During a recent conversation, a pricing manager from a client confessed he felt frustrated with his current state of affairs. He felt the way his company manages pricing is reactive. Exasperated, he cried out, “I want people to stop asking me what we want our prices to be, and start asking me what we want our prices to do!”
Looking at prices in a strategic rather than tactical manner is exactly what you want your pricing team to do. With that in mind, here are five things your prices can do for your organization.
Rationalize Your Product Strategy
At Holden Advisors, we often recommend a good/better/best strategy to provide products with high differential value to customers willing to pay and offer flanking products to customers on a budget. Your pricing strategy must clearly reflect this hierarchy. If discounts are given on the premium solution, the fences between the good/better/best offerings can be demolished quickly, and the entire product strategy falls apart.
Stay Ahead of the Competition
Your price is the strongest signal you send to the market. Pricing your differentiated offerings high with respect to competition (a skim strategy) while having a flanking brand on par with competitive offering, both in value and price (a neutral strategy), can help keep competitors in check. Communicate to the market whether you are willing to respond aggressively (using a penetration strategy) to a competitor that attacks on price.
Highlight the Quality of Your Product
In situations in which customers have little experience with your product, a high price signals high quality, therefore a low price can impede sales. For example, in professional services in which the quality of work cannot be judged until the work is complete, a high price denotes confidence in your work product; a low price sends the opposite signal.
In industries, such as manufacturing, where there is a push to fill the factory, lowering price can improve volume at slow times. Be careful with this tactic, however, because getting locked into low price contracts can come back to bite you when the market improves. A better approach is to offer a lower price for a contract that allows you to bump lower-paying customers to slower delivery when your factory is full. Price buyers will love the option, and buyers who need your product will balk at the delay and accept the higher price.
Let Your Sales Team Own Negotiations
If your sales teams are not clear how your price, value, and marketing come together, they will probably fall back on price discounts to close deals. Your pricing map becomes a scatter shot if discounting becomes common practice; you lose pricing integrity and encourage your customers to play poker to get better deals.
A better approach is to empower your sales team to articulate the value you deliver to customers. Arm your sales force with Give-GetsSM to allow price-value trade-offs, and leave customers confident that they paid the same as everyone else for the offering they purchased. Support your sales force in this way, allow them to negotiate with backbone, and you’d even be comfortable showing your customers an anonymized version of your price-volume plot. Now there’s integrity!
Think strategically about pricing, and you’ll discover a host of ways it can benefit your business. The list provided here is by no means exhaustive. What does your pricing do for your company?