Increase Profitability

Using Pricing to Drive Profit Margins

Using Pricing to Drive Profit Margins
 

Setting pricing can feel overwhelming given its impact on sales efforts, market positioning and revenue production.  Further, setting a coherent pricing strategy grounded in costs, customer value and competitive comparable data and then applying pricing to individual products can take quite a bit of time out of a busy schedule.   Yet thoughtful pricing and purposeful execution of a pricing strategy cannot be ignored.

Pricing Individual Products

Ultimately, price represents the value of your product or service to buyers and potential buyers.  This value is based on the overall benefit to your customer’s business, including intangible benefits beyond the product itself, such as reliability of delivery, level of service, or willingness to customize or rebrand.  It also represents value over time, not just at the moment of purchase.  Some products – like contracts or durable equipment --return benefits over years or decades, so these future benefits need to be understood in order to price well.

Fundamental to pricing is to view the value of the product through your customers’ eyes and to think about all of the benefits conveyed to the customer through the product.

Start by understanding the value of your products to your customer:

What is your customer is buying?  Is your customer using your product to solve a problem, to incorporate into what that they are selling, or to lower the cost of their own production?  It is really the value that your service or product brings that the customer is buying. 

What are the alternatives your customer can turn to in order to accomplish the same thing?  Are there similar products on the market or do you hold an intellectual property advantage?   What makes your product or the way you deliver it different?  If there are many similar products available, you will have some natural boundaries around your pricing.

Is your product key to your customer’s relationships with their own customers, or is it more “back office?”  The more central your product is to your customer, the more pricing power you have.

How easy would it be for someone else (or even your customer) to provide what you do?  If your product is easily duplicated, then the barrier to entry into your business is low and you have less price flexibility.  Raising your price too much would invite more competition.

What do you want your price to communicate?  Higher prices sometimes connote higher quality.  Setting a high price without the quality often backfires, but setting too low of a price for a quality product lowers the value of the product in the eyes of the buyer.

Pricing Strategy

With a solid knowledge of your individual products and their value to your customers, you can develop an approach across multiple products.  A pricing strategy seeks to maximize the overall suite of multiple products, not just maximize the revenue of one or another.  To do this, a strategy takes into account the needs and behaviors of customers and potential customers.

There are reasons to sell at a lower price than you might normally for an individual product.  Promotions, customer targeting through limited offers or carefully-selected partner organizations, and special offers to customers of competitors can all expose your company and product line to new customers.  One key to lowered pricing is to specifically limit it in time and audience in order to obtain a specific exposure.  Merely bringing bargain hunters for a short period of time is not helpful since lowering prices is much easier than raising them.  Selling one product at a low price in order to increase sales of a second required product is another reason to sell at a low price.

It may be beneficial to create a “path” for customers through your product line.  A lower-priced, no-frills entry level product can introduce customers to your company with little risk to them.  Once they understand the value of other options and they develop some level of trust, they may be enticed to buy more expensive options.  Some companies even give away products in order to attract new customers, though this only works if the product has a low unit cost and the number of units given away remains low.

When considering a pricing strategy, it is important to consider the process that customers go through in order to buy.  What drives them to seek information?  At what point do they make the purchase decision?  How readily do they reconsider or re-evaluate their purchase?  Do they make side-by-side competitive comparisons or start with a brand and select within that brand?

Sometimes you may just need to refresh your products and look for ways to boost margins.  If you do need a more substantive rethink of pricing, remember that creating a pricing strategy can be complex but that thinking through the psychology of how to attract customers to your value proposition and providing them with the right balance of value is one of the major drivers of margin and business success.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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