Pricing strategy: The pivotal and persistent power of pricing
It may sound like hyperbole, but because it directly impacts both the top and bottom lines, pricing will invariably make or break a business. Yet despite its importance as a growth lever many businesses continue to overlook the importance of a well-thought-out pricing strategy. Whether it is because of resource constraints or lack of dedicated pricing management, ignoring pricing can have serious repercussions on a business’s financial health, market share, sales performance, and customer relationships. A robust pricing strategy requires solid research, careful analysis, testing, and adjustment. Here are five compelling reasons why you should take pricing strategy seriously. 1. Top off your revenues and profits Price is directly correlated to your top line bottom line simply because revenue = price????quantity, and profit = revenue – cost. In fact, even incrementally increasing your price provides a much higher ROI on your margins than cutting costs (that often entails a whole lot of scarce time and resources, technology investments, and risk from loss of skilled employees and low morale among those who stay). Multiple studies have shown that a 1% price increase can result in an 8% to 20% increase in operating profits, depending on the industry and the cost structure and assuming no loss of volume (see discussion below on price elasticity). 2. Maximize your monetization A fraud-prevention software client sold licenses per user. However, similar-sized customers derived very different value from the software. One customer with 25 licenses saved $2.2 million. Another with 25 licenses saved $5.8 million. The per-user model was clearly suboptimal. A price model is made up of a price metric (i.e., price per license, price per user, etc.), price level (i.e., the dollar value), upcharges (e.g., value-added features and services, response time, etc.) and discounts (e.g., based on volume, length of contract, customer attributes such as loyalty, and cross-sell or product bundles). A cost-plus price model covers costs and then some to attain an (often) arbitrarily set margin goal. This setup is is rarely optimal because it fails to capture what the customer is actually willing to pay (which may be significantly more). A carefully developed and well-implemented value-based price model (see below) on the other hand ensures no revenue dollar is left on the table. 3. Sell on value, not price To be successful, your product’s price must reflect its value, perception, and positioning in the market. An inferior product at a high price is unlikely to sell much. Conversely, a superior product at an unexpectedly low price confuses customers and makes them question its quality. While doing customer research for a manufacturing client, one of their customers summed it up, “I need a product that does what I need. If it’s more expensive I will still buy it. I’ve tried cheaper ones and it’s very much you get what you pay for.” A price based on your perceived value (called “value-based” pricing) means your sales conversations focus on the incredible things your products can do for your customers and prospects. Which means price takes a backseat. As do unnecessary discounts. 4. Increase your price with confidence We often work with clients who, fearing a tide of customer churn, have barely or never changed their prices in years, only for us to discover that their customers are happy to pay as much as 20% to 40% more. Price elasticity measures how customers will react to a price increase or decrease. Will they continue with their current consumption, or will they buy fewer units? How likely are they to switch to a competitor? Understanding and quantifying price elasticity gives you the assurance to increase your prices on a regular basis. It can also help predict customer behavior and improve your financial impact forecasting from proposed price changes. Price elasticity is also an important indicator for investors. As Warren Buffett once put it, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” 5. Plug revenue leaks Here’s a thought experiment. Think of two similar customers located in the same geographic region. They buy from you roughly the same volume across the same products, give you the same amount of business in a year, have been with you for a similar number of years, etc. How confident are you that both customers get the same unit price? If you are absolutely certain, you are part of a rare and rarefied minority; the prize is yours. For those shrugging your shoulders, all is not lost. In fact you have only revenue to gain. Of the two customers, the one who got away with the lower price created what we call revenue leakage. Think of it as a missed opportunity that can yet be realized. A solid pricing strategy proactively prevents revenue leakage by properly structuring discounting policies. It provides the necessary pricing implementation guidance and a price monitoring and governance framework to prevent unauthorized or ad hoc discounts that erode both your top and bottom lines. * There are of course, many other reasons why pricing must never be an afterthought. For example, when entering a new market or launching a new product, pricing should be a key consideration. And, if you have customer relationships that span years, the price you set today can significantly influence the customer lifetime value (CLV). A well-constructed pricing strategy therefore not only helps with customer acquisition but also in retaining them for the long term, thereby maximizing CLV.
Price increases: How to raise prices successfully, and often
Raising prices can be a daunting task because of its potential repercussions (customer churn and low sales morale being primary). However, when done right, it can pave the path to substantial growth. Here are some tips on how to build confidence to successfully increase prices. Increasing prices is not just about making more money in the immediate turn; it’s as much about positioning your business for growth. It’s a strategic move that requires careful planning, clear communication, and a relentless focus on value. By aligning your pricing with your value proposition and navigating the process with care and empathy, your fear of raising pricing will be a thing of the past.
Pricing refresh: Four signs your pricing needs a makeover
Pricing is not a set-it-and-forget-it element of a business. Rather, it requires ongoing attention and adjustment. If your business shows any of the following signs, it is very much ready for a different pricing outlook and approach. Reconsidering your pricing strategy is not a sign of failure but a sign of pricing wisdom and adaptability. It’s about recognizing that the business landscape is dynamic so must be your pricing strategy. If any of the above signs resonate with you, don’t be afraid to reassess, recalibrate, and reinvigorate your pricing strategy. Your top and bottom lines will thank you for it.
PE corner: Pricing as a key tool for portco value creation
Implement strategic pricing in portfolio companies to maximize your ROI. In the last few years, private equity firms have become increasingly aware of the power of strategic pricing as a tool to drive growth and profitability in their portfolio companies (portcos). At Acustrategy we advise some of the leading private equity companies in the world to maximize their return by ensuring their portcos use strategic pricing to It is important for PE firms to remember that strategic pricing is not just a lever they can pull sometimes. It is a necessity for optimizing ROI. By insisting on a well-crafted pricing strategy, private equity firms can ensure that their portcos can thrive to their fullest.
Pricing management: Setting up successful pricing governance
In a competitive and evolving business landscape, pricing strategy plays a crucial role in determining a company’s profitability and market positioning. However, the success of any pricing strategy hinges on effective implementation and governance. To be clear, pricing implementation involves the practical application of a pricing strategy, including setting prices, communicating them to customers, and adjusting them as needed. Pricing governance, on the other hand, refers to the structures and processes that guide pricing decisions, ensuring they align with the company’s overall strategy and goals. Here’s our recommended roadmap based on our experience across a number of clients and industries: Effective pricing implementation and governance are pivotal to enhancing a company’s growth and competitive standing. Businesses can adapt more dynamically to market changes, better meet customer expectations, and achieve sustained financial success, not merely by setting the right pricing strategy, but also by embedding robust pricing management to ensure their pricing strategy sees the light of day.
Pricing and innovation: Pricing new products and services
Do you remember Better Place? If you’re scratching your head, you’re not alone. Founded in 2007, Better Place aimed to revolutionize the electric vehicle industry by providing battery charging and swapping services. Better Place ended up filing for bankruptcy in 2013 having burned through $850 million in private capital. One of the critical missteps? Their pricing strategy. Better Place opted for a subscription-based pricing model that was out of sync with market expectations and needs at the time. The result? Low adoption rates, financial strain, and ultimately, the company’s downfall. The story of Better Place serves as a cautionary tale about the importance of getting your pricing strategy right, especially when launching new products or services. Below are 10 tips for pricing new products and services in the B2B sector. Pricing is often an afterthought in the product development process, but it should always be at the forefront. By adopting a price-led approach to innovation and following these seven tips, you can increase the likelihood of your new product or service being a financial success. The best way to price a product is to never have to lower it.Charles L. Tiffany, founder of Tiffany & Co
