The devil really is in the details. You've heard that old saw before, but when it comes to strategic pricing, the devil is also sneaking around your strategy. As a result, someone in your organization is making mistakes today that you'll need to correct.
Pricing Strategy Run Amuck
Over and over again, we see companies making fundamental blunders in their pricing strategy and actually thinking they're making sound business decisions.
Their typical problem: basing pricing decisions on conventional wisdom, rules of thumb and sometimes over-relying on "scientific" data analysis. Across the board, managers have absorbed these "worst practices," and they unknowingly make poor decisions that undermine their businesses.
A common reason for such poor decision making is that managers carry those rules and techniques from one competitive environment into another. What may work in one situation becomes merely myth in another. Are you buying into any of the following myths?
Myth 1: You can't raise prices and volume at the same time
In many companies, executives believe that demand curves (i.e., price and volume) are fixed. This leads into the trap of thinking that optimizing price and volume is the only hope for driving profit.
However, price optimization is only a small piece of the answer. It's actually possible to hit multiple points on a demand curve with one product that will drive both volume and price simultaneously. This can be accomplished by creating tiered offerings that break products and services into different bundles that attract different customer segments.
Instead of a one-size-fits-all product offering and price, multiple product offerings and price points can be created. The result is higher prices for premium offerings and higher volume for the standard offerings. The net effect, if orchestrated properly, is significantly higher overall profits.
A recent client of ours, a Fortune 500 distributor with razor thin margins, was struggling with this exact problem. It believed that it had to choose between becoming either the low-cost producer or stake out higher ground as the premier solutions provider. What it didn't realize was that a tiered offering could hit multiple segments of the market, driving both volume and price. After working with us to create an entirely new go-to-market strategy, our client achieved incremental gains of 20% in both revenue and volume—a significant achievement in an industry where minor changes in revenue and margin are measured in basis points (i.e., hundredths of a percent). For more information, see "The Price Menu."
Myth 2: Pricing more profitably means having to raise prices
Structuring prices to encourage cost avoidance is another way to price more profitably, without actually raising prices. Big opportunities to improve profits lie in areas not often considered in the realm of pricing. By that, we mean service features that often get wrapped into a company's offering, such as rush orders, financial terms, warehousing and technical support.
Instead of bundling services into a product offering like an "all you can eat" buffet, positioning them as a la carte upgrades can help improve profits through cost avoidance. Customers will think twice about paying for services they don't actually value.
The net effect is to lower cost-to-serve and increase share from customers who forgo services, and increase revenue from those who value these services. When you add it all together, this approach can yield big dollars in profit improvement.
One of our clients, a leader in the transportation industry, did just that and took millions out of its cost structure. Its a la carte strategy was designed not to raise incremental revenue but to position its offerings to prevent service abusers from dragging down overall company profitability. A byproduct of the strategy was in the area of customer satisfaction. This approach actually created higher levels of customer satisfaction because service abusers were no longer creating bottlenecks in the system, and customer support personnel where able to react much faster to customer needs.