For management, using the pricing lever to improve their company’s business results is a great opportunity. Unfortunately, most companies, as reported in the authoritative book Pricing. The new CEO imperative, do not have up-to-date and evolved skills in terms of pricing, adopt oversimplified processes and ineffective systems, leading to the loss of significant revenue opportunities. At the end of the day, the question around which all pricing-related strategies and activities should be developed is this: “how do we ensure that we realize all possible value through pricing leverage to achieve long-term success?”
Mistakenly, many companies associate the need to change their pricing strategies with feelings such as fear and anxiety, precisely because what is often lacking are people who are truly competent in this area and have been able to update their pricing knowledge and study its impact on the end consumer.
Adopting a customer-centric view to pricing can lead to the results every company wants and dispel some of the myths around pricing. What are the main objections CEOs hear when contemplating going to price action? Below are the 5 most common.
Pricing, the importance of effective management
The market is volatile and dynamic and will always be more so. This is precisely the time to review your pricing strategy and optimize the prices of your products or services:
- Consumer buying behaviours are shifting at an accelerated pace to digital platforms, disrupting current value models such as convenience, safety and transparency.
- Raw material and input costs continue to shift.
- Rapidly changing demand forecasts are increasing the complexity of production and inventory management.
All of these elements are focusing attention on the challenge to preserve companies’ margins and new customer expectations. In addition, it would be critical for companies (and the most advanced have begun to do so) to question the negative impact of poor pricing management. Results from hundreds of projects implementing new technologies to support price management show that companies can increase revenue in a range of 3 to 5 per cent, “only” through better price management (Deloitte Consulting Analysis 2020).
With such remarkable results, executives need to learn how to seize the opportunities afforded by pricing leverage. It is true, however, that the risk of encountering resistance, both internally and from the market, on price variation is high. From the experience of many companies, it has emerged that blocking the progress of pricing science are several myths and misconceptions that need to begin to be debunked.
Pricing, the five myths that paralyze price increases
Let’s address five myths about pricing that often lead to poor decisions and failure to take full advantage of market opportunities:
- we’re a company that sells commodities, we can’t afford to raise prices;
- we are a customer-centric company, we cannot increase prices;
- the market is changing, we cannot risk raising prices during this uncertainty;
- as a B2B company, pricing negotiations are in the hands of the sales team and they are the ones who maximize the impact;
- our customers are extremely price-sensitive; there is no way to raise prices without negatively impacting sales;
Pricing, Focus on Myth 3
During times of uncertainty, whether it’s a pandemic, a recession, or competitive threats, most organizations tend to close their doors and weather the storm. Unfortunately, this attitude usually results in paralysis in doing something new and doubting what you’ve always done, although the market has fundamentally changed. In some cases, the sense of paralysis is reinforced by external factors. During pandemics and natural disasters, the government often imposes restrictions on price increases in the form of Anti-Price Gouging laws, restricts customer traffic, or slows down the approval process for new business applications. Conditions like these can seem like the worst time to get your pricing in gear. However, the idea that it’s imprudent to change prices in times of uncertainty can’t be further from the truth. In these fast-paced and massive times, consumer needs are changing faster than ever, and companies responding to those needs must learn to adapt their offerings.
Pricing, focus on myth 3 – case history
Examples that can disprove this myth include the story of a luxury building materials manufacturer. This company produced a high-quality wall covering with many highly differentiating benefits including water resistance and high stability. It also cost 30 to 50 per cent more than the most popular version of the same material, but which did not have the same qualities. When the housing market collapsed in 2008, demand for all building materials dropped precipitously. Virtually every other supplier responded by applying substantial discounts as an attempt to stimulate demand. The manufacturer of the quality material realized that, despite the downturn, the customers who were still building homes were generally those who had the financial wherewithal to get through that complex time and who were not particularly price sensitive. So, in the face of the worst housing recession in history, this manufacturer raised prices and managed to significantly increase margins.
Times of uncertainty open up opportunities to reimagine a company’s offerings. For example, a leading automaker realized that during periods of great change, consumers are less willing to commit to payments with a 36-month (or longer) time horizon for the purchase of a new car – regardless of the level of discount offered. The automaker created a program in which consumers could purchase a car using the conventional financing method of a long-term monthly repayment program, but with an add-on. If the consumer were to lose their job and no longer be able to afford the monthly payment, they would have the option to return the car to the dealership and be relieved of all remaining loan payments. This program was an immediate success and allowed the automaker to grow sales while the rest of the industry suffered a decline in sales.
Another example comes from the restaurant industry. A fast-food chain facing a decrease in demand due to covid-19 reinvented itself as a grocery store. In addition to assembling sandwiches to order, the chain also sold the individual ingredients so that customers could make their own sandwiches at home and minimize being away from home and touching others.
Pricing, adapting supply to changing demand
As reported in the previous examples, when the market changes, so do the needs and priorities of customers. It is essential at these stages to rethink the assumptions of your business and ask yourself, “What has changed radically about my customer? How can I adapt my offering to better meet their new needs?
Salespeople who can analyze and anticipate new market needs, and who respond more quickly to these changes, are usually the ones who are most successful in containing a crisis situation.
How is pricing managed in your company and what is the level of optimization? Find out here by answering some questions https://premoneo.com/en/pricing-optimization-score/