Pricing as a source of profit
Once upon a time in the dim and distant past people who made things priced them on the basis of cost plus a little profit. It was a balmy time. Some thought even ‘barmy’. What if a customer really needs or desires our product? Surely then we can charge her much more. The idea caught on. Gradually everyone began to weigh up how much their customers wanted or needed their products. Hunger for an Apple translated into more than a quick lay.
Customers, who had mysteriously become Consumers during this period, got used to the idea. If I need it, they said, I must pay for it. A life raft for a drowning man fetched a healthy sum. Dogs obsessed with a particular brand of offal persuaded their owners to stump up. The policy of pricing for what the market will bear was born. It survives to this day.
But not nearly as much as you might think. Certainly there is an understanding of the role of price in selling, more complex than simple market-place negotiations suggest. The consumer likes fixed prices - but then demands special offers, something not be undertaken lightly. Cutting prices implies excess production, declining sales or even quality deterioration.
Purveyors of haute parfumerie know this well.
Can pricing really affect the bottom line?
So is maximising price useful to the bottom line? Can we measure the obvious answer?
Jay Jubas, a director in McKinsey’s Stamford office, Dieter Kiewell, a director in McKinsey’s London office, and Georg Winkler, a principal in McKinsey’s Berlin office studied the matter thoroughly. Their examination of over 1,000 price-makers led them to conclude that between 2% and 7% could be added to the bottom line with shrewder pricing. It can be even more. The authors suggest five things to be done if your pricing is to be optimised.
They are, of course, addressing the MNCs, the big guns, for whom an edge over the competition is lifeblood to the future. I’d like to look at the smaller man – company and individual – who is not resourced to turn on the algorithm every time he needs an answer. The pressure he faces is a combination of surviving and sustaining. Loyalty, always important, features high on his list of what keeps his business afloat. Concern for the consumer often serves his business better than an eye on the quarterly profits.
Of the five recommendations - Provide meaningful transparency into pricing data, Understand what customers really value, Move from sales reps to ‘value negotiators’, Provide on-the-job training to build confidence, Change the culture – I find the last, Culture, to be the first. And I find the absence of ‘sell the value’ rather surprising. It’s a long time since they sold the sizzle in Walls’ sausages but it still conjures up a scrumptious meal.
I find 70% of SMEs seriously underrate the value of what they offer; for consultants the proportion is even higher. They project their culture as selling, like many of the big consultancies. Actually, what the customer wants is to buy things that work and adopt ideas that are common sense. Sales training often reinforces the wrong style, exulting the push and forgetting the pull.
Take a look at your prices. Examine them from the value you can establish with your customer. It will make you think again about what you charge.
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