10 tips for better pricing strategy
Pricing is one of the most powerful yet underutilized strategies available to businesses.
A McKinsey & Co. study of the Global one200 found that if companies increased prices by just one per cent and demand remained constant, operating profits would increase by 11 per cent or more.
The following 10 pricing tips can reap higher profits, generate growth, and better serve customers by providing options.
Stop marking up costs: The most common mistake in pricing involves setting prices by marking up costs (“I need a 30 per cent margin”). While easy to implement, these “cost-plus” prices bear absolutely no relation to the amount that consumers are willing to pay. As a result, profits are left on the table daily.
Set prices that capture value: The right way to set prices involves capturing the value that customers place on a product by “thinking like a customer.” Customers evaluate a product and its next best alternative(s) and then decide if the extra bells and whistles worth the price premium. They choose the product that provides the best deal.
Create a value statement: Every company should have a value statement that clearly articulates why customers should purchase their product over competitors’ offerings. Be specific in listing reasons—this is not a time to be modest. This statement will boost the confidence of your frontline so they can look customers squarely in the eye and say, “I know that you have options, but here are the reasons why you should buy our product.”
Earning high profits is good: I’ve found that many employees are uncomfortable setting prices above what they consider to be “fair” and are quick to offer unnecessary discounts. It is fair to charge what the market will bear to compensate for the hard work and financial risk necessary to bring products to market. It is also important to reinforce the truism that most customers are not loyal—if a new product offers a better value, many will defect.
A discount today doesn’t guarantee a premium tomorrow: Many people believe that offering a discount as an incentive will lead to future full price purchases, but this rarely works. Offering periodic discounts serves price sensitive customers (which is a great strategy) but often devalues a product in customers’ minds, which impedes future full price purchases.
Customers have different pricing needs: In virtually every facet of business companies develop strategies based on the truism that customers differ from each other. However, when it comes to pricing, many companies behave as though their customers are identical by setting just one price for each product. The key to developing a comprehensive pricing strategy involves embracing (and profiting from) the fact that customers’ pricing needs differ in three primary ways: pricing plans, product preferences, and product valuations. Pick-a-plan, versioning, and differential pricing tactics serve these diverse needs.