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Thursday, September 22, 2011

Are Your Prices Right? Reassessing Your Pricing Strategy Can Pay Dividends


Layoffs, hiring freezes, and pay and budget cuts were the go-to survival tactics during the economic downturn. In the midst of this downsizing frenzy, many manufacturers neglected to reassess their pricing strategy. Doing so can help companies remain profitable and competitive in good times and bad.

The first step to optimizing your pricing strategy requires you to identify specific, low-margin products and services. For example, rather than calculating the profit margins of a broader category or division, look at specific products and customers’ transactions to pinpoint exact areas of low profitability and their causes.

After picking the “low-hanging fruit,” identify and separate customer bases. What does this entail? Because not all customers are alike, you’ll need to categorize them based on their willingness to pay and the amount of value they place on your products.

For example, a customer who buys an optional part for an insignificant piece of machinery will be less tolerant of high prices than a customer who purchases a crucial part for an expensive, indispensable piece of machinery. Establish relevant and specific pricing and negotiation guidelines after identifying these categories and then assign customers to them. Companies that are able to identify low-margin products and services and associated causes can make decisions as to whether or not the transaction makes sense, or if action needs to be taken.

A company’s organizational structure may also need to change in order to effectively implement pricing strategies.  Many companies encounter challenges because there are multiple internal parties involved, which leads to uncertainty as to which department (sales, marketing, operations, etc.) is in charge of pricing strategy. There needs to be clear leadership in establishing prices. Companies that have been most successful in executing pricing strategies have appointed pricing strategy decision making to the highest level of the organization, often the CEO or president, or the appointment of an executive specifically in charge of pricing, the Chief Pricing Officer.  The appointment of a pricing executive will better allow companies to develop effective pricing strategies, identify opportunities for improving margins and disseminating information to other departments.

While pricing should be flexible, it’s also important to rein in sales negotiation activity that may be hurting margins. Set and enforce policies that prevent salespeople from going too low as a way to win customers and secure commissions.

Last, but not least, remember that flexibility and responsiveness are crucial to a successful pricing strategy: Companies must be able to assess and react quickly to volatile environments and competitors’ pricing behavior.

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