In these difficult times are you
doing enough for your business? Will you bring excuses to
the next board meeting, or can you justify and demonstrate that you
have taken control of your business’ performance?
Atenga
is a strategic price consultancy. We develop and implement pricing strategies
that increase revenues and maximize profits. During our engagements, we have
seen numerous examples of companies with failed pricing strategies, leading to
suboptimal business results or even business failure. Companies with flawed
pricing strategies are easy to spot: they are never the market leader, they
always struggle, they are always the runner-up, and they have revolving doors
at the executive suite. Fortunately, you have a choice, and this article will
guide you towards a better fate and a higher chance of surviving the current
economy.
The
following is a list of the most common warning signs that indicate your company
has a failed pricing strategy, leading to inferior business performance, and
sometimes, complete business failure. If
you see any of these signs in your
company, you need to take corrective action now.
Warning sign #1: Your company
does not have documented pricing processes.
In
many companies, the "pricing process" consists of hastily called "price
meetings"-a last-minute meeting to set the final price for a new product. The
attendees are often unprepared, and research is limited to (at best!) a few
salespeople’s biased anecdotes, perhaps a competitor’s outdated price list, and
the CFO’s careful calculation of where the price needs to be to meet the
financial projections. The resulting price, sometimes after hours of discussions,
will be just a guess. It may be an educated guess, but it’s still a guess.
These
ad hoc price meetings have nothing to do with a sound pricing process and do
not allow companies to develop and enforce a holistic pricing strategy designed
to optimize revenues, profits and corporate growth. Instead, pricing guesswork
will inevitably leave money on the table or reduce the sales volume-or
both!
Your
company needs to have a pricing process that is continuous, that has goals,
budget and authority. It needs a pricing leader, either an executive (Chief
Pricing Officer) or a non-executive "pricing czar". Companies who have a
pricing leader, on average, have twice the profitability, twice the growth
rate, and 4-5 times the valuation compared to companies who don’t. How can you afford not to initiate a sound
pricing process?
Warning sign #2: The only hard
data your company uses for pricing is your cost.
Prices
are optimized and lead to superior business results when they are based on the
value perceptions of the customer, thus, prices based on your costs will always
be wrong. Companies may say they add "the typical margin of our industry", or
"I know what markup the market will bear", or "an X% markup makes sense for my
customers", but in fact, statements like these just mean you don’t know your
customers’ value perceptions.
If
you don’t know your customers’ value perceptions, you also don’t know for sure
what marketing messages, marketing mix, sales strategy and tactics are the most
efficient. In addition, you don’t know which bundles and polices will drive
your prospects to your company and to buy your product or service. You and your
company are just winging it.
Think about this for a
while…. What hard data resource does your company use to drive your pricing
strategy?
Warning sign #3: Your company
doesn’t know your customers’ true willingness to pay.
Of
course your company is engaged in ongoing conversations with your customers,
and maybe to a lesser degree with your larger "marketplace" consisting of
prospects, suspects and companies or individuals for whom you might have
nothing to sell. And of course your sales people and your marketing people are
trying to find out what your customers are willing to pay for your product or
service and what drives the customer to make a decision. And of course, you
have some data on this. But there is a serious flaw; the data your sales and
marking people collect is all wrong! How can that be?
Here
is the reason: Whenever your company has a conversation with your customers or
your marketplace, it inevitably becomes a sales conversation, sometimes for
immediate sales, or sometimes for future sales. In every sales conversation,
your customer will try to discount the value of your product or service. They naturally
want a better deal so they will tell lies, or not tell the whole truth, or
both, all for the purpose of getting you to offer a better price, a deeper
discount, more for-free features etc.
Go
back in your memory and recall a time when you where interrogated by a company.
Maybe the last time you bought a new car, or negotiated with your contractor
for a kitchen renovation. Were you completely truthful? Did you leave out some
information you thought could get you in a worse negotiating position, letting
the seller take the upper hand? I don’t think so!
So why would you believe
the data collected from your company’s representatives? It is not hard data! It
is a biased collection of anecdotes, rumors and lies.
Warning sign #4: Your
company’s sales people are not trained to defend prices.
Many
companies send out their sales force unprepared and without an optimized
pricing strategy to back them up. Years of interaction with customers pushing
for lower prices, and trying to discount the value your company delivers, gives
the sales force a tainted and diminished view of the marketplace’s value
perceptions. "Selling" value then becomes almost impossible.
If
your company only trains your sales force on the product or service your
company offers, and doesn’t include training on the true value perceptions of
the marketplace, as well as specific sales tactics to defend your prices and
your pricing strategy, it will lead to unnecessary discounting, elongated sales
cycles, competitive disadvantage, loss of revenues and profits, and ultimately,
the commoditization of your offerings.
Why would you ever want
that?
Warning sign #5: Your
company’s sales people are allowed too much leeway in discounting.
Allowing your
sales people to drive you to discounting typically initiates a death-spiral;
salespeople discount heavily and they take "the deal" at any cost; they
convince management over and over again to accept deep discounting, and thus,
effectively runs the company’s pricing "strategy".
Ongoing
discounting diminishes the marketplace’s value perception about the company and
the product or service. So in order to maintain revenues, companies will be
forced to lower prices or discount even further in the hope that the sales
volume will increase to offset the lower prices-but it will not. Instead
companies will find themselves with, at best, flat growth, no profits, or with
ever declining revenues and ultimate business failure.
Think about this for a while. How often are
discount requests elevated to management? What would happen if you stopped your
sales people from discounting completely? How much would your profits increase?
What changes would it make in the sales volume? Any at all? What "tools" would
they need and use to close the deal without discounting? Do you really know or
are you just guessing?
Warning sign #6: Your company
has not segmented your customers based on their decision behavior.
The
"Iron Law of Pricing" says that different behavioral customer segments will
value your offering differently, and that the pricing strategy must be
constructed to leverage these differences to increase the company’s market
penetration, price realization and profitability.
Thus,
one-size-fits-all doesn’t cut it. Companies must know the behavioral
segmentation of their marketplace, as well as the value perceptions and
monetary value each segment assigns to their product. Companies must also be
aware of the buying decision drivers for each segment. Armed with sufficient
knowledge of these traits, companies must then leverage this knowledge to
tailor the product, packaging, delivery options, marketing messages and the
pricing strategy to maximize revenues and profits from the overall marketplace.
How does your company segment
your market? Just using SIC code, ZIP codes, or some other variable that may
have nothing do with companies’ decision behavior and willingness to pay?
Warning sign #7: Your company
benchmarks your prices on "the marketplace."
By
resorting to "marketplace pricing," companies accept the commoditization of
their product or service-and as commodities are sold on price alone-the company
will only win business when it sells at the lowest price.
Especially
in an attempt to gain market share, it is even common for a new entrance in a
market to price 15%, 25% or even 50% below the market leader. The low price
leads to low value perceptions, so this becomes a proven way to always be the
runner up, never be able to raise prices, always struggle with profitability,
and always be playing catch up to the market leader(s). Why would anybody want
that as a pricing strategy-it is just a failed business strategy!
Instead,
management teams must make the effort and investment to learn the value
perceptions and decision drivers of their customer. They can then use this
knowledge to differentiate their products or services to create additional
value, and then price the product to monetize that additional value.
The choice is yours. Look
around your market and your competition. I’ll bet you that the market leaders
in your industry are not the "low price leader," but instead are companies with
higher prices on their products or services with a sound understanding of the
customers’ needs and wants, willingness to pay, and decision drivers. What
about you? Are you the market leader? If not, why?
Conclusion
These
seven warning signs need to be taken seriously. Even if you just recognize a
single one, it is an indication that your company does not have an optimal
pricing strategy.
Since
most companies have never done it, a profit optimized pricing strategy has
emerged as an important source of competitive advantage and increased
profitability. CEO’s running companies with an optimized pricing strategy are
the most admired in their industry.
Thus,
the development of a holistic pricing strategy is just as important as the
management of costs and the growth of sales volume. If you recognized any of
these mistakes, you need to take action; read books on pricing, do some Google
searches, and understand what can be done and who will do it. Call us if you want to discuss.
