Sometimes the most difficult subject to raise with businesses is how they set their prices and whether they could raise them. Most believe they can’t. Most don’t have a strategy or a process.
And in not having either, pricing is not carried out systematically to optimise profits on a sustainable basis. Poor pricing is a classic profit leak, one way or another it leaves your money on the table, money which would go straight through to your bottom line. I’ve written many times on this subject.
For that reason, I welcomed a recent opportunity to exchange comments with Dennis Brown who was good enough to offer some kind words about my scribblings. Dennis is from Atenga Inc. (www.atenga.com), a consultancy which specialises in developing price optimisation strategies for businesses.
To quote them “With the right pricing strategy, sales will increase, discount requests can be effectively deflected and lowering your price will no longer be necessary to win the business.”
He was kind enough to offer an article, “Ten Common Mistakes Companies Make in Pricing their Products or Services”. In this, and the next two blogs, I’ll cover all ten common mistakes.
You might find a different perspective useful in considering your own pricing policies and processes, and I’m sure you will be nodding in agreement when you read some of these mistakes.
By Dennis E. Brown with contributions from Per Sjofors
Price strategy is emerging as the most important resource for companies to increase their competitive advantage. The vast majority of companies have spent years achieving gains through cost cutting, outsourcing, process re-engineering and the adoption of innovative technologies. However, the incremental benefits from these important activities are diminishing, and companies need to look at other areas to improve their business results.
Today, companies are looking to serve well-defined market segments with specialized products, messages, product variants and services, and to earn superior profit margins while doing so. Savvy companies are implementing price optimization schemes and focusing on building their organization to serve their most profitable customers. Many are even “firing” customers who are unprofitable.
All too many companies use simplistic pricing processes and cannot even identify their most profitable customers or customer segments. This lack of information means that all too many management teams have their sales staff focusing the bulk of their time servicing the least profitable of their customers. Some companies even embrace policies and pricing strategies that drive away their best customers, and then they wonder why their profits are not growing.
In the course of our engagements, we have seen examples of good and bad pricing policies. The following is a list of ten of the most common mistakes companies make when pricing their products and services.
Prices based on costs invariably lead to one of the following two scenarios:
(1) If the price is higher than the customers’ perceived value, discounting increases, sales cycles are prolonged and profits suffer;
(2) If the price is lower than the customers’ perceived value, sales are brisk, but companies are leaving money on the table, and therefore are not maximizing their profit.
Costs are only relevant in the pricing process because they establish a lower boundary for the price. In certain circumstances, there are strategic reasons a company may decide to sell a product below its cost for a period of time, or to a certain market segment as a “loss leader.”
However, when a price is set according to the perceived value of the product or service, sales are brisk, and profits are maximized.
One Atenga client manufactures audio components. Across their product line, they set prices according to a multiple of the parts cost. When the market for high-end audio components boomed, the company did well enough. But as competition began to increase, sales stagnated and profits evaporated. Our research showed that particular products were perceived by certain segments of the marketplace as “priced too low.” Repricing of those products created enough additional revenue to pay for the launch and marketing of a new line of products and restored the company’s leadership position in its niche of the industry.
The marketplace is often cited as the “wisdom of the crowds,” the collective judgment of the value of a product. But by resorting to “marketplace pricing,” companies accept the commoditization of their product or service. Marketplace pricing is a resting place for companies that have given up, and where profits end up being razor thin. Instead of giving up, these management teams must find ways to differentiate their products or services so as to create additional value for specific market segments. The marketplace is full of companies that have managed to drag themselves out of commoditization and establish a unique value proposition.
They have then gone on to capture that unique value at prices higher than those of “the marketplace.”
The best-known case of reverse commoditization is Starbucks. By rethinking the entire experience consumers of coffee engage when they consume a cup, the company has produced prodigious growth and outsized profits. A Starbucks cup of coffee delivers a unique value proposition that engages millions of consumers daily (including this author!), and they happily pay $3.00 to $4.95 for what used to be a ninety-nine cent cup of coffee.
Thanks Dennis – more pricing mistakes to avoid next week.
Do you face that dilemma, trying to reconcile the need to improve profitability with the threat of losing customers if you do raise your prices? If you would like to discuss how you could generate a continuous stream of profitable customers, keep those customers and minimise customer churn through an improved pricing strategy, contact me. There’s no cost for a consultation. It is my gift to you.
© Copyright 2016 Adam Gordon, The Profits Leak Detective
Some profit losses are pretty obvious - so you fix them.
BUT, what if you don't know profits are leaking, cash out the door?
Possible leaks could be anywhere.
Are there some clues or symptoms that are tell-tales?