7 Secrets of Driving Higher Sales Volume at Higher Prices with the Right Pricing Strategy
Believe it or not, there is a way to have higher sales volumes at higher prices. It’s done with the proper pricing strategy:
Table of Contents
Create value buyers will pay for and develop a pricing strategy to capture that value.
Define customer segments you can serve better than the competition.
Make buying easier with bundles.
(How to) Use demand curves to set prices.
(How to) Use salesmanship to win higher prices.
(How to) Use unbundling to deal with purchasing.
Five hard questions.
1. Create Value Specifically that Buyers Will Pay For
Companies often offer free products, services, additions, and features because they don't know if buyers are willing to pay for them. And if they are willing to pay, how much? This may reflect a lack of confidence in its products and services, or it may have arisen from a lack of knowledge of its buyers' decision drivers. Often companies add a free service to unnecessarily "apologize" for the cost of the product itself. Sometimes this gut feeling is right. Many times it is not.
Developing add-on products, services, and features represents an outlay of capital for any company. Therefore, capital – as well as time, talent, and energy – must be explicitly allocated to services customers will pay for unless those add-ons are necessary to sell the core product or service.
2. Target your segments
Most marketplaces are much larger than any one company can serve. Yet, many companies attempt to serve pretty much "all" the customers they can get for the simple reason that they lack hard data on which customer segment is the most desirable - the segment that will support the highest possible sales volume and price. Furthermore, trying to sell to an entire market dissipates the company's resources. This often leads to commoditization and a consequent loss in pricing power and profits.
When a company has the data to focus its messaging, products, and services on the market segments willing to pay a higher price for the product(s) or service(s), the business will soar. Intelligently defining their marketplace based on willingness-to-pay and purchase decision behavior leads to developing a pricing strategy where the price becomes a statement of their value proposition.
3. Make buying easier with bundles
Few executives and product and marketing managers can answer this question: What problems do you solve for your customers? This may sound counterintuitive, but it is essential because most companies think about their products, services, and customer relationships in terms of what they do rather than what problems they solve for their customers. Recall how the famed management consultant Peter Drucker coined the phrase: "Your customer is not buying a drill; they are buying a hole." So, customers usually initiate a purchase activity–or respond to a sales initiative—to solve a specific problem or get a specific outcome. They will not always tell the vendors the problem or the desired outcome.
The difference between the "drill" and the "hole" may be subtle, as these are simple; the drill is a simple solution to a simple need. However, in many other cases, the solution requires products or services that are considered complex.
By understanding the outcome customers are looking for, instead of focusing on its products or services, a company may discover that said product or service is insufficient to meet that customers' need as multiple of the company's products or 3d party products are necessary. This opens an opportunity to combine them into a solution bundle and offer that. Solution bundles may drive buyers to purchase high-profit items simply because you've taken the time and the care to figure out what is needed to solve the customer's problem. Just the fact that you've engineered the solution often commands a premium in the marketplace.
Offering bundles gives your salespeople an easy way to focus on solution selling. Bundles that solve the problem for the customer make the sales discussion much more productive. Salespeople are talking about peoples' problems rather than just pitching features. Even if the customer has a different problem, describing a critical problem and how your company solves it often gives the salesperson credibility in the eyes of the buyer just getting to know your company.
4. Use Willingness-to-Pay to Ensure Prices are Set right
When conducted correctly, willingness-to-pay research gives a company precise sales volume, revenue, and price predictions. It also pinpoints the psychological prices that, if crossed, substantially affect sales volume and revenue. These are called Price Walls.
Most companies do not bother to conduct willingness-to-pay research, so they do not know what sales volume and revenue they can expect at different prices. Thus, whatever method they use to set prices is guaranteed to leave money on the table. Unless they are fortunate - and this, of course, happens sometimes but not very often.
And it is only when prices are set based on accurate predictions of sales volume and revenue and when Price Walls can be identified that prices can be set correctly. Set on the "right" side of Price Walls to maximize sales volume in some cases, maximize revenue in others, and maximize profitability in others. These are different price points.
5. Optimize your sales processes to win higher prices
A salesperson's compensation plan, lack of relevant training, and conflicting management objectives usually lead to lower prices and profits. This sad truth probably costs American businesses billions of dollars in foregone profits. It's sad because it is not necessary.
Nearly all buyers – even (especially) purchasing agents for large companies – will tell you that they rarely buy the cheapest solution. In fact, among purchasing agents, 81% say they buy what delivers the best value. It's, therefore, up to your company to create and deliver a higher value than your competitors and justify charging a higher price. That relationship between price and customer value is best discovered through anonymous willingness-to-pay research. During a purchase negotiation, a purchasing agent is unlikely to disclose all the elements of value they are looking for. So, unless your company is satisfied with being a commodity provider, this drives three particular actions incorporated into your sales process to win higher prices consistently:
During the early sales conversations, position the company as a source of high value, not a source of low price. In a few rare instances, this will terminate the sales process, but that's usually a good thing, as this buyer is signaling that they will buy only on price, and the business will probably not be profitable. Salespeople can make statements like, "we're not the cheapest solution you can find, but our customers know that we provide the best value, and I'd like to show you why they are willing to pay the difference."
During a sales conversation, the salesperson should ask questions that elicit the buyers’ elements of value. For some, it might be a strong warranty, references from accounts they know, timely delivery, good technical support… But the key objective of the fact-finding process is to understand how to express and convince the buyer of the value of the offering.
During final negotiations, resist demands for lower prices. Sometimes this just requires fortitude, but sometimes it requires unbundling structures that let the salesperson remove features, services, or guarantees to lower the value commensurate with lowering the price. This forms the basis for productive negotiations. Note: Most companies leave it to the salesperson to figure out what features or services to remove in the negotiation, but this is a mistake. Salespeople are motivated "get the deal" regardless of the profitability, and they usually don't have the data or the visibility to do an excellent job at structuring unbundles. These structures should be created by those responsible for product management and taught to the salespeople as part of their training.
6. Use Unbundling to Deal with Purchasing
As discussed above, successful companies use unbundling to respond to price pressures. They structure the unbundles ahead of time, and they train their salespeople to respond to demands for lower prices by un-bundling costly elements of service, warranties, and even product features instead of a quick, profit-sapping 'Yes, Mr. Customer, we'll give another 5% discount'.
Successful unbundling processes require a detailed data model of your costs and the value you deliver to your customer. For example, when a customer demands a 10% reduction in price, you should be able to remove at least 10% of the cost from your deliverable in response and 10% of the value you're delivering. Artfully done, the conversation will force them to recognize the value of what you're taking away and decide whether it's worth the dollars to have it or not.
7. Five Hard Questions to Ask Yourself
In-depth customer understanding
Is there a management structure and processes to conduct willingness-to-pay research to discover and incorporate the value, purchase, and price drivers for the specific market segments that provide you with the most profitable business? Are these drivers at the center of your product design, development, messaging, bundling, sales processes, and pricing strategies? What are the structures, and what management incentives support this?
Continuous improvement
Does your company continuously focus on improving its products and services in ways that customers will pay for? Do you know what your market wants to pay for product and service improvement, so the company does spend on development that customers may "want" but not "want to pay for"?
Directing your salespeople
Do your salespeople speak to the right decision makers and others who care about your value benefits in the customer's organization? Are salespeople trained, retrained, and equipped to win the price negotiation? What structures and management incentives support this?
Pricing process
Does your company involve every department in discussing product development and pricing strategy to maximize efficiency, quality, and profits? Is there a pricing "tsar" who pulls all this together, and is there a pricing process with goals, resources, and authority? How do you make sure this happens?
Is your pricing strategy based on willingness-to-pay research, or are you using a guaranteed method to leave money on the table?
Price-driven product/service development
Does your company consider pricing when it's still developing a new service or product instead of when the product or service is introduced to the market? Is pricing based on gut feel, cost plus, or hard data in the form of accurate sales volume and revenue prediction at different prices? Is consideration taken to the price point and severity of Price Walls? What structures and management incentives support this?
A 'no' answer to any of these questions suggests that your company will likely leave considerable money on the table. And why would you want that?
Conclusion: When dealing with pricing, most managers lie down until the feeling disappears. The few that take the trouble to base prices on willingness-to-pay research often see sales growth rate double and improvements of 25 - 40% in their profits. Since most companies have never done it, even tepid price improvement has emerged as an essential source of competitive advantage and increased profitability. Companies who focus on pricing as a profit drive gain a superior knowledge of their customers' value drivers to align their processes and prices with their customers' value perceptions. In this way, they win customer loyalty, lower costs of sales, and above all, spectacular revenue and shareholder value growth.
Download our Guide to the 7 Easy Steps To Successfully Increase Prices.
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