If you had to pick one pricing method that consistently produces greater sales increases, increased market share and increased profits what would it be?Your sales team has done the heavy lifting… and they have made it though emails ,voicemails and finally met and presented a targeted buyer. Your team has used social selling and selling tools designed specifically to get to this phase of the sales process and build trust along the journey. The buyer feels your proposal could solve their problem and asks the big question: “how much? What is your price?” Would it shock you to learn most companies spend more time negotiating the lease agreements on their office copiers than they spend on price strategy? There are many ways you can price your product or service.
Price is one of McCarthy’s four P’s of marketing. Pricing is a critical part of any value exchange. Why is it price often receives the least amount of research and strategy?
Let’s start with a few definitions….
What is the definition of price?
Price is the value that is placed on a particular product or service as the result of a number of variables, research and understanding of risk.
What is the definition of pricing strategy?
A pricing strategy looks at market conditions, competitive pricing, industry margins, costs, the dollar value of the sale,the product life cycle, the products uniqueness, as well as other factors.
What are the most common forms of pricing?
Cost Plus Pricing- as the name implies you determine your cost to produce, overhead cost and mark the product up based on the profit you wish(need) to realize. The trouble with this model is it is internally focused and not market driven. With this model you run the risk of pricing your product to low or too high. You run the risk of loosing sales you could have (and should have ) won and not making the maximum profit your product could have realized. Companies who practice this method often ask for “another kick at the can” when they are informed their price was too high. (In my post discussing kick the can I share the reasons this strategy is dangerous.)
Low cost strategy– in this model you price your products low and you have structured your company to have low overhead and low marketing and selling costs. In this model you might hear someone say: “ the margin is low but we will make it up in volume” We often see this in commodity products where price is the only main differentiation .
Predatory pricing- you price your product low to “get your foot in the door” of an account or market. The intent is the price will rise after a specific period of time. Companies struggle in the price increase phase if they have not established a strong value proposition in the mind of their buyers before the price increase occurs.
Premium pricing- you price your product high. This is associated with a product or service that has little or no competition of similar quality and or performance. These kinds of products have clear distinction in the market place and buyers place a high value on them. These market driven, unique products are seen as the best of best and buyers are willing to pay for them.When you hear their names you think best in class; Gunner Kennels, TenPoint Cross Bows, Yeti coolers, InVue Security Products, and many more. Each of these companies have other substitute products in their markets and many competitors. What they all have in common is focus. The made it their job to understand their buyer, the problem the buyer wanted solved, and they solved it completely.
I have seen a number of companies try to be more strategic in their price methodology. Where I have seen some companies struggle is only talking to their current customers when doing market research. This is the most common mistake. The difficulty is, for most companies, your current customers only represent approximately 30% of your total market. If you only speak to your customers you are missing 70% of the market’s voice. Keep in mind that 70% is buying something similar to your product and they are not buying from you for a reason. You really need to know why some buyers buy from you and why some do not. Without this critical market data companies run the risk of becoming internally focused on what they want/ need to make. This one of the four P’s has more emotion tied to it than any other. One of the toughest sales I often have to make is not in the market with large customers, but internally to help companies want to be market driven.
There is an excellent article on the advantages of being market driven you can read here. A quote from the article shares;Your strategy should be driven by the needs of the market. Becoming market-driven is critical to intentional product success.
Some of the advantages of being market driven that i have experienced include, but not limited to:
- Quickly deliver new and improved solutions that address the changing needs of your markets.
- Quickly identify and understand the changes in your market.
- Higher than industry average profits
- Faster sales growth than competitors
- Higher sales close %’s
The best method of pricing I have found is “strategic pricing”.
-Mark Allen Roberts
In strategic pricing you have done your market homework. You understand the value of your product to your customer and you can quantify it. It is a marketing decision (not an accounting exercise) that is the result of market knowledge, knowing your buyers and buyer personas, competitors, substitute products, buyer process and buying criteria. Strategy work is hard work and it is not done overnight.
As you can see pricing is not as easy as some people believe. It takes a great deal of strategic thought and that is why a number of companies price their products incorrectly.
As consumers we are all buyers. Buyers are wired to spend until we experience pain. This is based on the field of neuroeconomics. As a buyer you stop spending when the perceived pain of spending is greater than the perceived gain. Your marketing team must determine that tipping point in their research and apply it to your strategic pricing.
If you want to experience rapid sales growth,increase sales close rates, increased market share and higher profits you must start strategic pricing. The burden is on your team to clearly understand your market and how your buyers make decisions. You must understand your distinctive competence and share it in a value proposition that resonates with your buyers.
What kind of pricing method does your team use?
What are some examples where cost plus pricing may work?
Has your team used strategic pricing? Any stories you can share?
Would you say you are market driven or internally driven?