Lately, we've had a lot of conversations with businesses that are ramping up "strategic pricing". They've adopted more systematic approaches to pricing and have taken responsibility for setting prices away from salespeople. This transitions price away from the team worried about closing a sale to specialized pricing people who are worried about generating profits that meet company goals. That's terrific. Well, it might be terrific for some, but it's not terrific for the sales force that is struggling with this new pressure and, like many sales forces, now calls the pricing people the "sales prevention" department.
It has led me to raise the question: what is strategic pricing? I'm going to warn you that this conversation may start a little circular but bear with me. Roll your shoulders – here we go. Strategy, simply put, is how you achieve your objectives. The essence of strategy, in the words of a terrific college professor, "is the efficient allocation of scarce resources to maximize their return for the organization"
For pricing to be "strategic" it must first be focused on achieving an objective. The problem is that many firms often have multiple and conflicting objectives. I remember one CEO standing in front of a sales force saying he wanted to grow revenue, profits, and market share. This company was in a highly-competitive mature business, and here's the point: you can't do all three with price alone. It was no wonder they weren't making a profit. The first action is to make the objective reasonable, given customer and market conditions. Focus pricing on one thing, hence my mantra: "price for profits, innovate for growth."
The basis for pricing to be "strategic" requires a good understanding of:
- how the products and associated services differ from competitors
- what that difference is worth to customers
- how competitors are likely to react
- the products and services costs
- the ability to return profits to a company
The second action is to recognize that knowing your costs for price setting can be very difficult and dig in. Because costs are often structured in a way that hide their real nature, they prevent managers from making decisions to reduce price to fill capacity when that might be a strategic move. That is, even though it may appear that the prices are lower than the “apparent” costs, they still provide incremental contributions to profit. Most costing systems hide that.
I believe the biggest action for strategic pricing is however, in realizing the game that customers play to prevent you from charging prices which reflect your value given competitors. Take action by developing tactics which minimize that damage. To do that, you must really understand your value and employ the use of give/gets and tough negotiating to capture that value.
Are you achieving "strategic pricing" or is the program putting pressure on poorly informed salespeople (hint: it's not their fault) who face customers without the tools they need to make strategic pricing work? All the strategy in the world falls to the wayside, if salespeople cannot implement the price strategy. If pricing is to achieve a revenue or profit objective, it is critical to make sure the “last mile” is implemented well.