Price reduction is a great way to shift stock and achieve volume targets. Yet, excessive discounting at the line level eats away margins and destroys profitability in the long run. Taylor Wells discusses some simple tricks of changing entrenched discounting habits in under a month (with a new pricing system) and beyond. 

 

The pandemic has changed the game for businesses, creating a divide between essential and non-essential services. It has developed a major imbalance for demand and supply across all industries.

 

Over the past few years, successful pricing executives have been quietly putting together a pricing toolkit that reduces sales’ dependency on discounting to drive volume. Like any decision and changes that you’ll make for your business, it isn’t simply done on a whim. Rather, it should be planned well in advance. Similarly, when creating sales promotion activities, it’s best to use a price reduction calculator.

 

 

Building a world-class pricing team

 

A pricing toolkit includes low invasive and long-lasting strategies in organisational behaviour and best practice price management interventions. At the heart of these interventions is “mental unblocking.” This simply removes psychological barriers that keep people stuck in damaging thought patterns and behaviour.

 

Often, a company’s ability to drive profit is measured by who is on the team and how it functions. Pricing policies, organisational design, and team capability are key success factors. Teams that are invested in addressing skill gaps, team members, strategies, and operations generate more revenue than companies that ignore these key result areas.

 

This may seem pretty simple though. But it can be very hard to get pricing and sales teams to work together. It’s even more difficult to alter how sales teams view pricing with the use of logical arguments and data.

 

Salespeople often think that they are in the best position for price setting and management because they are the closest to the customer. But it’s not that easy. Even if sales teams quote prices to customers and hear them respond to prices every day, that does not mean they’re the best people to optimise prices.

 

Better pricing is a lot like science. Not an art.

 

Price Remodelling

 

There are many reasons behind a price cut…meaning it can range from changes in supplier competition or getting rid of old and surplus inventory. Product quality downgrade and customer churn are other reasons. Also, during crises and through challenging times, most businesses resort to the oldest trick in the pricing rulebook: price reduction. So, when the need to employ sales promotion activities arises, a combination of marketing, pricing and psychological principles will mitigate margin leakage created by excessive discounting.

 

Any pricing intervention is like a “jab” on a superficial level. It functions as an external device developed to guide stakeholders towards better choices. Google and IBM use these methods quite often.

 

For example, some of the leading technology businesses have been re-publishing optimised price lists. They also tighten price reduction levels for heavily discounted consumables on their enterprise systems (superficial level). Others have been encouraging their sales force to avoid excessive price reduction by calibrating individual discounting behaviour with their take-home commission (deeper level).

 

In any price cut and sales promotion activities, you must let customers know through marketing tactics – meaning it’s best to accentuate the brand value and logic, rather than personal or business reasons.

 

Read how you can structure your pricing in 5 easy steps!

 

Price reduction calculator

 

Price reduction: What’s your goal?

 

The necessity of a price cut must be justified, meaning they must be part of sales promotion marketing campaigns or activities. This is how you let customers respond and avoid the risk of them completely ignoring the price change. Simply highlight the new price, features, and elements. You’re not introducing a new product per se, but you shouldn’t only focus on the price decrease either.

 

Price reduction time frame calculator

 

Decide if your price cut is either temporary or permanent – meaning how long will it last? Are you risking margin loss or is there a similar product in your line that you want to differentiate its price from – so that customers have more choices? With the help of a price reduction calculator, a long-term price drop should receive the least marketing efforts. For short-term price drops, you must invest in a larger marketing campaign.

 

Temporary sales promotion activities result in a quick boost of customer numbers. But if you’re out to target a specific demographic and gain new patronage, then a permanent price drop suits the goal better. Of course, be on the lookout for your competitors. It’s highly likely that they’ll respond to all your sales promotion activities as well as in the industry. So, it’s important to focus on what makes your brand, product, strategy, and value unique.

 

Disadvantages of price reduction

 

Of course, in any industry, there are competitors. And it’s often a game of tug-of-war as to who keeps and gains more loyal customers. Oftentimes, when you initiate a price cut, it may lead to a price war. It’s highly likely that your loyal customers aren’t price-specific shoppers and that they’re after the long-term value. A price cut can generate a spike in sales in the short term. So, if you don’t prefer price remodelling, then you should consider including freebies or an upgrade to premium products/services on specific items.

 

In any pricing method, you must justify it to the customer base. This rule is just as applicable as it is for sales promotion activities and expensive items. A high-priced product or service must be briefly explained and included as part of the marketing campaign.  Simply mention its uniqueness. That may come from its superior quality in the industry, compared to your competitors. This way, your customers understand the efforts that your team make to serve them with value. Ultimately, they get the rationale behind your pricing.

 

Sales promotion activities – What’s in it for sales professionals?

 

In the previous example, discount practices lessen as businesses employ psychological pricing principles of loss aversion. The hypothesis is that sales representatives will tend to avoid excessive discounting as it directly impacts their commission.

 

As we know from psychology and pricing principles, people feel the pain of loss twice as much as the pleasure of gaining. By anchoring sales to a higher commission number, the decision to quote lower prices triggers a physically uncomfortable response to discounting. In effect, a new pricing system discourages sales representatives from quoting larger discounts, as they associate discounts with losses.

 

Our brains and physiology simply dislike the prospect of loss (or risk aversion). The key assumption to this psychological and pricing intervention is how sales teams will hesitate using price drops as a tactic to win more deals at lower margins in fear of losing commission. However, knowing which interventions will work are different and must be tested every time.

 

Conclusion

 

Sales promotion activities address specific psychological and pricing sticking points. When the condition for change is properly set up, then price reduction plans are more likely to work. It’s just as effective for nearly every significant problem related to pricing or market trend change.

 

For price rebranding, they are usually specific to address a problem to boost revenue either temporarily or gain new loyal customers for the long term.

 

Price interventions alter persisting customer behaviour. They’re primarily rooted in basic human psychology and pricing theories.

 

In summary, our capacity to change poor discount habits is often unrealised. And this is because most teams are not in the right position to take action.

 

See our blog on how pricing and sales can work together.

 

For a comprehensive view on driving pricing strategies to maximise growth,

 

Download a complimentary whitepaper on How to Drive Pricing Strategy to Maximise EBIT Growth

 

Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 9000 1115.

You can also email us at team@taylorwells.com.au if you have any further questions.

Make your pricing world class!

 

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