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Pricing is not a number; it's a strategy. I have seen numerous examples of companies with failed pricing strategies, nearly all leading to loss of sales and profits. Companies with flawed pricing strategies are easy to spot: They are never the market leader; they always struggle; they are always the runner up; and they almost always compete on price.
The following is a list of the six most common warning signs that indicate your company has a failed pricing strategy. If this is the case, it is likely you are leaving easy money on the table. With cost-cutting at an all-time high, you most likely need every penny you can get. If you see any of these signs in your company, take corrective action immediately.
1. Undocumented Pricing Process
In many companies, the "pricing process" only consists of some quick discussions with members of the sales team and some review of going rates within the industry. This method of pricing has nothing to do with a sound pricing process and does not allow companies to develop and enforce a holistic pricing strategy designed to increase sales and optimize revenues, profit and growth. This type of pricing guesswork will inevitably leave money on the table or reduce your sales volume-or both.
2. Pricing on Cost Alone
Pricing is optimized when it is based on the value perceptions of your customers; a price based on cost alone will always be wrong. Even when you tweak a price to reflect competitive intelligence, it still misses the critical component of what customers are actually willing to pay for your product or services. A company may say it adds "the typical margin of our industry," or that it "knows the markup the market will bear," or that "a markup of X% makes sense for my customers," but, in fact, statements like these mean the company leaders do not really know what its customers are willing to pay. Think about this question for a while: What hard data resources does your company use to drive your pricing strategy?
3. Untrained Salespeople
Most companies send out their sales force unprepared, ill-equipped and without an optimized pricing strategy to back them up. Unfortunately, years of interacting with customers who are pushing for lower prices-and discounting the value your company delivers-has given your sales force a diminished view of the marketplace's value perceptions.
If your company does not train and equip your sales force with tactics to defend your company's prices, your company will be the victim of unnecessary discounting and will be put at a competitive disadvantage. Without trained salespeople, you'll lose sales volume, revenue and profit, and your products will succumb to commoditization, or becoming a product that can only be sold on price alone. Why would you ever want that?
4. Salespeople Given Too Much Leeway
Allowing salespeople to drive you to discounting typically initiates a death spiral. Salespeople end up discounting heavily; they take "the deal" at any cost. In this bad situation, salespeople will convince you over and over again to accept ever-deeper discounts, and they effectively control the company's pricing "strategy."
Habitual discounting diminishes the marketplace's value perceptions about the company and the product or service. So in order to maintain revenues, companies will lower prices or discount even further in the hope that the sales volume will increase to offset the lower prices; however, it almost never does. Instead, companies will find themselves with, at best, flat growth and little profits.
5. Listening to Biased Customers Too Much
Of course your company is engaged in ongoing conversations with your customers, and maybe to a lesser degree with your larger "marketplace" of prospects. Your salespeople are trying to find out what your customers are willing to pay for your products or services, and you might have some data on this. But often there is a serious flaw: The data your sales and marketing people collect is wrong-it's nearly always biased, in a bad way. How can that be? Here is the reason: Whenever your company has a conversation with your customers or someone within your marketplace, it inevitably becomes a sales conversation. Sometimes the conversation is aimed at generating an immediate sale; sometimes it is aimed at generating future business. But no matter the case, the conversation is still viewed by the customer as a sales pitch-and in every sales pitch, your customer will try to discount the value of your product or service. They naturally want a better deal. So they will tell lies or they will withhold vital information, all for the purpose of getting you to offer a better price, a deeper discount, or more free features.
6. Unsegmented Customers
The "Iron Law of Pricing" says that different customer segments will value your products differently. The pricing strategy must be constructed to leverage these differences to increase the company's market penetration, price performance, and profitability. One-size-fits-all pricing is not adequate. Companies must know how their markets are segmented, as well as the value perceptions and the monetary value each segment assigns to your company's products and services. Companies must also be aware of the buying-decision drivers for each segment. Armed with sufficient knowledge of these traits, companies must leverage this information to tailor the product, packaging, service, delivery options, marketing messages and pricing strategy in order to maximize revenues and profits from across the marketplace.
These six warning signs need to be taken seriously. Even if you just recognize a single one, it is an indication that your company does not have an optimal pricing strategy, and that there is room to improve your sales and profits. Since most companies have never done it, a profit-optimized pricing strategy has emerged as an important source of competitive advantage and increased profitability. CEOs running companies with an optimized pricing strategy are the most admired in their industry. The development of a holistic pricing strategy is just as important as managing costs and sales volume. If you recognized any of these mistakes, take action to fix the problems.