We all work so hard to make our businesses a success. We focus on quality, customer service, innovative technology, smart branding — you name it.
So it seems a shame when I see a company take a one-size-fits-all approach to its pricing. After all the hard work devoted to designing great products and putting great customer service procedures in place, too many companies fail to put the same thoughtfulness into their pricing strategies. They calculate their costs; add a standardized percent margin, and then they’re done. Or, underdone is more like it.
So much of a company’s profit potential is connected to its approach to pricing. A McKinsey & Company study found that a 1 percent improvement in pricing typically leads to an 8 percent increase in operating profit. That’s 50 percent more impact than a 1 percent reduction in costs, and three times the impact of a 1 percent increase in sales volume. So a well-conceived pricing strategy is definitely worth the effort.
But I’ve seen the disastrous effects of a one-size-fits all pricing strategy many times.
One client, for example, used to calculate its costs and then add a standard “mark-up” to all of their products in all of its markets.
But a pricing analysis found that the client’s one-size-fits-all price only “fit” 6 percent of the time. The rest of the time, the pricing was undermining the company’s profits. In 26 percent of its major markets, it was losing sales because its prices were too high. In an astonishing 68 percent of the time, the company was losing revenue because its pricing was too low and it couldn’t make up in volume what it was losing in price.
So we threw-out the old one-size-fits-all pricing approach and used the company’s own sales data and competitive intelligence to tailor a pricing strategy to better fit each of its main markets. The process took a few weeks and involved a lot of hard work. But the profit increases will be even more than the 8 percent average found in the McKinsey study.
The standard steps to create a tailored pricing strategy are common to almost every business, including your own. Here they are:
1. Understand that customers don’t know and don’t really care how much it costs you to make your product. They care about the value they derive from using it. Therefore, the well-tailored price falls between your costs and the value you provide to your customers.
2. The better you are at communicating value, the further you can set your prices above your costs. Do a great job of selling value. Remember, an iPhone 6 costs about $200 to make but sells for $650.
3. Know that people have different willingness to pay. Some people are attracted by products that are stripped-down, bare-bones and low-priced. Others want all the bells and whistles or crave convenience and service, and they’re happy to pay a premium.
4. Therefore, two prices are better than one. Three prices are better than two. You can capture a broader spectrum of people’s willingness to pay with a good, better and best product offering.
5. Keep an eye on your competition. Ultimately, your customers determine the prices you can charge for your products, and they’ll keep buying from you as long as they get sufficient value. But don’t leave too much room for copycat competitors to swoop in and steal your lunch.
6. Similarly, keep your costs low. Strive for efficiency. It’ll add flexibility to your pricing strategy.
7. Not many of us set perfect prices right off the bat. So learn to move prices up and down seamlessly. Keep prices in electronic media that can be quickly and easily changed as you learn what works best.
Sure, a one-size-fits-all pricing approach is quick and easy. But a pricing strategy that fits like a glove will make your business much more profitable.
Adam Snitzer is a revenue strategy expert and president of Peak Revenue Performance, a Miami consulting firm that specializes in designing and executing innovative pricing strategies. He can be reached at firstname.lastname@example.org, or via the company’s website at PeakRevenuePerformance.com.