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Today’s successful businesses hold quarterly strategic pricing meetings that are separate from sales meetings.
Pricing meetings focus on net profitability. Doug Butdorf, a senior pricing consultant for Boost Pricing, recently presented to my Vistage chief executive board. I felt inspired to share his message. Here are five profitable pricing strategies to consider.
1. Understand the numbers.
Have you trained your staff to understand how pricing affects profitability? An educated team recognizes that a 1% price increase leads to a 10% or 20% net profit increase or more. This is a bigger impact than a 1% improvement in sales volume growth or 1% cost reduction. Yet pricing gets the least attention and is least understood.
2. Know the pricing psychology.
A common self-limiting belief for price reduction is the fear of customers walking away unless you offer a discount. Boost Pricing says that’s a phantom fear, and sellers are losing substantial profit because customers behave as customers do (get discounts wherever possible).
Do you believe in your product? Do you solve real problems for your customers? Do you provide the best quality? Do you exceed customer expectations? If yes, then you don’t need to discount out of fear.
A pricing strategy based on confidence in the product and the company’s added value reduces fear-driven discounting. When discounting exceptions are absolutely necessary, have pricing guidelines for discounting non-sensitive items instead of using blanket percent discounts.
3. Recognize that requests to negotiate are a buying signal.
When you exceed your customers’ expectations and make their businesses or lives even better, you can charge a premium price. Before automatically lowering prices as a response to discounting pressures, first try to assess the customer’s actions.
One example of a negotiating tactic includes a request to match your price with that of another company. What does this indicate? Any customer negotiation tactic is actually a buying signal.
Customers, like all humans, are notoriously interested in themselves. They don’t waste time asking for a better deal if they have absolutely no interest in buying from you. Asking indicates you have some power, including pricing power, when the customer beats you up on price. Some sales people’s brains short circuit when under pricing pressure. Instead, try this. Pause. Ask more questions to consider other options. And operate from confidence rather than fear.
4. Analyze your customers and sales staff.
How often does your pricing team regularly analyze your customers based on sales revenue and margins? High margins/high sales customers are great. High margins/low sales customers are good. Low margins/high sales customers are OK. But evaluate keeping low margins/low sales customers. Similarly, analyze the sales team profitability as it aligns to the company’s goals.
5. Remember that freebies add up quickly.
When was the last time you listed all the services or products you gave away for free? These internal expenses or pass-through items are not sold but incur as expenses. The exhaustive list includes freight, rush charges, no-show fees, disposal fees and COVID surcharges.
Once your pricing team categorizes them as acceptable or not, decide how to communicate them to customers. A few options include:
Increase the product price.
Add a specific line on the invoice.
Boost recommends that if you decide to give the specific line item away for free, you should create a subsequent credit line below it called, for example, “Service Waived for Long-Term Partnership” that removes the fee. Those options show customers your fees and create future tracking measurements.
New pricing strategies extend beyond traditional sale objectives. Which of these strategies and tactics resonate with you? Why? What will you commit to doing?