Mary-Clare Tomes

The Pain of pricing

I recently worked with a group of artists to put on an exhibition … everything was going smoothly, the venue was sorted, the guests list finalised, all were in agreement on how the event would run … then it came to agreeing a pricing structure …and the wheels fell off…

Why?

Businesses must generate income to survive … but pricing is rarely the ‘sexy’ leg of strategy. We enjoy creating ideas about customer values, developing new products, and creating high performing teams … but pouring over figures to agree a pricing structure  … not quite so much fun!

For smaller businesses and consulting, pricing is also personal … what am I really worth, how can I put a value my own intellectual property? In larger businesses … it can highlight the gaps in knowledge around consumers and competitors leading to some awkward moments.

But if the wrong pricing strategy is in place … the consequences can be disastrous and far reaching.  The fiasco at JC Penney in 2013 was a great example of how the wrong pricing strategy can drive away both customers and staff and cost the CEO his job.

So how do you ensure you get the right pricing strategy in place?

1 . Articulate your value proposition

From concept development to agreeing the pricing strategy … the value proposition may have shifted.  Re-articulate the value proposition and then define the message that the price needs to convey.

Is it …

“this is a premium product delivering a premium service”

or …

“this is a hard working product delivering operational efficiency”

2. Really understand your cost structure

Map all the elements that contribute to the cost of the sale, not just the production or delivery costs, but indirect costs such as rebates, sales commissions, administration and development costs.   What profit margin are you aiming for?  What is your break-even point?

3. Unpack the purchasing chain

How many purchasing decisions are there in the chain?  You may have got the retail price spot on but if there is not enough margin for the distributor … then the product is going to sit at the back of the store.  Again map the process and really understand how each decision to purchase will be made … climb inside the head of your consumers!

4. Plot your competitors

Plot not only the obvious competitors, but look at all products or services that are competing for a share of the same budget. Understand their pricing strategies and value propositions.

5. Future Proof

Constantly adjusting prices is time consuming and frustrates staff and customers, so identify the factors that could impact pricing over the next 12 months … exchange rates, raw material costs, or fuel prices etc.  What can you do to reduce the impact of these factors and have you built in enough buffers to weather a few storms?

6. Test the market

Pricing strategies are difficult to reverse … so test the market, speak to trusted distributors and current customers.  Trialling not only checks assumptions but also builds internal confidence.  This confidence will ensure the buy-in and support from the sales team … so critical to any pricing strategy.

By taking a structured approach to pricing, much of the emotion is stripped out and the risks reduced.   Pricing may never be sexy, but getting it right can be the difference between business success and failure.