It seems like an oxymoron during this increasingly deep recession, but the subject of pricing is certainly on all our minds. The choices are only three: hold, retreat or advance.
Regardless of your choice, let me share 10 common pricing mistakes. Thanks to Vistage/TEC and input from Per Sjofors, managing partner of Atenga, Inc.
1. The anchor point
Dan Nimer, one of the all-time leading advocates of effective pricing, warned that basing prices on costs would eventually lead to a rude awakening. Basing prices on customer perceived value is the only valid pricing anchor point. So, do you have a handle on your customers’ perceived value of your product and service offerings? I don’t think the airlines do.
2. The wisdom of the marketplace
This wisdom frequently leads to a perceived commoditization of the marketplace for your products or services. A preferred alternative is to specifically refine the definition of your market segments, determine how you are differentiated from your competition in each segment and price accordingly.
3. Unilateral profit margin objectives
Hard to believe, but some companies persist in trying to achieve the same profit margin objectives across different product lines. Not a good idea. For any given product or service, the customer’s perceived value dictates the ultimate pricing structure.
4. Customer segmentation hesitation
Different customers signal different supply chain requirements such as packaging, delivery methods, warranties and stocking options. Pricing should reflect the added value provided by tailoring product specifications to these differing customer expectations.
5. Pricing stagnation
The old “learning curve” argument in this age of doing business gets old once the product or service reaches the apex of the product cycle bell curve. The bottom line is that customers do need to see frequent, moderate price adjustments, consistent with cost changes, changes in customer preferences, competitive dynamics and improvements in value-added.
6. Sales force incentives
Building sales incentive programs based upon volume target levels sends the wrong message, because they compromise maximum profits. At best, sales incentive programs should be based solely on gross margin results, at second-best a combination of gross margin and sales revenue results.
7. Blind pricing changes
Companies sometimes fail to consider or anticipate competitors’ reactions to a price change. You can’t do anything about the reaction, but you can think through what you can do to prevent a price war that can ultimately ravage the entire industry.
8. Managing the profit drivers
We all know that cost, volume and price are the basic ingredients of any break-even business model. All too often, however, diligent attention is given to the cost and volume factors, with pricing almost a mathematical afterthought. The fact is that the pricing decision and computation are most important among the three profit drivers.
9. Price optimization decisions
Pricing is an art and a science. The science part entails accurate cost inputs, direct costing if you will, and a good estimation of competitor cost structures. The art part entails a careful evaluation of customer needs and perceptions, and being able to focus on those elements that are “make or break” for the customer. It’s the art part that gets most companies in pricing trouble.
10. The old “80/20” rule
It’s widely believed that in other than strict commodity businesses, 80 percent of a firm’s profits are generated by 20 percent of its customers. Unfortunately, too many companies waste valuable resources on those customers who contribute very little to the bottom line. One symptom of this is when you hear a manager exclaim, “But they’re helping us cover our overhead!” Much better to focus on the 20 percent and continue meeting their needs while keeping predatory competitors at bay.
Nimer used to say that the best way to get at perceived value pricing is to establish customer focus groups by individual market segment and find out what precisely they need from you.
Next, he said, you need to isolate their “wants” from what it is they truly need. If you’re largely meeting their “wants” at the expense of their needs, then he argued that you’re probably in a cost-plus pricing mode, and that’s not where you want to be.
Equally important is the need to identify the crucial customer price trigger points that make up their perceived value of your product or service. You can only do this if you get to the customer’s key person who influences buying decisions. Nimer points out that too many companies mistakenly believe it’s the purchasing manager. The problem, however, is that the purchasing manager is cost-control driven, not perceived-value driven. The savvy salesperson will find out how to meet and work with the true buyer, while diplomatically paying homage to the purchasing manager.
Until next month, keep your glass half-full as you make your 2009 pricing decisions.
Harry S. Dennis III is the chairman and CEO of TEC Wisconsin/Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at (262) 821-3340.