time delays in communicated price changes can cost you money because you have lost the opportunity to sell at the new price for the period before the new price is communicated to the sales force.
This will be especially important if you're correcting an error or reacting to a change in the market. This makes it almost imperative that you change to a price management solution that allows you to quote professionally, increase deal sizes, reduce errors and drive better pricing decisions.
In conclusion, pricing offers many companies the most direct route to higher profits, yet the pricing function often fails to get sufficient attention.
When it comes to pricing your products a combination of greater management commitment to the art of pricing along with powerful analytical software tools can make a significant difference.
The Strategy and Tactics of Pricing, Thomas Nagle and Reed Holden 2016
Pricing Strategies for Small Business, Andrew Gregson 2008