40-year high inflation and weakening demand are making pricing top-of-mind across all types of companies. Business leaders face pressure from boards, shareholders, and creditors to maintain short-term sales and margin plans.
Consequently, business leaders are turning to price to manage these challenges since it’s a factor within their control.
Understanding price and how best to leverage it is critical for every company. Any organization can gather published inflation statistics for its industry and make high-level price increases on that basis, but that isn’t a long-term winning strategy.
Best-in-class pricing strategies require a nuanced understanding of your holistic context within an industry. The following 5 pillars will help you get that detailed understanding to optimize the prices of your products and services.
The 5 Pillars For Pricing Strategy Success
- Monetization: Pricing monetization refers to how a product or service is packaged and billed to the customer. Monetization methods must align with how customers consume and engage with your products and services. This straightforward model is most appropriate for transaction businesses, such as retailers and wholesalers.
Monetization is more open-ended in service and technology sectors where recurring revenue models have become the norm. While companies like their predictability, these models may not align with consumers.
Consider a corporate gifting platform or service that allows individuals to select gifts to send to customers or colleagues. Some service providers might use a recurring revenue model with a recurring “fixed’ fee” or “per user” license. However, the customer would likely view their consumption based on the number of gifts purchased. In contrast, a less tangible cloud security platform would favor recurring models.
Customers across all industries expect pricing to align with how they consume your product.
- Position: Before adjusting pricing strategies, you must verify that your portfolios align with customer needs and competitors. This relationship is often based on gut feeling rather than data.
You’ll want to empirically verify the following: Are you serving customer needs? Are you doing so at the right price points? How does this compare to competitors? Failing to validate those considerations likely means you’re losing profits.
Leading organizations conduct regular ‘outside-in’ reviews to rigorously evaluate their portfolios’ fit relative to customer needs and competitors. Such processes are conducted by cross-functional teams (sales, finance, pricing, product management, etc.) and help uncover portfolio gaps, risks, and opportunities.
For example, price increases may be justified when a product priced equal to its competitors is found to be more valuable than them.
In addition, a portfolio and price-band comparison can identify gaps in competitor strategies. You can then fill in those gaps to increase market share and profits.
- Architecture: Uniform price adjustments often underperform because organizations need to understand the nuances of their various products. Not all products carry the same price perception or sensitivity. For example, customers know the prices of staple items such as bread, milk, and bananas, but they may not recall the prices of other items. Further, those same customers are more likely to develop perceptions of grocery stores based on the price of key-value items.
You’ll be most successful if you understand each product’s value and base pricing on that. Importantly, you want to regularly evaluate what percentage of customers buy each product and how much of a customer’s total spend that is, in addition to elasticity. Doing so helps you maximize pricing and adjust as needed.
- Incentives: Once organizations have the proper portfolio position and structures in place, commercial incentives (including price) must drive the intended customer behavior.
Take a SaaS solution that offers higher levels of service at higher prices. Are the incremental benefits – as compared to the most basic solution – worthwhile to the customer? Is the incremental price worth the risk to the sales team promoting and selling the solution?
For B2C, consider TVs. Are there clear and compelling reasons to upgrade from a “great” to an “excellent” device?
Regardless of industry, aligning incentives starts with measuring item-level profit and customer preference. You can do so through A/B testing and conjoint analysis. What you discover from these analyses informs pricing and marketing tactics.
Take the TV example above. By discounting the “excellent” TV, customers might upgrade from a “great” one and boost overall profits.
- Management: Many organizations take scientific approaches to establish the correct price but experience price leaks because they don’t evaluate and enforce proper discounts.
Take a B2B organization with a well-informed list price but discounts based on something other than data. Sales teams might be incentivized to pass along discounts to avoid difficult conversations with customers, and doing so inadvertently impacts profits. Similarly, B2C retail merchants striving to hit volume quotas might overdo the use of rebates and coupons, undermining profits and brand perception.
Leave it to The Experts
Pricing strategy is an inherently challenging topic. To maximize profits, you want to create an open dialogue across pricing decision-makers and take some basic precautions to prevent profit leakage and needless oversights.
Paramount to your pricing strategy is leaving big decisions to the experts. If you don’t yet have in-house pricing strategists, you may be leaving revenue on the table. Jennings Executive has over two decades of combined experience matching companies with pricing leaders who will help you create enduring pricing strategies that maximize profits. Learn more today!
