Most businesses set their prices and don’t look at them for a long time never realizing how much money they’re leaving on the table. Prices are a key element of the overall marketing mix and is a powerful statement about your value proposition. But it is an often ignored area of opportunity to generate incremental revenue & profit for a business. Managing pricing takes some finesse and a good understanding of who your competition is and what your competitive position is.
Often companies will identify either the wrong competitor or too many competitors as their competition. If that’s the case then setting optimum prices can be very challenging. One of the things that you want to do is conduct a pricing review on an annual basis to make sure your marketing mix is optimized.
If done correctly a pricing review can uncover significant areas of opportunity to grow your business.
Step 1 – Prepare a list of the products for review. Unless you’re a very small company with only a handful of products, it’s recommended that you do the review by product line or group. The place to start is with the key products or group that drives the lion’s share of the revenue line. Start from largest product lines to smallest, that way you’ll focus your efforts in the early stages on the products that will have the biggest impact on the business. If you don’t know which product contribute the largest portion to the revenue line then start with some basic analysis of each product (annual sales by product ÷ total annual revenue).
Step 2 – Prepare a list of similar products for the ‘key’ competitors. This is an important step in the process because you need to know WHO the competitor is that sets benchmark pricing in the category. A list of each product and their respective features is needed to do a proper comparison. Once you have this you can do a proper assessment of how your pricing compares to the competition. It’s not recommended that you use any more than 3 or 4 competitors as a basis of comparison as it can quickly become a confusing process with feature rich products.
Step 3- Identify the financial goals of the company. Are there margin hurdles that need to be met? Are there revenue targets the company is trying to achieve in the next two, three or five years? Knowing these objectives and goals is key to establishing the right strategic framework for your pricing action. Recommending a price change needs to be considered in the context of the strategic, competitive and financial goals of the company.
Step 4 – Analyse your product pricing with a view to under-performing products from a margin and profit standpoint. Do your products follow the Pareto rule (80% of your profit coming from 20% of your products). Which products are not meeting your margin hurdle rates? What market position are these under-performing products in? Can the under-performers be improved with a product change or increased marketing effort? What products have had a price increase in the past 12 months and which ones haven’t? Are your price increases keeping pace with inflation? These are all key questions an experienced manager needs to ask to identify opportunities for pricing action.
Step 5 – Prepare a communication plan to support the price changes. Customers never like to see prices increase so managing the optics of an increase is critical. When done properly and with consistency price changes can be a smooth practice for a company and generate an incremental 3-5% in bottom line profitability. When pricing action is done adhoc or on an infrequent basis then it can be a distraction for the company and lead to erosion of customer loyalty.
If you would like to learn more about how to manage an effective price increase, contact us today for more information.