One of the most over-utilized promotional tactics of marketing is price but it is a strategic weapon not a tactical weapon. This is partly due to the fact that a lot of marketers don’t know how to manage price effectively as part of the overall marketing mix. In many cases, rightly or wrongly, marketing managers assume that pricing is a flexible element of the marketing mix at their disposal. However, senior executives know the direct link between pricing and profitability and therefore are more likely to manage it with care, meaning they are less likely to adjust it.
Make no mistake, pricing should be scrutinized on a regular basis to ensure that a company’s products or services are competitively positioned and that revenue is being maximized. The annual business plan should contain a section on pricing analysis and if done correctly, should identify areas where a company can take pricing action.
A few guiding principles will help identify whether your business is able to implement a price change or not.
1. Time since the last price increase. If you haven’t taken any pricing action in the past two or three years then it should be a flag for the business to take action. Normal inflation is eroding your margins so a business should stay current with the market. NOT taking pricing action also signals the market that your services have less value than the market leaders.
2. Competitive environment. If you operate in a very competitive industry with a healthy number of competitors then it will be more challenging to increase prices. In this case price increases need to be on select products where the business has a competitive advantage or where you have few competitors. Taking pricing action on products that are basically a commodity will be met with resistance.
Most businesses will generate 80% of the revenue from 20% of their products so pricing action can be taken on specific products and have a material impact on the revenue line. For non core products that are small contributors to profit should be assessed for re-positioning or enhanced with more features to support a price change.
3. Type of customer base. If your customer base is very price sensitive then a price increase has to be communicated clearly and supported with clear rationale on where your costs have increased. Nothing annoys a customer more than having to absorb a price increase where they know a suppliers’ costs have not increased. Build your story and give your customers advance warning that a price increase is coming. In this way it isn’t a surprise to them and they can build it in to their plans.
4. Competitive position. Nothing limits pricing power more than having a weak value proposition. To grow your business effectively, both from a volume and pricing standpoint, a business needs a strong competitive position. Finding products or services where a business can add value for customers will add pricing power to the business. A good rule of thumb is to maintain products or services where your market share exceeds your profit margin. Marginal businesses that contribute very little to the bottom line but require ongoing investment and consume valuable resources should be exited.
5. Bundle products & services. This is an effective way for a business to take two or three lower value products and bundle them together for customers at a more attractive price. Bundling also helps to limit pricing transparency. Think of the McDonalds meal, it’s hard to see what product is being discounted to reach their price point so they can keep individual product prices high.
Effective pricing management takes creativity and a strategic approach but when done properly it can deliver significant dividends for a business. To learn more about how we can help you increase your revenue through more effective pricing contact us today at 1-416-435-5290