With an improving economy, managers have grown increasingly aggressive in their efforts to raise prices. Unfortunately for many companies, rosy profit projections have been replaced by a frustrating inability to realize long-sought-after price increases.

Are you among the managers stung by this fate? If so, here are three questions that should lead to an informed understanding of the problem and where you should focus your energy and resources:

  1. Are you using objective, value-based criteria to manage prices?

  2. Are your pricing policies really just a list of discounting authorities?

  3. Are you tracking the relative impact of different pricing decisions?

Using these questions to guide decision making, we have seen companies from a diverse set of industries revive their pricing performance and finally deliver their long-awaited profits.

Question 1: Are you using objective, value-based criteria to manage prices?

Discounting decisions are usually made quickly, in the heat of the moment, in order to win deals. The criteria that managers often site for discounting usually include market factors such as these:

  • Competitor pricing

  • Powerful procurement groups

  • Skilled customer negotiators

  • Length of customer relationship

While these market factors may exist, they have little connection with the value of an offering or their cost to deliver. Such criteria all too often lead to the following:

  • Markets that are increasingly price sensitive (even as economic fundamentals improve)

  • An increasing spread between published price and pocket (realized) price

  • Less correlation between objective measures (purchase size, share of wallet, service usage) and quoted price

The most effective pricing strategies follow three fundamental policies to ensure the realization of price:

  1. Focus on value and competitive reference for setting pricing decisions. Initial price setting decisions need to align your value with different customer segments while honestly recognizing your competitive advantages and disadvantages versus the reference price (i.e., the price customers will compare you against).

  2. Focus on value and cost/productivity improvements for tradeoff elements. Tradeoff elements need to be designed into your offering to allow sales to handle customer objections and with different value "bundles" that force customers to make tradeoffs. These tradeoff elements may include aspects of your product mix like access to supporting services, production tied to specific assets or even turnaround/delivery times.

  3. Focus on business performance impact for reasons to provide incremental discounts. Incremental discounting decisions should be made primarily on the performance impact they have on a company. While most customer requests for discounting should be handled by the rules above (because they force customers to trade off the value they receive for the price they pay), there may be situations where price adjustments make sense. In those situations, pricing decisions should be explicitly tied to objective and measurable elements such as order type/length,% of business/spend, order size/volume or asset utilization.

Question 2: Are your pricing policies really just a list of discounting authorities?

The most insightful question about pricing is usually the simplest: what is your pricing strategy, and what policies do you use to sustain it? All too often, managers answer by either saying they "don't have them" or ticking off a series of authority levels as the definition of their strategy.

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ABOUT THE AUTHOR

image of Jeff Thull

Jeff Thull is president and CEO of Prime Resource Group (www.primeresource.com) and the author of Exceptional Selling: How the Best Connect and Win in High Stakes Sales (September 2006), The Prime Solution: Close the Value Gap, Increase Margins, and Win the Complex Sale (Dearborn Trade Publishing, 2005) and Mastering the Complex Sale (2003).