10 Simple Pricing Rules for Challenging Economic Times
Jan 24, 2019
We’ll leave it to the economists to determine whether our current economic situation is a bona fide recession, a down turn, or whatever. In any case, your company may be tempted to reduce prices in order to increase sales or hold on to market share. In doing so, however, you will accomplish two things—neither of them good.
First, you will be using the wrong pricing approach for the current market cycle. In a mature/declining market, the right pricing strategy is a neutral one. Dropping prices will only cause price wars, eliminate profits, and cause revenues to decline further. Second, this strategy reduces prices on your high-value products and services rather than helping you sell more low-value wares.
The following 10 rules will give everyone at your company pricing confidence:
- Replace the discounting habit with a little arrogance. Price discounting is an entrenched attitude in most organizations. To dislodge any deep-rooted attitude, replace it with another. Arrogance—feeling good about your products and services—will help you kick the discounting habit.
- Understand the value you offer to your customer. You can’t have confidence in your pricing until you have confidence in the financial value your offerings create for customers. Most of your customers are eager to tell you. Ask the right questions and be willing to listen.
- Apply one of three simple pricing strategies. Know when to price high, when to price low, and develop a strategy for everything in between. Strategies can and should be simple and all stake holders in the company should agree to them.
- Play better poker with customers. Most customers say value is what they most want, but many are bluffing when they ask for a discount. Some are motivated by price alone. Others want—and are willing to pay for—value. The trickiest types are the poker players, who love to play the pricing game and have learned that if they focus on price, they can get vendors to leave money on the table but continue to provide high-value features and services. Knowing the strength of your own hand—the value you offer—gives salespeople confidence to resist the temptation to close at any price.
- Price to increase profits. It’s a myth that if you discount price to increase sales, you will see increased profits. Profits result when an organization does many things right, including simplifying costing approaches so they permit more effective use of your company’s resources, be they people or machines. Efficiency, controlling costs, better profit metrics—all are required for pricing success.
- Add new products and services that give you negotiating flexibility and growth. When customers regard your products as commodities, add services to differentiate products and prop up prices. An effective strategy is to develop a dual offering that covers both the high- and low-end customer needs. If customers want a lower price, subtract features and services.
- Force your competitor to react to your pricing. Don’t participate in a competitive pricing death spiral. Map your markets. Define where you do and do not have a value advantage over your competitors. Know where and how to compete on price—and where and how not to.
- Build your selling backbone. To have confidence in negotiation, salespeople and managers need confidence in pricing. This comes from knowing the value of your products or services. It also comes from knowing your customer. Backbone comes from knowing the tricks your customers use to get you to drop price and how to deal with them.
- Take simple steps to move from cost-plus to value-based pricing. There is nothing wrong with cost-plus pricing as long as it does a good job of leveraging the financial value you create for customers. Value-based pricing is the ideal. It requires sophisticated internal skills and systems. The trick to value-based pricing is to evolve pricing as the discipline and skills of your people improve. Start gradually. Once your people hone those skills, moving forward to real value-based pricing is a snap.
- Price with confidence: remember who you are. Customers buy results, not rhetoric. Shift negotiations to highlight specific ways you provide them with concrete results. By moving beyond the rhetoric of value you will be able to prove those results to customers.