Are Your Pricing Capabilities Optimised Or A Profit Liability? 🌈
Do you have the pricing capabilities you need to set and manage prices without losing volume, revenue and margin?
“Changing prices is easy.”
“Anyone can move prices around in a spreadsheet.”
“Why do we even need a list price?”
“What’s the harm in giving customers more discounts and freebies.”
Every day, views and assumptions like these on pricing and revenue management are circulating around every level of your business. In effect, all of them are unwarranted and ill-informed. Thus, making them a serious profit liability.
Indeed, any CEO who’s actually tried to make a price change notice across thousands of different SKUs and hundreds of customers will testify that good pricing is not easy.
Any manager that has tried to set new prices for new, high-value products in new markets, will say that once they started to think about pricing more broadly than just the cost of a product and ask themselves important questions about customer value will tell you that a good price is hard:
- How do your customers really value your products?
- How will they perceive the price?
- Would they pay more or less than you think they’d pay?
- What will competitors do in response to this price?
- Should you be setting prices differently for different customer groups?
- How can you do tiered pricing properly without upsetting your customers?
It is time to inform our views on pricing and give ourselves the best chance to capture the premium pricing we truly deserve for the great products and services we deliver to our customers.
Building your pricing capabilities
Not asking the right questions and just assuming things about pricing that are not true are detrimentally impacting your chances of building pricing capabilities. As a result, you could be generating 11% earnings growth a year from a strategic pricing capability, but instead, you’re probably losing 3-5% margin or more each year.
Yes, tinkering with numbers in a spreadsheet to produce a random set of prices is easy. Thus, increasing prices by 3% across the board for price rise is easy.
But strategically pricing to deliver more revenue and margin for the business and your customers without giving away hard-earned revenue and volume in the process is not easy.
To do pricing well, you need more than a set of new prices, you need pricing capabilities.
In this article, you will learn about the importance of pricing capabilities in implementing pricing strategy.
We argue that it takes investment in your strategy, people and operations to truly develop pricing capabilities.
We’ll explore the 5 obstacles preventing Australian businesses from achieving a real capability.
We strongly believe that it’s a huge risk to reduce pricing down to tactics or random numbers in a spreadsheet, especially in downtime or during a crisis.
New pricing tools and techniques are becoming more available and sophisticated. In effect, to get the right price at the right time, businesses should focus on resources, infrastructure and processes. It will allow for the creation of a pricing strategy. Therefore, by regularly updating the systems to get the proper pricing capability for all its products and services that align with customers’ product value, the competitors’ response to this price and price differently for different consumer groups.
Not having pricing capabilities is riskier
A pricing capability isn’t just something nice to have for your customers. Therefore, the risk of not having a pricing strategy is costlier than making poor pricing decisions. Bad pricing decisions can be corrected.
Take for example Polaroid; they are the biggest producer of photographic films. They were the first to develop digital photography. Though the company had a great pricing strategy, they didn’t think that it was worth the investment developing it. They relied on selling their films instead and selling their cameras cheap. In effect, one misstep leads to another and now the company is bankrupt.
Polaroid didn’t know how to extract value from digital technology. Therefore, the lesson learned here is that a company that is always driven by a culture of innovation can be stopped abruptly when its pricing capability cannot support its business strategy.
3 pillars of pricing capabilities
To find the right pricing strategy, focusing on these three areas will greatly enhance the company’s pricing capability:
Pricing process doesn’t run on automation; at least not yet. It needs people who are familiar in pricing strategy, range of products or services, customers, suppliers and competitors. Companies can train the current workers and also hire qualified people in business school or experienced executives who are experts in pricing.
Companies who don’t have these people are caught in an endless loop of catch-up with the competitors who invested in human capital.
Having people who are capable of creating pricing strategies isn’t enough to have pricing capability. Companies need to invest in software and hardware systems to collect, share and analyse data. One great example is the Amazon pricing system. It developed a system and human capital to work harmoniously to find the right prices.
All the information from the purchases is found on its website; they are constantly analysing the data in all the transactions. Therefore, its pricing analytical program enables the dynamic pricing program efficiently.
- Strategy (not forgetting culture!)
Although the two above pillars are important in pricing capability, there is one more to bring all these together. Hence, this is what puts the right price at the right time. Without this, there will be a total meltdown in staff and customer relationships. Thus, investing the time to develop this will optimise the people and operational pillars of pricing so management can improve upon its pricing capability.
Strategy and culture are unique that it cannot be acquired or bought. It takes time to develop and nurture social connections. Too many times, companies use technical and legal jargon to justify their pricing. In effect, this drives away staff and customers.
Companies need to develop teams that anticipate and manage customers’ response to price changes, involving lead users, conduct market research, and study of price change predictor.
To get the right pricing capabilities here are easy to follow the five-step process:
Determine your business goals. How you make money determines everything about your pricing and sales strategy.
Create a thorough market pricing analysis. Hence, while the first step is about your business goals, this step ensures that your pricing strategy considers the context of the market in which your product or service will compete.
If your market and product are broader against many players who offer similar products or services, chances are you will compete on price. Hence, you will need to properly plan to keep operational costs down to ensure a maximum profits margin.
Analyse your target audience. In effect, this step enables you to answer why, what, and how customers will value your product or service based on their specific and urgent needs. Therefore, ask yourself the most important question: “what perceived and real value does my product or service bring to the customer?”
Your pricing model and promotional campaigns must align with why your customer would buy your product. For example, if you have the best product that uniquely fulfils a customer’s urgent needs, value-based premium pricing may be the best strategy. In effect, creating low-cost promotions and giveaways will confuse your customers, undercut your value, and shrink your profit margin.
Profile your competitive landscape. Hence, whether you are a low-cost provider or a differentiated vendor, the pricing model and price point of your competitors is a significant pricing strategy mover.
Identify at least three direct competitors. Study the structure of their pricing. For example, do they have component pricing and allow for heavy discounts? Do they bundle with other products or solutions? Or, do they employ value-based pricing where clients pay a percentage of the total perceived ROI?
Create a pricing strategy and execution plan. At this point, you have enough information to formulate an action plan. Hence, use the information on product value, price perception of the customers, the competitors’ reaction to your prices and tiered pricing of your products. This will improve your pricing capability.
Once you completed the five steps, review them one more time. In addition, this will help you ensure that the strategy you chose to take gives you a chance at successfully competing in your target market segments, gaining revenue and market share.
The concept of pricing capability is challenging. Therefore, it will not be easy to develop the capability as well as with other standard strategic capabilities. Thus, it requires dedication to follow this through.
Companies have to balance investments to create new value to extract more value from the existing products. Thus, CEOs have to consider that investments in pricing capital may not generate the returns that investments in areas like product development or R&D. Thus, not even new plant construction can produce ROIs.
Many companies follow the pricing trends of their competitors and end up costing them more than their competitors. In such cases, you shouldn’t aspire to be a price leader but to find innovative ways to attract customers.
Creating the right uniform pricing strategy can be excruciating. In addition, it is a complex endeavour that brings out insecurities in the best of us. However, once you overcome the obstacles, your pricing capability will outlast the competition and bring in more profits.
Companies that don’t have a pricing capability won’t be able to extract a larger share of wallet, customer value and market opportunities they create as competitors who invested in pricing capabilities.
A strategic pricing capability is an important contributor to the company’s long-term existence. Indeed, the key is understanding the different forms of capitals work together flawlessly. Thus, making the necessary investments creates a great new strategic capability.
Most CEOs will never settle on a single price. Hence, they give their pricing managers the room to lead the market with their unique expertise and build an price architecture that can win price wars, maintain price leadership and maintain a competitive edge in pricing.
Discover your company’s full potential to drive profitability using pricing capability strategy. Contact us for a free consultation.
You can download our whitepaper here.