Priceless planning: Seven warning signs your company won’t survive
Per Sjofors, founder & CEO, Atenga Inc. -- Manufacturing Business Technology, 10/31/2008 8:26:00 PM
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In what some are now confirming is a recession, are you doing enough for your business? Review this list of the most common warning signs that a company has a failed pricing strategy, leading to inferior business performance—and sometimes, complete business failure.
If you see any of these signs in your company, you need to take corrective action now.
Warning sign No. 1: Your company does not have documented pricing processes.
In many companies, the “pricing process” consists of hastily called “price meetings”—i.e., a last-minute gathering to set the final price for a new product. The attendees often are unprepared, and research is limited to—at best—a few biased anecdotes from salespeople, perhaps a competitor’s outdated price list, and the CFO’s careful calculation of where the price needs to be to meet the financial projections. The resulting price—sometimes arrived at after hours of discussions—will be just a guess.
It may be an educated guess, but it’s still a guess.
These ad hock meetings have nothing to do with a sound pricing process and do not allow companies to develop and enforce a holistic pricing strategy designed to optimize revenues, profits, and corporate growth. Instead, pricing guesswork will inevitably leave money on the table or reduce the sales volume—or both.
Your company needs to have a pricing process that is continuous, that has goals, budget and authority. It needs a pricing leader, either an executive—i.e., chief pricing officer—or a non-executive “pricing czar.” Companies that have pricing leaders, on average, have twice the profitability, twice the growth rate, and four to five times the valuation compared to companies that don’t. How can you afford not to initiate a sound pricing process?
Warning sign No.2: The only hard data your company uses for pricing is your cost.
Prices are optimized and lead to superior business results when they are based on the value perceptions of the customer—thus prices based on your costs will always be wrong. Companies may say they add “the typical margin of our industry”, or, “I know what markup the market will bear”, or, “an X-percent markup makes sense for my customers,” but in fact, statements like these just mean you don’t know your customers’ value perceptions.
If you don’t know your customers’ value perceptions, you also don’t know for sure what marketing messages, marketing mix, sales strategy, and tactics are the most efficient. In addition, you don’t know which bundles and polices will drive your prospects to your company to buy your product or service. You and your company are just winging it.
Think about this for a while…. What hard data resource does your company use to drive your pricing strategy?
Warning sign No. 3: Your company doesn’t know your customers’ true willingness to pay.
Of course your company is engaged in ongoing conversations with your customers, and maybe to a lesser degree with your larger marketplace—consisting of prospects, suspects, and companies or individuals for whom you might have nothing to sell. And of course your salespeople and your marketing people are trying to find out what your customers are willing to pay for your product or service, and what drives the customer to make a decision. And of course, you have some data on this. But there is a serious flaw: The data your sales & marking people collect is all wrong! How can that be?
Here is the reason: Whenever your company has a conversation with your customers or your marketplace, it inevitably becomes a sales conversation, sometimes for immediate sales, or sometimes for future sales. In every sales conversation, your customer will try to discount the value of your product or service. They naturally want a better deal so they will tell lies, or not tell the whole truth, or both—all for the purpose of getting you to offer a better price, a deeper discount, more for-free features, etc.
Go back in your memory and recall a time when you where interrogated by a company. Maybe the last time you bought a new car, or negotiated with your contractor for a kitchen renovation. Were you completely truthful? Did you leave out some information you thought could get you in a worse negotiating position, letting the seller take the upper hand? Not likely.
So why would you believe the data collected from your company’s representatives? It is not hard data.
Warning sign No. 4: Your company’s salespeople are not trained to defend prices.
Many companies send out their sales force unprepared and without an optimized pricing strategy to back them up. Years of interaction with customers pushing for lower prices—and trying to discount the value your company delivers—gives the sales force a tainted and diminished view of the marketplace’s value perceptions. “Selling” value then becomes almost impossible.
If your company only trains your sales force on the product or service your company offers, and doesn’t include training on the true value perceptions of the marketplace—as well as specific sales tactics to defend your prices and your pricing strategy—it will lead to unnecessary discounting, elongated sales cycles, competitive disadvantage, loss of revenues and profits, and ultimately, the commoditization of your offerings.
Why would you ever want that?
Warning sign No. 5: Your company’s salespeople are allowed too much leeway in discounting.
Allowing your salespeople to drive you to discounting typically initiates a death-spiral: Salespeople discount heavily and they take “the deal” at any cost. They convince management over and over again to accept deep discounting, which effectively runs the company’s pricing “strategy.”
Ongoing discounting diminishes the marketplace’s value perception about the company and the product or service. So to maintain revenues, companies will be forced to lower prices or discount even further in the hope that the sales volume will increase to offset the lower prices—but it will not. Instead companies will find themselves with, at best, flat growth, no profits, or with ever-declining revenues and ultimate business failure.
How often are discount requests elevated to management? What would happen if you stopped your salespeople from discounting completely? How much would your profits increase? What changes would it make in the sales volume? Any at all? What “tools” would they need and use to close the deal without discounting? Do you really know or are you just guessing?
Warning sign No. 6: Your company has not segmented your customers based on their decision behavior.
The “Iron Law of Pricing” says different behavioral customer segments will value your offering differently, and that the pricing strategy must be constructed to leverage these differences to increase the company’s market penetration, price realization, and profitability.
Thus, one-size-fits-all doesn't cut it. Companies must know the behavioral segmentation of their marketplace, as well as the value perceptions and monetary value each segment assigns to their product. Companies also must be aware of the buying decision drivers for each segment. Armed with sufficient knowledge of these traits, companies must then leverage this knowledge to tailor the product, packaging, delivery options, marketing messages, and the pricing strategy to maximize revenues and profits from the overall marketplace.
How does your company segment your market? Just using SIC code, ZIP codes, or some other variable that may have nothing do with companies' decision behavior and willingness to pay?
Warning sign No. 7: Your company benchmarks your prices on “the marketplace.”
By resorting to “marketplace pricing,” companies accept the commoditization of their product or service. And as commodities are sold on price alone, the company will only win business when it sells at the lowest price.
Especially in an attempt to gain market share, it is even common for a new entrance in a market to price 15 percent, 25 percent, or even 50 percent below the market leader. The low price leads to low value perceptions, and this becomes a proven way to always be the runner-up—never able to raise prices, always struggling with profitability, and always playing catch up to the market leader(s).
Instead, management teams must make the effort and investment to learn the value perceptions and decision drivers of their customers. They can then use this knowledge to differentiate their products or services to create additional value, and then price the product to monetize that additional value.
The choice is yours. Look around at your market and your competition. Likely the market leaders in your industry are not the “low price leaders,” but instead are companies with higher prices on their products or services with a sound understanding of the customers’ needs and wants, willingness to pay, and decision drivers.
What about you? Are you the market leader? If not, why?
Closing thoughts
These seven warning signs need to be taken seriously. Even if recognize just a single sign, it is an indication that your company does not have an optimal pricing strategy.
Since most companies have never done it, a profit optimized pricing strategy has emerged as an important source of competitive advantage and increased profitability. CEOs running companies with an optimized pricing strategy are the most admired in their industries.
That’s why development of a holistic pricing strategy is just as important as the management of costs and the growth of sales volume. If you recognized any of these mistakes, you need to take action. Gather resources about pricing to develop a thorough understanding of what can be done and who will do it.
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About the author:
Per Sjofors is founder & CEO of Atenga, a strategic price consultancy that delivers education, strategic direction, profit audits, pricing strategies, perception studies, and segmentation models that have driven rapid growth for companies of all sizes.
