Product and Service Pricing – Invest in Your Business’ Pricing Capability
First in a Series about Pricing
Most businesses can improve prices by 2% within a year with a focused emphasis on pricing. But putting a price on products and services can be one of the most difficult tasks for a business owner. It takes a deliberate process and commitment to become the premier pricing competitor in your market.
Remember that price is almost 100% profit. There are few things that a business can do to more impact profits than being great at pricing.
Typical Approaches That Diminish Pricing Profitability
1. When costs go down we should lower prices to pick up market share.
2. Prices are set by adding up costs and factoring a fixed margin.
3. The timing of pricing changes should follow annual budget cycles.
4. The market sets the price so we have little influence.
5. Salespeople set the price because they know the customers and market best.
Some or all of these characteristics are often present in companies selling products and services. The more your company behaves in the manner described above the chances are you are leaving valuable money on the table by being reactive or even passive to pricing.
Here are some common capabilities used by companies that are really good at pricing:
Appoint a Pricing Czar
There can be one person or person overseeing a product line that has overall responsibility for pricing. Typically, pricing is shared across levels of management which results in ‘pricing bands’ with little thought of how to achieve the highest price in all instances. Pricing on lost order reports is death. One person should be the thought leader for the company’s pricing.
Rarely are costs lower than expected. Especially when considering the indirect costs of handling a needy customer. Keeping a close and keen eye on actual costs of delivery is key to smart pricing.
Train salespeople in pricing: selling is an art. Selling for maximum profitability is a rare skill.
Studies show that the higher volume customers often DO NOT pay the lowest price. It’s the needy, demanding customers that do. So stop giving an initial low price to someone just because they give you a big order.
Understand if You are a Price Leader or Follower
Both can be successful. But knowing who you are will enable you to maximize that strategy.
When you build pricing capability in your organization you increase your tactical pricing effectiveness. It is often the small daily pricing skirmishes that decide the winners in a market.