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In these difficult times, are you doing enough for your business? Can you justify and demonstrate that you are in control of your business’ performance?
Atenga is a strategic price consultant that develops and implements pricing strategies that increase revenues and maximize profits. The company has seen numerous examples of companies with failed pricing strategies, leading to sub-optimal business results or even business failure. Companies with flawed pricing strategies are easy to spot: they are never the market leader, they always struggle, and they have revolving doors at the executive suite. This article will guide you toward a better fate and a better chance of surviving the current economy.
There are several common warning signs that indicate your company has a failed pricing strategy that may lead to inferior business performance and perhaps even complete business failure. If you see any of these signs in your company, you need to take corrective action now.
Warning Sign #1Your company does not have documented pricing processes.
In many companies, the “pricing process” consists of hastily called “price meetings” - a last-minute gathering to set the final price for a new product. The attendees are often unprepared, and research is limited to a few salespeople’s biased anecdotes, a competitor’s outdated price list, and the CFO’s careful calculation of where the price needs to be to meet financial projections. The resulting price, arrived upon after hours of discussions, will be just a guess. It may be an educated guess, but it’s still just a guess.
These ad hoc price meetings are not part of 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 sales volume - or both!
Your company needs to have a pricing process that is continuous and has goals, a budget, and authority. It needs a pricing leader, either an executive (chief pricing officer) or a non-executive “pricing czar.” Companies with a pricing leader, on average, have twice the profitability, twice the growth rate and 4-5 times the valuation compared to companies that don’t. How can you afford not to initiate a sound pricing process?
Warning Sign #2The 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 customer’s perception of value; thus, prices based on your costs will always be wrong. Companies may say that they add the typical margin of their industry, that they know what markup the market will bear or that a certain percent markup makes sense for their customers, but statements like these just mean you don’t know your customers’ value perceptions.
If this is the case, you also don’t know what marketing messages, marketing mix, sales strategy and tactics are the most efficient. In addition, you aren’t aware of which bundles and policies will drive prospects to your company to buy your product or service. Essentially, your and your company are just winging it.
Warning Sign #3Your company doesn’t know your customers’ true willingness to pay.
Of course your company is engaged in ongoing conversations with your customers and, perhaps to a lesser degree, with your larger marketplace, which consists of prospects and companies or individuals for whom you might have nothing to sell. Your sales and marketing people are trying to find out what your customers are willing to pay for your product or service and what drives them to make a decision. You have some data on this, but there is a serious flaw: the data your sales and marking people collect is wrong! How can that be?
Whenever your company has a conversation with your customers or your marketplace, it inevitably becomes a sales conversation - sometimes for immediate sales, sometimes for future sales. In every sales conversation, your customer will try to discount the value of your product or service. Naturally, they want a better deal, so they will tell lies, or they won't tell the whole truth, all for the purpose of getting you to offer a better price, a deeper discount, more free features, etc.
Think back to 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 might put you in a worse negotiating position, allowing the seller to take the upper hand? Of course not. So why would you believe the data collected from your company’s representatives? It's not hard data! It's a biased collection of anecdotes, rumors and lies.
Warning Sign #4Your company’s salespeople are not trained to defend prices.
Many companies deploy 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. The ability to sell value then becomes almost impossible.
If your company only trains your sales force on the product or service it 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 want that?
Warning Sign #5Your company’s salespeople are allowed too much leeway in discounting.
Allowing your salespeople 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, effectively ruining the company’s pricing strategy.
Ongoing discounts diminish the marketplace's value perception about a company and its product or service. So, in order to maintain revenues, companies will be forced to lower prices or discount even further in the hope that their 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 eventual business failure.
Consider the following questions: How often are discount requests elevated to management? What would happen if you stopped your salespeople from discounting completely? How much would your profits increase? What change would it make in the sales volume? What tools would salespeople need and use to close the deal without discounting? Do you really know, or are you just guessing?
Warning Sign #6Your 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.
Needless to say, 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 products. Companies must also be aware of the buying decision drivers for each segment. Armed with sufficient knowledge of these traits, companies must then tailor their products, packaging, delivery options, marketing messages and pricing strategies to maximize revenues and profits from the overall marketplace.
How does your company segment your market? Using only SIC code, ZIP codes or some other variable that may have nothing do with companies’ decision behavior and willingness to pay?
Warning Sign #7Your 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.
In an attempt to gain market share, it is common for a new entrant to price 15%, 25% or even 50% below the market leader. The low price leads to low value perceptions, which is a surefire way to always be the runner up - to never be able to raise prices, to always struggle with profitability, and to always be playing catch-up with the market leader(s). This is not a pricing strategy - it is a failed business strategy!
Instead, management teams must make the effort to learn the value perceptions and decision drivers of their customers. They can then use this knowledge to differentiate their products or services to create additional value.
The choice is yours. Examine your market and your competition. The market leaders in your industry are probably not low-price leaders, but companies with higher prices on their products or services with a sound understanding of their customers: their needs and wants, their willingness to pay, and their decision drivers. What about you? Are you the market leader? If not, why?
For more information, visit www.atenga.com.