Most senior leadership know that pricing can be the most effective lever to use in the short term to drive enterprise value. So why don’t more use it?
I believe it’s due to fear. Fear of losing customers if anything related to an offer is changed, especially an increase in price. This fear is the reason we often see clients with 20% of their customers bringing in 80% of their profitability. This fear of losing customers definitely slows, and at times, even stops pricing projects from being implemented.
As a board member, how do you know what issues are inhibiting you from getting the most from your pricing?
Here are three simple, yet effective questions that will kickstart your path to double digit profit gains:
1. How do we know we have the right price for the market?
The first thing you need to understand is how the current pricing was created. There are a lot of ways to look at this, but here are some common approaches and the potential issues with each.
If prices are based on copying competitors’ prices: then you know you aren’t getting paid for your differentiation/what you are doing for customers above and beyond what competitors are delivering. There are always reasons why a customer buys from you and not a competitor. If this wasn’t the case, every competitor in the market would have equal share.
If prices are based on a flat margin (e.g., everything is cost +30%): you are underpriced with some customers, and overpriced for others (e.g., losing share in some segments). Not all customers derive the same value from your offerings – and part of value-based pricing is to understand how best to modulate your value (thus your price) to align with various customer needs.
If prices are based off an understanding of willingness to pay (WTP): likely you are under-priced in the market. WTP is great as a guidance, but WTP can change and should change. Just think of yourself as a consumer, our WTP changes all the time for the same product depending on where we are shopping, how tired we are, how much research we did, and even who we are shopping with to name a few.
For businesses, are your sales teams trained on how to sell on value for different sales scenarios? Do they have the proper freedom and flexibility to change an offer based on sales scenarios? Do they have the right Give-Gets to use for the right scenarios?
2. Are we actually getting the prices we’ve set?
If you are getting your list price most of the time, then it could indicate that list prices aren’t truly aligned to your value or you may have unnecessary transaction loss.
If you hear that there is heavy discounting in most transactions, then your list price may be mis-aligned with value/market needs and/or your sales teams are poorly trained to defend your value-based prices.
A healthy value-based transaction set should have some negotiated discounts (typically around 30% of your transactions) and a some level of customer churn (less than 10%) with a solid governance process to monitor these changes.
3. When was the last time we made a price adjustment? Why?
If the answer is more than two years, then your prices are likely stale. Think about it this way, your products/services are typically changing every year, customer needs change often, market conditions change and your competitors are changing and their offerings are changing, so why aren’t your prices? That doesn’t necesaily mean raising prices. If there is a new competitor with a better solution that comes into your space, then you may have to adjust your prices down relative to the new differential value you are delivering.
If you are only changing prices when your costs change, then you are likely not value aligned for the same reasons. You also may not be using these cost changes strategically. As an example, most of our clients are dealing with the consequences of increased tariffs and most are looking to pass any and all tariff costs through to their customers.
This is the correct response, but you might also:
- Move more costs to certain customers based on your cost to serve them
- Decide to hold on passing some of the costs through to certain customers to gain share from your competitors
- Keep this in mind in negotiations where you know you are less dependent on suppliers from Canada/Mexico/China than your competitors (More on tariffs here).
Understanding your pricing environment through these questions will enable you to solve for the right issue your team is facing. Any change to a customer is risky and your organization will find many reasons why it won’t work, but if you’re clear and thoughtful, you’ll be able to execute in a way that is fair for both parties and advances the business relationship. Then you are on your way to double digit gains with your pricing strategy.
