How do you set your prices? With ad-hoc, last minute, pricing meeting or with a more stringent process? And what data does the company use? Cost and gut feel are the most common ones. The results are prices that are hit or miss – mostly miss. Prices that leave money on the table AND reduce sales. At best, these ad hoc meetings may come up with a price that “kind of works”, but they do not allow companies to develop optimal prices.
So what then is optimal pricing? Well, every prospective customer of a company has a certain willingness to pay. This willingness to pay is influenced by many things; the tangible and intangible benefits of the product or service the prospect is about to buy, the competitive landscape and other alternatives, the urgency the prospect has to solve the problem the product or service solves, and, of course, access to funds.
Optimal prices allow a company to capture the maximum available of every prospective customer’s willingness to pay.
Optimal prices help your customers select the specific products and levels of service they are willing to pay for.
And optimizing prices really make a huge difference for the business results. In fact, companies who optimized their prices have, on average, twice the profitability, twice the growth rate, and 4-5 times the valuation when compared to companies who don’t. And optimizing prices is surprisingly easy to do. But you do need the data.
An 8 Question Check List for Price Optimization
Which of the statements below best apply to you? If most of these items are checked, then your prices are optimal, and you likely capture the maximum possible percentage of your prospect’s willingness to pay. Most likely you are the leader in your industry. And if not, and if you aspire to become the leader in your industry, or at least improve your sales level and profit margin, this list will help you view your pricing differently, and inspire you to take action to begin harnessing the power of price optimization.
Optimized Pricing Check List:
- We know, beyond a gut feel, what our customers are willing to pay for our products or services.
- We know precisely how price levels influence sales volumes for our most important products or services.
- We know which market segments are most successful with our products and services, and which are the most profitable to sell to and to serve.
- We have analyzed our historical sales transaction data to find correlations and dependencies between products and between services, and we take pricing action based on these findings. We use strategic discounts solely to drive customers to more profitable choices.
- We use a different pricing and discount strategy for products and services that are unique, than we use for product or services that are a competitive, or even commodities.
- We know how we can use our price structure to increase willingness to buy and willingness to pay over time.
- Our sales people are good at selling value.
- Our sales people are not compensated solely on revenue.
These are just a few of the check-points for Optimized Pricing. But if your pricing today is driven mostly by gut feelings or guesswork, optimizing pricing today will have a profound impact on your company.