Why Pricing Matters
By admin | August 28, 2008
By Mike Myatt, Chief Strategy Officer, N2growth
While I welcome a passionate discussion on the topic of pricing, the simple truth is that most executives avoid the topic altogether. Let me be clear; Pricing Matters…Do you have a pricing strategy, or do you set your prices by some ethereal or arbitrary method? It is my opinion that issues surrounding pricing decisions are root level drivers to a successful business strategy. That being said, I’m always amazed at how many corporations and professional advisers seem to pull their pricing out of thin air. Moreover, of those that actually go through some form of disciplined process, many of them seem to believe that once they have set the initial pricing that their job is finished and that the topic of pricing requires no further attention…nothing could be further from the truth. In today’s post I share my thoughts on how to develop a sound pricing strategy…
While the topic of pricing is certainly not rocket science, it has indeed been a thorn in the side of business people since the dawn of commerce. It has definitely caused its fair share of angst, frustration, and vigorous debate among executives and managers simply for the reason that it is one of the few metrics that touches virtually every aspect of a business. Pricing impacts everything from strategy and tactics, to finance, to branding, to marketing and sales, to vendor selection and supply chain management, to recruiting and compensation, and to customer satisfaction and loyalty. As mission critical as pricing is, it is also one of the most often undervalued and overlooked business disciplines.
A recent trend which demonstrates that corporations have recognized the need for specific domain expertise is pricing is the emergence of a bevy of C-level positions charged with direct leadership over strategic pricing. It is no longer uncommon for me to see a chief revenue officer or chief pricing officer joining the ranks of executive teams. Moreover, in absence of a specific headcount assignment tied to pricing, other C-suite officers are starting to take ownership over pricing as a key business driver.
Why is it that some attorneys have difficulty justifying $70 dollars an hour, and others can command $700 dollars and hour? Why do some products have a large backlog of orders at premium prices, while others struggle to get any traction at discounted price points? Why will someone pay $30,000 dollars for a Rolex, but feel a Timex isn’t worth more than $50 dollars? Why do some real estate brokers get their full fee on every deal, while others must discount their fees to remain competitive? While I could continue by citing other examples of pricing discrepancies my guess is that it is not necessary…not only will the following points provide some insight into answering the aforementioned questions, but they are also the main items that should be considered when evaluating your pricing strategy:
- Cost: Any evaluation of pricing should begin by having a firm understanding of what it costs to provide your product or service. If you don’t have a handle on all direct and indirect costs then how can you possibly even begin to understand whether or not your pricing will be profitable? By the way…if you forget to factor in cash flow in your considerations you’ll be very sorry.
- Methodology: You do have a choice…Moreover most successful pricing models offer a variety of options. Flat rate pricing, subscription based pricing, cost plus pricing, ala carte or menu based pricing, retainer based pricing, volume pricing, incentive pricing, discount pricing, percentage pricing, performance pricing, value pricing, risk transfer pricing, venture pricing, relationship pricing, bundled pricing, hybrid pricing structures, and any number of other options abound. The use of solid research, segmentation, and sound business logic in the engineering of your pricing model will pay long-term dividends. Avoid arbitrary or static percentage increases in pricing that do not take into account current market dynamics and trends. Where possible all pricing should be subject to nuanced considerations.
- Brand: Pricing most certainly plays into brand perception, and the strength of your brand (or lack thereof) will most definitely impact your pricing. Does you brand command a pricing premium, or force you into being a low cost provider? By the way, one strategy isn’t necessarily better than the other. However it is never a good thing to be forced into a low cost position.
- Competition: Does your pricing place you at a competitive advantage, or disadvantage in the market? While I always recommend understanding competitive pricing models, it is rarely a good idea to drive your pricing model using this as a sole point of consideration. What is more important than the actual price point in relationship to your competition is whether or not you can justify whatever position you adopt.
- Market Demand: Put simply, the market is what the market is. Do you know how big your market is or isn’t? The reality is that there is no limit on the upper-end of pricing until the market places a cap on it. That being said, at some point the market will eventually determine the top-end of the pricing scale for any product or service. Supply and demand will perhaps impact pricing as much as any other given market force outside of playing to the emotions of your target market(s).
- Consumer Emotions: The emotional impact surrounding the delivery of your product or service will have a powerful impact on pricing. The law of scarcity, the principle of exclusivity, the perception of value, or creating a sense of urgency can all create pricing premiums. Catering to the emotions of fear, greed, ego, pride, lust, envy, loneliness, safety and any number of other emotions will impact what can ultimately be charged. Pricing only becomes an issue when you cannot justify it…Better yet, pricing is a non-issue when it justifies itself.
Bottom line…pricing is not a taboo subject to be avoided, but rather a key metric that needs to be well understood as well as proactively measured and managed. Pricing needs to be dealt with in the most embryonic stages of strategic planning and needs to constantly be evaluated based upon changes in market dynamics.
Topics: Operations & Strategy |
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