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10 Tips to Better Pricing
By: Rafi Mohammed
Posted: March 25, 2011, from the April 2011 issue of GCI Magazine.
Pricing is one of the most powerful strategies available to businesses, yet it is under utilized. A McKinsey & Company study of the Global 1,200 found that if companies increased prices by just 1%, and demand remained constant, operating profits would, on average, increase by 11%. Using a 1% increase in price, some companies would see even more growth in percentage of profit: Sears, 155%; McKesson, 100%, Tyson, 81%, Land O’Lakes, 58%, Whirlpool, 35%. Just as important, price is a key attribute that consumers consider before making a purchase.
The following 10 pricing tips can reap higher profits, generate growth and better serve customers by providing options.
Stop Marking up Costs
The most common mistake in pricing involves setting prices by marking up costs (“I need a 30% margin”). While easy to implement, these “cost-plus” prices bear absolutely no relation to the amount that consumers are willing to pay. As a result, profits are left on the table daily.
Set Prices that Capture Value
Manhattan street vendors understand the principle of value-based pricing. The moment that it looks like it will rain, they raise their umbrella prices. This hike has nothing to do with costs; instead it’s all about capturing the increased value that customers place on a safe haven from rain. The right way to set prices involves capturing the value that customers place on a product by “thinking like a customer.” Customers evaluate a product and its next best alternative(s) and then ask themselves, “Are the extra bells and whistles worth the price premium (organic vs. regular) or does the discount stripped down model make sense (private label vs. brand name). They choose the product that provides the best deal (price vs. attributes).
Create a Value Statement
Every company should have a value statement that clearly articulates why customers should purchase their product over competitors’ offerings. Be specific in listing reasons…this is not a time to be modest. This statement will boost the confidence of your frontline so they can look customers squarely in the eye and say, “I know that you have options, but here are the reasons why you should buy our product.”