Most owners I meet don’t really understand pricing when we meet. It’s surprising how simple the concept of price management is, and how misunderstood it is. On the surface it is plain to see that more is better. However, many mindsets and emotions come into play just below the surface that make pricing excellence something few firms achieve. Mindset challenges include thought errors like:
• Our customers are difficult to negotiate with; they hold all the cards;
• In our industry we don’t have the luxury of pricing freedom;
• With the thousands of SKUs we carry, the problem is so large we can’t afford to solve it;
• Our service is not valued highly enough to raise prices; and
• We are a premium brand and we already are priced near the top.
While the situation or constraint in each of these mindsets may be true, what’s always false is the self-limiting thought that you can’t do better. Ask yourself, is our pricing so good that we can’t do 1-2% better? I’m not talking about Martin Shkreli style unethical price advances here, just 1-2% will have a significant impact on a firm’s earning performance. It is the first place we help clients look if they need to move the earnings needle in 90 days.
A famous business owner related the last mindset in the list above. A leader in his industry, he told us; “This is not a discount operation” as we began an assessment of the business in anticipation of accelerating earnings growth. The firm had an upscale, luxurious brand and they knew they were priced in the top of the market. After a detailed review of their pricing practices, policies and management we found 10% of their revenue lost through price leaks. Over the next 24 months, we assisted them to recapture 2% of revenue and return it to the bottom line. Most business leaders imagine they are good at pricing, and there is little room for improvement. Interestingly, even when this is true, a 2% change in pricing performance represents a 10-20% improvement in earnings for most businesses. Often the changes involved are not perceived by customers. But they are strategic and meaningful to earnings growth.
The source of these thought errors regarding pricing performance is the fact that a small win has such a big impact. You CAN be good at pricing and STILL have a 1-2% opportunity. Pricing is a discipline of details and analysis. Most firms don’t have staffing for internal pricing analytics until they reach level 3 of the business capability maturity model where processes are defined, and process change is formalized. Without adequate resources and rigor, it is likely that money will be left on the table.
Consider the following actions if you would like a 10-20% increase in your earnings:
1. Review and challenge all cost deductions from your selling price;
2. Determine your customer’s value proposition for each product and service you offer;
3. Examine the margin behavior of groups of products/services and groups of customers;
4. Find places where you are paying for the privilege of doing business with a customer; and
5. Assess your pricing performance with a third party if you haven’t done it in the last three years.