Can you Start Optimising Prices Immediately? 💸 Podcast Ep. 62
When it comes to pricing – we know that people want great results from day 1. However – what do you need to do first before trying optimising prices.
Should you optimise – before you fix issues and build a strategy?
TIME-STAMPED SHOW NOTES
[01:33] If you haven’t built your pricing team, optimising prices might not be beneficial to your company
[02:23] Joanna explains why crude optimisations strategy will lead you to risk and how a crude segmentation strategy will limit your ability to optimise prices
[05:12] Aidan discuss how optimising prices benefits your company and why optimisation is a one-day thing set and forget
[06:59] Reasons why companies are building pricing teams
What do you need to do first before optimising prices?
Often in life, people want to jump right into the deep end we cover this in a few previous episodes. But often people want to know, sometimes you can talk to a business.
They want you to start optimising prices immediately. And you say well, what sort of processes do you have in place at the beginning? They go, well nothing we don’t have any pricing in place.
So the question is, can you just start optimising prices on day one?
I think executives want to optimise prices. Because it does in theory, sound like a great way to drive profitability quickly. Especially maybe if you’re in a tricky situation.
You need to cash flow or markets have changed and you want to get ahead of competitors. Now, optimisation, if you look at vendors of optimisation software, will tick the box and all of that. Or, even consultants that say they can do that. Yes, they can.
But I think it’s really important for executives and pricing teams to just be aware of a few things before they do dive into price optimisation projects.
I think it’s common sense if you’ve invested no time, no effort in your pricing department. If you don’t even know who it’s run by. It could be the sales, it could be the marketing, it could be just discounting ad hoc of a list price.
If you have no processes control systems in place, which let’s be honest is a huge number of companies. You can start optimising but let’s be honest what you’re going to be doing is not going to be that useful.
It may not fit into your overall strategy or your overarching aim for the business. It may not align with what your marketing departments doing.
I’ll be honest, it’s probably not that beneficial to you.
You may end up optimising changing prices communicating them to your customers. Then, when you start digging into your pricing has to undo it or do something completely different.
I think it’s important to understand the pricing maturity of your company before you consider optimising prices.
Good consultants will start any project with very thorough pricing diagnostic. Just to know if price optimisation is the right thing for you. Or, even to customise the right program roadmap for the business to ensure success. And to limit any risk exposure, especially profit downgrades, volume loss, things like that.
But if you are going to look at this with this question very theoretically. And you say that the businesses are in medium maturity. There could be a possibility of optimising prices with some risk.
But if they’re managed correctly, Could you do it?
Yes, if you’ve got say a list price. And you want that to be optimised in some way. Put some sense to the price category hierarchy, this year and last year sales. You’re going to compare and do some price elasticity based on those very few metrics.
Yes, you can do it. There will be some gains from it I would say maybe a 1 or 2% margin increase from doing that within the first six months.
When you look at it there are only a few factors and variables to consider there.
I think if you just do the bare basics, good sales directors and their teams can do it. I’ve seen see them do it. But I’ve also seen this optimisation being applied more as a blanket price increase. Or done very crudely because their segmentation strategy is also very crude.
It’s just a quadrant segmentation that lump customers into four groups. Then applies a very basic price algorithm on top.
This often leads to a lot of customers complaining about the price. Because it doesn’t apply to them they feel like they’re being overcharged. While others feel like they’re being under charge and they’re going yeah this is great.
But what happens to you? You lose money.
So I think you’ve got to be careful how you go about this. I think having a crude optimisations strategy will get you so far but also lead you to risk.
Equally having a crude segmentation strategy will limit your optimisation.
I think, in that context what we’re talking about is you put make a call to someone. You say we want to improve our pricing. It’s the consultancy model. Where some external expert will come in and do it for you or help you do it. Or, handhold you through that optimisation process.
But then they’ll leave after the checks have been paid. They’ll leave and the skills won’t be there so it’s a short term thing. Or, do you build the internal process in your company that then will over time be able to continually optimise?
Because let’s be honest, optimisation is not a one-day thing set and forget.
Business changes you’ve got to keep doing it over and over and over again as you hold in your strategy and improve the business and the pricing approach of that company.
It’s the old cliche… ‘do you want to fish today or do you want to learn to fish then eat forever’.
I suppose it’s not a philosophical difference but it’s a business difference.
My personal view is sometimes if you want everything immediately and all this great benefit today and free money. A price optimisation will help you but if it sounds too good to be true. The reality is it probably is.
You have to put in the hard work. You have to dig through it. Have a plausible business plan business model which aligned with pricing. Then you implement.
One of the big buzzwords nowadays in business and entrepreneurial stuff is execution.
You have to execute you have to have the plan and the strategy and then executed. The pricing optimisation should be something that once your strategies are in place. You can do it down the line.
If your business is in massive trouble and you need extra cash in the next three months. which nearly all companies do, it will help you. But bear in mind that it’s probably you want both things happening.
I think that’s a really good point. I think that speaks to the point I was making earlier. There’s only so far lay people can go in pricing when they’re doing optimisation.
Because they just don’t know they’ve got this playing with very basic variables. They’re not doing full optimisation. They’re just doing some analytics. It’s just a basic formula.
This is why a lot of companies now are building pricing teams to internalise and drive optimisation and analytics programs.
Both in terms of developing the price algorithm. So it’s not necessarily just the consultants who can do that high-performance pricing teams can as well.
But also drive that program, tweak it. Optimise even the process. Learn from mistakes and mitigate risks. And capitalise on the value of the product portfolio or the services that the business is selling.
As we’ve spoken a lot in other podcasts, a good pricing team is the glue in an organisation.
It brings teams together to make pricing sort of more of an organisation or discipline. It’s not just owned by the pricing team, or whoever does the optimisation. It’s owned by everybody who gets involved.
That’s the beauty of internalising that optimisation and pricing capability.
I think in your business if you want to discuss this with us, reach out. Contact us all our contact info is on the website Taylorwells.com.au. We look forward to chatting with you through options, suggestions, all those sorts of things. So yeah, that’s it for me today.
The best way is to go to Taylor wells.com.au, our homepage and click on Free pricing audit. We can help you with all these different optimisation and pricing, people and strategy issues and problems.
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