Insights

Pricing Isn’t A Four Letter Word

When the topic of pricing arises, anticipation often follows that the discussion will be unpleasant, putting more pressure on the annual goals.  We have all heard quotes like the following.  “The only way we got people into our store over the holidays was with massive discounts.”  “My customers had to go down market during the recession, and they aren’t moving back up.”  “We keep losing share to private labels in the Big Boxes, all due to price.”

While such quotes are solidly based on reality, making pricing a daunting topic, firms that proactively manage pricing strategy with the right tools in place can produce significant top- and bottom-line results.  A point gain in realized prices can yield a much larger proportional improvement in profits.  In our work with clients on pricing strategy, four lessons have emerged that can help you get to the point where pricing is a positive contributor to 2012’s success.

First, understand that not every price challenge is a real threat.  There are elite segments in just about every market.  Many of your customers want to buy a product they see as superior or one where they have a strong level of confidence in the brand or because they want the associated top-of-the-line service.  Remembering – and, more importantly, reinforcing – the non-price advantages that won your firm business in the first place can allow you to avoid unnecessary participation in the vicious cycle of price-based competition.  If price is the only reason you give customers to purchase from you, don’t expect anything other than price pressure.

Second, if there is ever a topic where strong analytics makes a contribution, it is pricing.  One of your key goals in 2012 should be to build a strong analytics foundation to assess the external business environment and your own firm’s dependence on pricing gains to achieve profit gains.  Over and over, we see instances in which there are sharp differences in the pricing environment from one product-market segment to the next.  Knowing where and when pricing pressures are likely to be intense can enable you to make the correct decisions on price increases and determine the right responses to competitive challenges. A “one size fits all” pricing strategy might be correct on average, but wrong in every application.

Third, keep on top of best practice approaches to pricing strategy.  We recently worked with a company that successfully introduced a premium price product into an incredibly challenging market by implementing a strategy that “gave customers an option that they could refuse.”  That strategy offers the best of both worlds – you don’t have to take a risk because you continue to offer a low-priced option, but you gain upside potential from customer segments that want more and will pay for it.  In another instance, we saw a firm with a brand that was preferred by many customers shoot themselves in the foot by placing the product in too many channels, creating an inappropriate image that their product was one where “deals were always available”.  Implementing best practice concepts can yield some major gains for your company.

Finally, it always is important to remember to “create value to capture value”.  While the results of new strategies to create value will probably contribute more to 2013 and beyond than to 2012, the concept underlies all successful pricing strategies.  If you are delivering value to your customers, you can be rewarded for it, through a price premium or otherwise.  If you aren’t, any success you can achieve is likely to be short-lived, at best.  Asking the question “How can I deliver more value to my customers?” in 2012, and taking action consistent with the answers to that question, can make the discussion of pricing a much more pleasant event in future years.  One firm that we worked with recently had a significant volume of sales through the Internet.  When we interviewed their customers about what they liked, what they disliked, and what they hoped for in the future, three of the top ten themes were surprises to our client.  Gaining a strong understanding of customer priorities is the route to success in value creation.

Pricing challenges aren’t going to go away.  But firms that take a proactive approach to pricing and that believe that it’s an element of strategy that can make a positive contribution are going to be rewarded.  Remember the elite segments and serve them well.  Build a strong knowledge foundation for decisions.  Implement creative practices that create upside.  And let your customers provide the roadmap as to how you can deliver value.  The rewards from those actions can be tremendous.

Author: George F. Brown, Jr.

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