Price to Profit!
Oct 01, 2020 12:27 pm
1. Are you a price-taker or a price-setter?
Are you a price-taker or a price-setter? A price-taker assumes that he has no control over the price, hence benchmarks the price with the competition. A price-setter, on the other hand, actively finds opportunity to set the price than follow the competition.
If you are a price- taker today, you must change your mindset and explore how you can become a price- setter. Some of the ways in which you can become a price-setter include:
1) Differentiate your product vis-à-vis the competition
2) Bundle your products or create a bundle of product and a service
3) Unbundle your products to discover value for a niche
4) Integrate backwards or forwards by partnering
5) Use tiered pricing to cater to different customer preferences
6) Create an intellectual property, the best long-standing differentiator.
How you set and manage product prices has a much bigger impact on revenues, growth, profitability, cash flows, and business valuation, as compared to the impact of managing costs.
2. How to move towards pricing strategically
Most organizations have far more resources dedicated to managing costs, as compared to the resources dedicated to managing pricing. This shows lack of awareness of the impact of pricing decisions on growth and profitability, which is way more than that of other variables like cost.
Once you discover that price is not a result of the market or costs alone, you need a huge change in mindset to implement price changes.
If you have a portfolio of products, do not change prices for all the products at one go. Implementing pricing strategy requires lots of research, analysis, patience, and calibration.
A few things to keep in mind:
1) Implement changes in increments, do not change prices of all products at one go
2) Make the price change in a local market to isolate the impact
3) Ensure that you have a pricing model in place to test the impact of each change.
4) Test the results of the change, calibrate and measure.
5) Move on to the next change – next product or next market
Pricing is not a one-time exercise; it is a continuous exercise at delivering higher value and discovering appropriate price which ensures customer delight.
3. Understand that pricing is also an art
One of the studies conducted in the US found that, when the same product was priced at $45 versus $49 across different stores within the same city, the stores that priced the product at $49 achieved much higher sales.
This is counter-intuitive to the relationship between price and demand, which postulates that as the price increases, demand goes down.
The reason for the product selling more at $49 than at $45 is that, at $49, the customer perceives that they are getting a better deal. And perception is reality!
Now you know why most consumer products are priced at $9.99, $19.99 and so on.
While scientific approach to setting price is essential, we should remember that pricing is also an art. You must not ignore consumer buying behavior while setting price.
If you want to know more about strategic pricing for higher profitability, do check out the book “Price to Profit” on Amazon at https://www.amazon.in/Price-Profit-P2P-Shailendra-Marathe/dp/9389024617