“The moment you make a mistake in pricing, you’re eating into your reputation or your profits.” – Katharine Paine
Simple pricing increases are often an easy approach to increasing sales revenue when companies need to improve profitability or top-line performance. It’s not a strategy, its more often a reaction. It may be a kicked off by rises in supply chain costs, or corrosive profitability reports. Often planned with the short term in mind to resolve problems and are a simple solution.
Discussions are held between the CFO and sales management to convince them it is a required business move. The sales manager well aware of the workload, and after-effects of a price increase, lacks the enthusiasm to start the process.
But for many companies, those pricing strategies just don’t work – they are not as simple as often considered, and the risk of customer departure can be high.
Pricing is temporary in any company, and they can go up and down according to supply chains, competitors, and markets. A change in price does expose companies to potentially losing accounts and, if not managed correctly, can be the start of a downturn. Simply putting up your prices by 3 or 5% is not the answer.
Pricing strategies are sensitive subjects to both customers and sales personnel.
Sales personnel are reluctant to engage in price increase discussions with the customers knowing the first reaction can be difficult and, at worst, lead to the loss of a customer. Of course, a salesperson’s nightmare is when pricing increases are announced by email or letter, and immediately, they are defending the company’s position rather than building value. The general email or letter can be even more detrimental to larger accounts with the lack of personal interaction.
Customers are price-sensitive, and that sensitivity changes according to their requirements. Urgency, lack of availability, and quality often impacting what they are willing to pay. Customer perception can be a low price is a bargain to some, while others see it as a lower quality product. The same applies to higher prices. Some consider its values for a quality product, and others don’t see the value and step away. Selling value is more important than the selling price.
Before you embark on pricing strategies, you need to know how your customers value your product or service so that any price changes encourage the market behaviour you desire.
The customers should be segmented into groups, and not just by the volume of purchases or total purchases each year. Consideration needs to be given to the geographical areas, costs of purchase, frequency of purchase combined with the volume of individual purchases, how the customer uses the product or service, or on-sells it.
To be competitive, you need to consider pricing strategies that are outside your usual industry offerings. Bring something new, fresh, and innovative that meets customer segments’ needs. Build the value in the offering rather than just focusing on price.
With today’s software managing, multiple pricing agreements are not tricky, giving sales managers more flexibility in how they package and offer prices to the market.
It is important that you establish the goals of what outcomes you wish to achieve and establish clear measures to monitor the actions or reactions of your customers.
Some examples of objectives can be:
- Immediate Increased Revenue – An immediate price increase will deliver additional revenues and profits to the business if the price increase does not negatively impact sales. If the value is not integrated into the increase, the risk of customer loss increases dramatically.
- Taking Market Share – A price reduction can stimulate additional sales and take market share away from other suppliers. It can also drive prices down permanently if competitors follow your lead. Being informed with market intelligence of how your products compare with similar products, as well as the prices of competitive products, is essential for positioning prices correctly. You need to avoid going to low unnecessarily.
- Timed increases – Raising your prices regularly for small amounts can be a more digestible approach for customers than one major increase. Your customers learn to plan for regular incremental increases and accept them more readily, with little discussion required. While a small increase in price may not seem significant the impact will flow directly to the bottom line.
Poorly managed price increases can have a negative effect on customer relationships. If the customer’s reaction is adverse, you can make further adjustments, including a return to the old prices. In situations where the increases are rejected by customers, you will be faced with future challenges from the same customer and risk their loss. Risk strategies need to be implemented in these situations.
Pricing strategies can also include:
Sell more stock lines Bundling products can be an option for some industries; however, there is often a price sacrifice to entice the customers to purchase the bundle. The bundle must be products that fit together and are considered required by the customer. The individual product prices need to have sufficient profit margins to allow bundled sales to remain profitable. The result is you can sell more products with an overall increase in top-line revenue and profit margins
Rebates – A rebate is a deferred discount, issuing a percentage of the price in cash after the product is purchased. This is heavily utilised in construction and FMCG markets, where price lists are protected by confidential pricing agreements. The retail-wholesale price lists are circulated as common knowledge, with all suppliers having similar rates. Behind the scenes, negotiations are fierce as rebates are discussed on volume purchases. The rebates are known at the senior management level, and individual agreements are negotiated between the company and its customers. Rebates are corrosive, and as volumes increase, your company becomes more reliant on supplying larger customers where profit is under pressure. The failure to promptly release a rebate can undermine customer relations. With the negatives associated, some companies have discontinued rebate programmes.
Service Charges – Add, Reduce, or Eliminate Shipping and Handling Charges. An alternative to raising prices is to consider adding a shipping or handling charge. This can be more easily absorbed into the customer’s cost structures and can spark behaviour of larger orders. The outcome of sales revenue is the same while avoiding buyer backlash to a product price increase. Another approach to consider is if you do charge for shipping and handling now, consider reducing or eliminating the service charges for a specific time frame or volume to stimulate sales.
The strategy to avoid
A difficult pricing strategy and one your company should attempt to avoid is the sale environment strategy. This is the backbone of retail selling and can be seen being applied in industrial and wholesale markets. Sale environments are designed to spur people into action and are very short-term measures to increase sales. Often you see companies bring sales opportunities forward by offering the incentive to buy now, losing sales opportunities further down the track.
Those discount measures are offering for a limited time, creating a sense of urgency. They can be quantity driven, bundled, seasonal, to name a few. It is a merry-go-round that once you are on it, the customers will wait for the next offering, slowing your sales down.
Pricing strategies need to be carefully planned to align with your overall business strategy. How you wish to be seen in the market and how you want certain customers segments to respond. They should be well planned over a twelve-month to a two-year period of time-evolving the company customer base to what you would like them to be.
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