We uncover what is the correct way to define and measure price? More importantly, how can you improve net price realization and profit more money. The following steps can help improve your pricing and profits:
Have a clear executive level pricing owner:
Most organizations do a sufficient job of managing pricing execution and deals flow through the building smoothly. Where we break down is having a clear and experienced owner of pricing strategy. Your pricing manager may be doing a good job tactically, however they are not usually thinking strategically. According to a study published in the MIT Sloan Review, fewer than 15% of companies have any systematic pricing review,pop
Assign, goal and empower one of your executive team, most likely the VP of Marketing or CMO, with developing a pricing improvement plan and process.
- Optimize your product range:
If you have segmented your customers and understand which ones are truly price sensitive, having a basic price fighter in your range will meet their needs without disrupting your full product line pricing. At the high end, are their additional products or services such as extended warranty or faster shipping or higher performance that a segment of customers values
Look at your product pricing strategy vs. your user segmentation again.
- Align sales compensation with profit growth:
If your reps are compensated for revenue, and not for profits or price improvement, what incentive do they have to fight for the best price? If you were selling and could make 5% commission on $1000 with little effort, or 5% commission on a $1010 sale with some effort and risk, what would you do? The 1% price lift is worth a negligible amount to them, but a huge amount to your bottom line and exit multiple!
Consider having, at a minimum, your sales leaders compensated on expansion of either average selling price or gross margin.
- Revisit your ‘price waterfall’ annually:
Look at each deduction from your list price to the final, net/net price you bank. Are programs such as co-op still pulling their weight as you’ve shifted your mix to inbound marketing, away from relying on distributors to create demand? Do customers take an early pay discount when paying after the early pay period has expired?
Once you have established your price waterfall, compare it to your leading competitors. Odds are you are being pushed to match invoice price plus you have more attractive trade terms, which your customers and sales team are not discussing in a price negotiation. A good overview of this analysis is available from this McKinsey article.
Conduct a review of you and your competitors, selling terms and price structure annually.
- Understand what your customers’ value:
Do those who set pricing truly understand what your customers’ value? Do your selling tools and training continuously reinforce the value of your products? What was the last insight your team delivered about how to improve pricing?
Ask your customers why they do, and don’t, buy from you.
Explore how Stratinis can help you control and manage your pricing