That question tantalises all of us running our own business. 

Do you actually decide your prices through a well thought out price strategy (the sensible, but usually unused approach), or gut feel?  I’d bet the latter!

Let’s see if this will help you.

In my previous posting based on the “personal reflections on pricing” of Per Sjofors, Founder/CEO of Atenga Inc. I looked at the problems arising from not having a proper strategy, and using a “simplified” approach.  The chances are that is what you are using. 

Pers suggest price-savvy companies use a more sophisticated pricing strategy - an optimized pricing strategy. In the context of pricing, this is what it means: The price of your product or your service provides you the opportunity to capture a portion of your customers’ willingness to pay. When your pricing strategy is optimized, you make the best use of that opportunity - you are capturing the maximum possible of that willingness to pay.

Now that sounds better.

In that post I looked at Pers’ six pricing options that could be utilised in an “optimised procing strategy”.  They are:

•   Good-better-best

•    Bundles and unbundles

•    Price imaging

•    Options

•    Differentiated price structure

•    Clarity

Let’s move on to look at how Pers suggests you might use these to optimise price levels.

Optimized price levels

The price of your product or services is a value statement. In fact, it is the strongest value statement you can make. It is the price itself that makes the value; the exclusivity of the brand is generated and maintained by the high price, and the high price is a strong indicator of quality and design of the product.

Even if the manufacturing cost, including cost of exclusive raw materials, of a Prada handbag may be 3 - 5 - 10 times that of a “generic” nonbranded handbag, it is still the price that makes up most of the value it generates for its buyers.

So how can you tie this into optimized price levels? Here is how: Of course, there are people, many people, who can’t afford a $4,000 handbag. At the same time, there are people who can afford it but believe the price is ridiculously high and others, not very many, I would guess, who think the price is not high enough, does not provide enough exclusivity and therefore value.

And this is the trick with optimized pricing. At any given price you set, a number of prospective buyers will simply say they cannot afford it; a number of prospective buyers will say they just won’t buy it, and, maybe surprisingly for some readers, some will say it is not high enough, does not message enough of a value and quality, so they won’t buy for that reason.

So prices are optimized at the price point where the minimum of prospective buyers, say the price is either too high or too low, and they will not buy because of that, and, where the maximum of buyers say it is good value and meets their price expectations. They are further optimized when there are structures and sales processes (such as those listed above) that capture higher prices when buyers are willing to pay “more,” and also win the business of buyers who would be profitable but are only willing to pay “less.”

This is all about psychology of pricing. It’s based on how we humans make buying decisions. And we are all different.

You get what you price for:  The price of a product or a service is the strongest message of that product’s or service’s quality. It sets the buyers’ expectations of quality. So the price becomes either the driver for a company’s business strategy or market position. The price needs to be set in full support of that business strategy or market position. Any discrepancy will alienate customers.

You know that pricing is more than just a number, as Pers suggested in the previous post. It is process and structure. Its tentacles reach to almost every nook and cranny of your company; sales, product marketing, production, product management, finance, executives and maybe even to the board.

And I’m sure that if you see a mountain of things to do to get your company into optimized pricing, not only do you need it the most, but the sooner you start the better.

And of course, you’ll start small. Maybe just take 10 or 20 of your products. Have your product management categorize these products into A - B - C - D categories. A for totally unique products, D for totally commodity products. B and C for in-between.

Then for A products you simply stop all discounting.

For B products you lower the allowed discount rate. You have your product management work on unbundles for the A and B products. You may want to try to increase price for them, and increase sales commission too - but just for the A products. Devise a good-better-best strategy for these products. Introduce price imaging - maybe with bundles.

You look at the D products with the view of “are they strategic?”, “can we further reduce cost?” and “are we making enough money on these so it makes it all worthwhile?”. If they are not strategic or you are not making enough money on them, ask yourself why you still want to sell them. If you decide to - what can you do to reduce cost?

As you follow the results of these 10 or maybe 20 products, I can guarantee that you’ll be astonished of the results. It will add to your bottom line so that you gain more resources to continue the price optimization; categorize more products; generate more un-bundles and bundles; train your salespeople on selling without discounting; invest in research to discover buyers’ true willingness to pay.

Eventually you probably will need to recruit a person to run the pricing process in the company, and now you are really in price optimization happy-land and you realize that your revenue growth will double and your profits too - compared to when you started out.

Thanks Pers.  Now I challenge you to trial his A, B, C, D process.  Let me know the results.

Would you like a hand to improve your pricing?

When clients approach me for coaching, so often, they are troubled by their profitability, or lack of it.

Their pricing strategy is usually simple, and not differentiated from the competition.

For more than 29 years I’ve been helping small business owners plug the profit leaks in their business and restoring their cash flows by assisting them understand where there profits really come from, where they’re leaving money on the table, and where their sales are costing them profits.

If you would like to discuss with me how you might do that, book a Strategy Consult here

© Copyright 2017 Adam Gordon, The Profits Leak Detective 

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