Price management need not be the art of the obscure

In the business world, a great deal of time and energy is spent finding ways to cut costs and do things better. Management uses countless formulas, theories, and strategies to achieve smoother operations.

But when it comes to pricing, many companies drop the ball, approaching it as an afterthought. Creating and implementing price strategies—or price management—not only improves perceived value, but also enhances customer relationships.

“Some people believe pricing is a black art, but if you arm yourself with the right knowledge, it is a process similar to controlling cost,” says Per Sjofors, managing partner and founder of Atenga, a consulting firm specializing in price management. “We want to help companies get away from the habit of guessing when it comes to pricing a new product.”

Sjofors says there are three activities that lead to better pricing:

• Know your clients' willingness to pay;
• Establish policies that capture their maximum willingness to pay; and
• Implement internal procedures and processes that ensure there is no revenue leakage.

“One common example of revenue leakage is when sales reps sell product at an old price,” says Sjofors. Atenga focuses on the first two points, working primarily in the B2B range, conducting targeted market research to determine what elements of value drive customers to make the decisions they do.

“In almost all of our investigations, companies have a skewed view of how much their clients are willing to pay,” says Sjofors.

Having sales reps capture market data is one of the biggest mistakes companies can make when it comes to setting price strategies.

“Salespeople cannot capture accurate information because customers are most likely not honest in their responses. Clients are always trying to get the best deal from sales reps,” Sjofors asserts.

Atenga conducts anonymous market research by offering cash incentives to determine a customer's willingness to pay, as well as perception of value of the products and company. Research and analysis typically takes three months.

Atenga’s methodology defines the customer-perceived value of a product or service, and then makes pricing recommendations to match that perceived value. Companies benefit by being invited to bid more often, and they discount less often, and win business more frequently. A sales force can be trained based on the findings, making it less prone to discounting to close a deal.

“Home theater and custom installation changed our business dramatically over the past 10 years,” says Dave Reich, general manager of Theta Digital. “New homeowners now find specialists that install home theaters, but they may not be familiar with certain brands or equipment. Custom installers don't have retail outlets and buy directly through other manufacturers.”

By employing Atenga, Theta Digital was hoping to increase sales as well as reach new customers and markets.

“We've been in a holding pattern for years and were having trouble growing,” says Reich. “We were unsure about our name and reputation. Our $20,000 system is very complex to install. It's also not user-friendly unless you know what you're doing.”

Following Atenga's market analysis, Theta Digital was pleasantly surprised to discover its name was quite strong in the industry and comparable in perceived value to its major competitors. “We learned to set price based on what the market can bear, and how to introduce and support price increases among our sales staff.”

Theta Digital also was concerned about underpricing its high-tech items, which can backfire in a luxury item market. “If a price is set too low compared to competitive products, the perception is that the quality is lower as well,” says Reich.

Running the risk of perceived undervalue is not worth the lower price, explains Cindy Jutras, analyst for Boston-based Aberdeen Group. “If a price is significantly lower than its competition, there is a perception that it cannot be as good a product. Also, if something is priced significantly higher, people can be turned off because they believe it is overpriced.”

When developing a pricing strategy, Jutras says it is important to set some type of metric or unit of value that can translate into a customer's end value. “You can add more options or services, for example, but they must be relevant,” explains Jutras. “A company cannot justify higher-priced software based simply on a more powerful CPU.”