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TIMES ARE tough, no debate here. So I have to ask a number of questions. Why add bottom line pressure by charging too little for your goods or services? Automatically rising volumes are no longer the given they were six or seven years ago.
I learnt an inescapable truth as the sales director for several multi-nationals - whilst I couldn’t always guarantee the sales volumes, I could always guarantee the pricing achieved.
Traditionally, when I was looking for more profit, I could sell more or cut costs or both. Today, these two options are not as readily available as they used to be, but there is a third option – selectively re-look at your pricing. Are you charging too little? More on this later.
Do you have pricing policies in place in your company that are effective, business compliant, strictly adhered to, flexible, clearly understood and appropriate? Are there “consequences” for price policy non-compliance? There should be!
A wise sage once said that pricing was too important to be left to just the sales or marketing departments. Far too little time is spent, in my opinion (I was a board director for 24 years) by the directors discussing and agreeing the critical issue of the company’s pricing architecture.
Pricing or (lack thereof) is often not the key problem – ineffective management of price and the pricing process is the real problem!
So how do you know if you are pricing too low for example? One needs to go back to the fundamentals and ask the question “do we really know the role that price pays in our customer’s buying decision?”.
There is not an obvious answer. Most customers make their buying decision on what they perceive to be the “benefit to them” and not just on pure price. So you have to make sure you know, with crystal clarity, what benefits they perceive they are getting when then buy your product or service.
Then, make sure that you are capturing these benefits in your pricing architecture. Whilst the 4 P’s of Marketing have expanded to include “People and Processes”, the Price component is still critical! Remember that price is the ultimate statement of worth and value to your customer. This all adds up to your pricing strategy becoming proactive. What does this mean?
The best outcome is the one that is planned so you need to pro-actively understand the role of price in your business model? What are the revenue and cost drivers in the model (remember revenue is a product of price and volume/time/units)?
What issues are you solving for your customer? Remember, planning means thinking strategically and realising that price is where all the marketing investment meets the “moment of truth” when the customer sees the product or service, the price asked, the benefits that will or will not accrue to them and makes the final buying decision.
Customers are looking for value. Do you know what value they are looking for? Are you charging the appropriate price for this value?
The Japanese motor industry in the 70’s started with the US West Coast car dealership showroom floor price (that contributed to the value proposition) and then engineered backwards to the motor plant floor.
The result of starting with the end price was they developed products that met the value expectations of the buyers, price and specification were in sync.
•A Pro-active Pricing checklist consists of the following elements
•Understanding your business model and the role of price
•Establishing the pricing strategic objective for the product or service (building share, maximising profit etc)
•Clearly identifying what value the buyer sees in your product/service (also check vs competitors)
•Align your pricing strategy with the product or service deliverables, marketing promise etc
•Communicate the value, measure and recalibrate price levels if necessary
•Make smart pricing part of your company’s DNA – price policies, processes, training for understanding of price impact (dealing, price increases etc).
I get asked a lot about pricing a new product or service. It’s a key question and my answer is in what you’ve already read above. You have to do your homework by researching what your customers consider value (don’t forget the competitors impact).
Why did I start with value and not the P&L? Well, you don’t have a P&L until the customer decides to buy (sales is the first line of the P&L)!
Make the sales happen by delivering value to the customer. Also, the issue of price increases causes a lot of friction between buyers and suppliers.
My advice is that if the input cost pressures really cannot be avoided, then you have to do it, timeously.
This is what senior management are paid to anticipate, plan and then to execute. In one of the industries that I worked in, we always tried to add a little “extra value” when pricing up was unavoidable (an extra gram, slightly better terms etc). Use you creativity and pro-actively manage your pricing.
*David Hendrie is a partner at Gateways Business Consultants. He is consulted by multi-nationals and medium sized businesses on deliverable growth strategies.
