When the issue of pricing arises in a management meeting, anticipation often follows that the discussion will be unpleasant, putting more pressure on the annual goals. Avoiding the subject until the last minute makes that outcome even more likely for firms that are sitting on a pricing bulls-eye, targeted by their competitors and supply chain managers in the organizations through which they reach market.
While pricing is a daunting topic, firms that proactively manage pricing strategy with the right tools in place can produce significant top- and bottom-line results. A point gain in realized prices can yield a much larger proportional improvement in profits. In our work with clients on pricing strategy, four lessons have emerged that can help you get to the point where pricing is a positive contributor to 2012’s success.
First, understand that not every price challenge is a real threat. Many of your customers make their purchase decisions because they see your product as being superior or because they have a strong level of confidence in the brand. Remembering – and, more importantly, reinforcing – the non-price advantages that won your firm business in the first place can allow you to avoid unnecessary participation in the vicious cycle of price-based competition.
One firm that we worked with had been succumbing to price pressures, and over a two year period had seen their margins drop by half. When we interviewed customers, we learned that price was far down on the list of “what matters”, and that customers in fact had a “wish list” for which they will willing to pay. When this firm responded to that wish list and “raised the bar” in terms of its product offering, it not only reversed the trend in terms of margin deterioration, but in fact actually picked up several points of market share.
Second, if there is ever a topic where strong analytics makes a contribution, it is pricing. One of your key goals in 2012 should be to build a strong analytics foundation to assess the external business environment and your own firm’s dependence on pricing gains to achieve profit gains. Over and over, we see instances in which there are sharp differences in the pricing environment from one product-market segment to the next. Knowing where and when pricing pressures are likely to be intense can enable you to make the correct decisions on price increases and determine the right responses to competitive challenges. A “one size fits all” pricing strategy might be correct on average, but wrong in every application.
An extreme example of how important segmentation can be emerged from work done with a firm operating in China. We found there that there were market segments that redefined the meaning of luxury, with ample number of consumers in those segments looking for extraordinary products with every imaginable bell-and-whistle and high-end packaging – and that these consumers were more than able to pay for those extraordinary products. At the same time, there were middle market segments and lower-tier segments where price was a more significant factor in their purchase decisions. By understanding what drives purchase decisions for each market segment, it was possible for this firm to match its product lines and price points to each segment, achieving significant overall gains. China’s markets represent an extreme example, but the same opportunity for segment-specific strategies exists in the US and virtually every other country market.
Third, keep on top of best practice approaches to pricing strategy. We recently worked with a company that successfully introduced a premium price product into an incredibly challenging market by implementing a strategy that “ gave customers an option that they could refuse.” In another instance, we saw a firm with a brand that was preferred by many customers shoot themselves in the foot by placing the product in too many channels, creating an inappropriate image that their product was one where “ deals were always available”. Implementing best practice concepts can yield some major gains for your company.
Just about every firm that I work with makes significant investments in their products, with specialists in product technology, design, and other dimensions looking for ways to improve the next generation of offerings. And that money is typically very well spent, with customers rewarding the improvements that result from such programs. The same opportunities for gains through innovation apply to the topic of pricing, but far fewer firms make the investments that are necessary to realize such gains. One executive in a health care products firm recently commented to me that “We invest a lot in pricing – mostly by throwing away our investments in products by giving it back every time we see a competitive threat”. There are far better ways to invest in pricing. Companies that take a strategic approach to pricing and bring best practice concepts into their decisions put money into the hands of shareholders.
Finally, it always is important to remember to “create value to capture value”. While the results of new strategies to create value will probably contribute more to 2013 and beyond than to 2012, the concept underlies all successful pricing strategies. If you are delivering value to your customers, you can be rewarded for it, through a price premium or otherwise. If you aren’t, any success you can achieve is likely to be short-lived, at best. Asking the question “How can I deliver more value to my customers?” in 2012, and taking action consistent with the answers to that question, can make the discussion of pricing a much more pleasant event in future years.
About the Author
George F. Brown, Jr. is the CEO and cofounder of Blue Canyon Partners, Inc., a strategy consulting firm working with leading business suppliers on growth strategy. See www.bluecanyonpartners.com for more information. Along with Atlee Valentine Pope, he is the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, TX.