|By Per Sjofors||
|November 24, 2009 10:00 AM EST||
CEOs in Technology on Ulitzer
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. 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.
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.
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 a few salespeople’s biased anecdotes, perhaps a competitor’s outdated price list, and the CFO’s careful calculation of where the price needs to be to meet the financial projections.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 hock 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 7 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.
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