Everything you sell has a price, but how you set and change prices is up to you. Often, prices are set by executive leadership using instinct or cost-plus methods, then left untouched until the market demands change. That kind of passive approach to pricing can be costly, especially when you consider the fact that a 1 percent improvement in price can increase your operating profits by 11 percent.
Pricing often gets relegated to the back burner, even though its impact has been proven to exceed the impact of other profitability initiatives, like cost-cutting or sales increases. While those measures are important, a balanced strategy that focuses on reducing costs and optimizing prices is actually the quickest path to sustainable profitability improvements.
So, why don’t more companies pursue strategic pricing? There are many reasons, ranging from poor quality data to implementation challenges. If you’re considering optimizing your pricing strategy, it’s important to know the most common misconceptions about optimizing your pricing, so you’ll be prepared to overcome them.
Misconception #1: We don’t have a problem with our pricing.
If you don’t know how much profit you’re losing due to poor pricing, why would you try to improve anything? Unfortunately, an overall lack of awareness that a problem exists is one of biggest hurdles to tackling the issue. At its root, the problem is a perception that nothing is broken and nothing needs to be improved, leading many executives to leave money on the table over long periods of time.
Finding out how strong your pricing strategy really is may require an investment in technology, which—on the surface—can be difficult to justify. However, once you do make the investment, the ROI will become self-evident. With advanced analytic tools and transaction-level data, you’ll gain new insights into price leaks, price opportunities and best-practice strategies, allowing you to align customer pricing and margins and other low-hanging fruit for immediate profit gains.
Misconception #2: We’ll lose our competitive edge.
Competitive edge isn’t just about undercutting your competitors’ prices; it’s about understanding how the value of your offerings compares to your competitors—and pricing accordingly. Many companies default to cost-plus pricing, and while that may seem simpler, it can actually harm you in the long run. When you fail to take an active role in shaping your customers’ perceptions of your products, you’re leaving the future of your profitability up to chance.
Data mining software applications can help you identify and analyze a broad mix of data points, including market insights, customer preferences, product details and more. By deeply understanding your market segments, you can differentiate your pricing, optimize your product and customer mix, and get paid for your competitive advantage.
Misconception #3: We’ll lose customers.
“Sure,” the rationale goes, “we can increase profits by raising our prices. But any gains we realize will be short-lived because our customers will leave us for the competition.”
Actually, this statement has some truth to it. Price premiums won’t be sustainable over time if your customers aren’t receiving accurate information about the value of your offerings. That’s why communicating that value should be your number one priority.
You also need to acknowledge the fact that not all customers bring the same value to you.
Consider whether your prices reflect both cost and value – including the value you provide to your customers, and the value you receive from your customers. For example, do some customer segments typically place relatively small orders that bring lower margins? Have you made product improvements that are hugely important to another customer segment? Your pricing should incorporate all of these influences – and it’s up to you to communicate the reasons why. If you lose customers that aren’t bringing you sufficient value, that can actually have a positive effect on both your sales team’s morale and your bottom line.
Misconception #4: It’s too hard.
Here’s a cold hard truth: pricing is complex. However, it can be made easier and more effective if you have the right tools in place—tools that allow you to set, execute and measure pricing change. With the right infrastructure, you can develop a sustainable cadence for change that reduces price variation and maximizes profitability.
Additionally, there’s a cultural aspect to change that can’t be ignored – particularly if your company hasn’t focused heavily on price in the past. As with any change process, it’s important to identify the change agents who are leading the charge. Also, start small and execute early wins. You’ll gain insights and improve your own expertise, and you’ll build support within the organization that you can leverage to ultimately unroll a more comprehensive strategy.
In the end, developing and implementing the right pricing strategy for your company will be a long-term, iterative process. A data-driven approach will give you the foundation you need to overcome hurdles and take full advantage of every opportunity for growth and value.