The Art of Pricing: Why Pricing Is The Most Underestimated Consumer Goods Profit Lever - And What You Can Do About It
It's not a piece of news. Setting the right pricing of a product is an important thing. But hardly any consumer brands give it the attention it not only deserves but also needs. Let me show you how the right pricing can easily double the ROI of your huge investments in brand, advertising, and product development.
There is a simple reason why pricing is rarely managed perfectly by any brand: It’s not simple. It is complicated and influenced by a lot of external factors. The information needed to improve it is highly opaque.
An endless series of questions arise for the marketer when pricing a product initially and during its life cycle.
What is the customer willing to pay for this product? How do sales decrease with an increase in product pricing? What influences the pricing of the most comparable product in our product range? What pricing do competing products charge, and what influence does this pricing have? Do the features or our brand have the potential to justify premium pricing instead of economy pricing?
But the list of questions goes on. How do I get the retailer to charge what I have identified as ideal pricing on the shelf? What sale price should I aim for in the retailer negotiation? Should I bundle products and charge?bundle pricing?
What impact do pricing promotions have on short- and long-term sales and willingness to pay? Should I, as a brand, therefore, support them or try to avoid them?
It is complicated. But complexity can be resolved with a lot of work. But other problems stand in the way.
In the absence of alternatives, simple rules of thumb have been established since time immemorial. The “cost-plus” thinking is the most dangerous of these.
Another heuristic is that of “listening to your gut.” Managers tend to overestimate the value of their own intuitive assessment “that’s way too expensive,” and “we’ve never charged that much before.”
Trivial?surveying?of consumers is subject to so many biased effects that its value is low.
Pricing Intelligence Pays Off
“Divide et impera” (divide and conquer) was a basic rule of the Romans. With the same thought, brands can master the complexity of pricing. The key step is to move from “expert opinion” to evidence-based management.
In subsequent chapters and articles, I will explain all the dos and don’ts.
The path is worthwhile. Because the consequences are four central successes:
An Example Of Successful Price Management
The medium-sized manufacturer of cat and dog food and cat litter had grown steadily like a good family business. With internationalization and the increasing complexity of the product range came the problems of price management.
When Jordi Queralt was hired as CMO, he started by taking stock. When it came to pricing, the results were sobering. It was based exclusively on the experiences of the product managers. There was no valid information on how good the prices set were in the market.
The company was equally blind to new product launches.
The call to data providers like IRI or Nielsson was sobering?too. They offer sales figures and pricing strategies for large markets and relevant product groups. This makes it possible to deduce how customers react to pricing changes within existing price fluctuations.
But nothing was available. This is probably because medium-sized brands cannot afford to spend money on such suppliers in the 6 to 7-digit range.
Simple direct price- assessment surveys were under discussion, as well as was the use of?conjoint analysis. The choice resembled a dilemma. “Can we trust the results?” was the relative question, as?conjoint analysis?are expensive when applying for many products.
A novel methodology that combined techniques from neuroscience and AI (Implicit Intelligence?) came to the rescue and helped Jordi measure the price-sales function of relevant products and new products on a low budget.
Result: Sales increase with rising profit margins and two successful new product launches.
The 3 Reasons Why Price Management Could Be Your Bottleneck
In many businesses, the price of their products or services is the key driver of profitability. To ensure that product pricing is set correctly, businesses need to have a good handle on price management. Unfortunately, this can often be a bottleneck for companies, as it can be challenging to get the balance right.
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Three logics make the central role of pricing management clear. These three basic arguments have been discussed and debated so often in a company until pricing has relevance and professionalism.
BALANCE – The Image Of The Scales
When it comes to price management, one of the key things to keep in mind is the idea of balance. Like with a balancing scale, if one side is heavier than the other, the entire structure is thrown off. In the same way, if you have high prices and your pricing is too high or you have too low prices compared to the competition, your business will suffer.?
For example, if your pricing is too high, you may find that you cannot win as many customers or clients as you’d like. On the other hand, if your pricing is too low through extremely low prices, you may struggle to make a profit.?
So, which pricing is the right one? How much should one set oneself apart from the competition?
While there is no one-size-fits-all answer to this, the picture of the balance provides a clear concept. The pricing is equivalent to the customer value of the product.?
To understand the optimal product pricing, it is necessary to understand which value, advantages, and benefits the product has – subjectively, situationally, in comparison.
This understanding also relativizes the role of costs, which are only of downstream importance. Unit costs merely shift the optimal price point somewhat since a low-margin product needs more sales to be profitable.
Thus, to ensure that your product pricing is well-balanced, it’s important to review them regularly and adjust. This can be a difficult task, but it’s essential if you want to avoid problems down the road.
ALLOCATE – Investment Must Be Mirrored
What investments are you making in marketing and product development? All of this increases the value perceived by the consumer.
Moreover, if the product pricing counterbalances your product’s value to the customer, management should reflect this.
Your efforts to find and maintain the right product pricing should be commensurate with those creating value. A farmer who produces the best fruit should be able to harvest it professionally. Otherwise, all the effort goes to waste.
Thus, the discipline of pricing should be seen as “the harvest” of your labor. You should provide sufficient investment in your “harvesting machinery and processes”.
LEVERAGE – The Mathematical Leverage Of Price In Comparison
Leverage is a key concept in business, and it is also important in price management. This is because the product pricing or service directly impacts profitability.
Consumer goods manufacturers have a long-term average profit margin of around 10%. If, for example, it is possible to raise the pricing by 5% without demand reacting noticeably,?revenue?will increase by 5%.
If?revenue?increase at constant costs (and constant sales volume), the 5% additional sales are equal to a net profit. The profit margin rises from 10% to 15% and increases by 50% in relative terms.
Increasing profits by 50% through professional pricing is a realistic target.
Setting the optimal prices does not cause costs, only profits.
Conclusion
Professional pricing pays off in four areas: It leverages the ROI of marketing investments, it makes the decision-making process sustainable, it reduces the flotation rate of new products and it improves the overall profitability of the products.
The?professionalization?of pricing requires a basic philosophy based on three pillars:
Based on this, companies will build the right pricing strategies and?organizations. However, the Achilles’ heel on which everything stands or falls is “pricing research” – the process of understanding what price customers are willing to pay.