How do you work out your pricing – sound methodology or seat of the pants? Is it based on a simple cost plus arbitrary mark-up or do you follow a strategy? Whatever your approach, accounting for the real value you offer your customers is critical, otherwise you run the risk of undercharging and, more importantly, losing control of the whole process. This blog is an introduction to pricing strategies for companies in my specialist area – the manufacturing industry.
Effective pricing is a skill worth acquiring. There are over 20 different pricing strategies – from Absorption to Yield – the relevance of which will depend upon your industry. However, there are some universal truths about pricing that every business should consider adopting, starting with not treating it as a purely tactical process.
Discounting to undercut the competition – then increasing your margin when you can get away with it – that’s an unsustainable strategy. You’re likely to be weakening your sales structure but, more to the point, you’re missing out on a means of strengthening and growing your whole business. Differentiating your brand and putting clear water between you and the competition is something that you can achieve with a good pricing strategy.
7 Reasons not to Lower your Prices
Discounts and introductory offers have their place, of course they do. But here are 7 reasons why relying on lowering your prices, as a basic sales strategy, is going to harm your business in the long term:
1. You’re not in control: you’ve effectively given over control of your bottom line to the market place (ie your customers and the competition).
2. Poor margins: if you cut prices, you’re relying on your suppliers to reduce their margins so you can keep yours in tact.
3. Damaged supplier relations: cutting prices has a domino effect on everyone.
4. Prices will spiral downwards: raising prices once you’ve slashed them is very difficult.
5. Poor customer loyalty: don’t give your customers a reason to always seek out the lowest price.
6. Poor reflection of your brand: price cutting should never be your brand’s stand out message.
7. Weak business growth: how can you possibly plan the growth of your business based on cutting price?
The widespread belief that everybody is looking for the cheapest version of everything is simply not true. If this were the case, everybody would live in the cheapest houses, drive the cheapest cars, wear the cheapest clothes and have the cheapest holidays. They don’t. Price is only part of the mix.
People use a more sophisticated set of buying judgments whether they are engaged in retail therapy or business trading. Purchasing managers base their buying decisions on the perceived value you offer: how you take their pain away and make their job easier.
Tailor your price to your customer
Fully understanding the attributes and services that are most important to your target customer is the key to ensuring you do not compete or sell on price.
In my last blog, I discussed the Price vs Performance Matrix
This is a vital piece of work I help my clients carry out in order to identify, and then offer, the true benefit(s) valued by your target market.
These perceived benefits can come from a range of hidden elements other than product features. For example:
• Product quality
• Order lead time
• Delivery options and logistics
• Technical support
• Customer service
Pricing is all about understanding the market place – your customers and the competition. For this reason, the pricing strategy is a function of the marketing department who must validate their position to the sales team. The sales team then has a rationale to communicate clearly to the customer thereby reducing the pressure to discount in order to get sales at (literally) any price.
So what matters to your customers, and how can you provide it at a price that satisfies you both? First understand what your break-even point is: cost of materials AND labour AND overheads AND depreciation AND..? Then, what else can you offer your customers? Improved functionality, volume/economy of scale, 12 month warranty, high quality, no maintenance call out fee? In effect, what value are you bringing, what costs are you saving in the long run?
I take these 6 steps to help my clients define value:
1. Determine precisely against whom or what you are selling
2. State the benefit
3. Quantify the benefit
4. Monetise the benefit
5. Express the total monetised benefit in ‘per unit’ terms
6. Demonstrate the true net value of your product versus the competition
The relationship between precise tailoring of your offering and a pricing strategy to match, is critical and the means by which you distinguish yourself from the competition. Give your customers a clear understanding of the value they will derive from doing business with you (ie the ‘total cost of ownership’) Show them the exact cost of doing business with you instead of the competition.
As I stated earlier, this can only be accomplished by fully understanding your customer needs. Then (and only then) are you able to tailor your offering and make doing business with you a ‘no-brainer’.
Communicate value to your customers
Once you know what value means to your customer, communicate it. Create a ‘value proposition’, one that gives a context to your pricing strategy. One to which your customers and employees alike can relate.
“We are the only supplier who can offer a full 5 year equipment and spares warranty, saving you X on a call-out charge.”
“Independent test data shows that our manufacturing facilities have a reject rate of 1:1million, thereby saving you X in time and money on any product recall.”
In effect, you are monetising the points of difference you are offering your customer versus the competition.
Discover the true value proposition, demonstrate it to your customers, and the price will be a logical extension.
Pricing has such a major impact on business profit it’s worth becoming really competent in this area. I have a proven record of helping businesses improve their net profit by 2-3% using effective price management and differentiation. For a company with sales of £10m this can be an additional £200k-300k net profit. Call me and find out how I can turn you into a Pricing (Super) Strategist.