How a Pricing Consultant Transforms a Company
Most companies treat the pricing of their product or service almost as an afterthought, so companies need to use a pricing consultant to define their pricing strategies. A price consultant can often bring expertise that a company may not have, ensuring you price your product or service correctly and don't leave money on the table.
Almost all companies look at pricing from a simplistic point of view and don't put a lot of resources into their pricing strategy.
A typical company has considerable resources to control its costs and increase its sales volume by creating demand with marketing and marketing campaigns and then fulfilling that demand by hiring the best salespeople and training them the best they can.
On the cost side, companies put in expensive software and hire an army of people to control costs to ensure the most efficient business process and lowest cost possible.
In many companies, pricing only becomes an issue when it becomes urgent. This can be when launching a new product and the salespeople need a price list. Or prices need to go up on the website, or there is a need for price in a new product press release, or there is a trade show, and if nobody knows what the price is, how are they going to be able to tell visitors to your booth at the tradeshow?
This pricing urgency often means companies cut corners in their pricing strategy. They may decide to try to find a competitor's price list, which seldom works. They may try to look up competitors' prices online and set a similar price. That also doesn't work for a couple of reasons. Or they use simple gut feelings or guesses or think they know the "market price." Or they may use cost plus to calculate their cost and then add a margin based on a rule of thumb.
And all of these methods have in common that they leave money on the table. But let's examine them a little bit, one by one. First of all, finding a competitor's price list is pretty hard. Getting that info from joint customers is almost impossible as they'll be very reluctant to disclose what your competitors offer them for a similar product or service. Maybe you can get a price list from a friendly reseller, but it's often last year's price list or perhaps the international price list. It may be the GSA schedule that companies used to sell to the government, and it's almost always incomplete. And you still don't know what kind of deals, discounts, and bundles the competitor does, so it's not a very good data point for pricing. And the same thing applies even if the competition has prices on their website. You don't know what deals and what bundles they may do. Maybe they geo-tag their website. So, if you're in different areas, you see different prices; maybe they change the prices eight times a day as some retailers do to try to find the optimum price by trial and error. So, that is also not a good source of pricing.
Guessing what customers are willing to pay for a product or service is inaccurate. Some companies say the "price to market," which is a euphemism for guessing - how would they know what "the market" is paying unless it is published? So, yes, it works in retail, but that's about it.
And, then, there is cost plus. Of course, you can calculate a product's or service's cost and slap on a rule-of-thumb margin. Different industries have different sorts of rules of thumb. The traditional manufacturing industry often adds 35%, or maybe 50%, on top of costs to set prices.
In other industries, like retail, costs are doubled to arrive at a price. Some industries take the cost times five. Other industries take the cost times 10. And none of those price points have anything to do with what customers genuinely want to pay.
And this is where a pricing consultant comes in - to bring expertise to a company it rarely has. Consider also that price consultants have three main activities, and few, if any, have expertise in all three.
The first pricing consultant works very much as pricing managers do in a company, especially a manufacturing company. What these pricing managers often do, and consequently what a pricing consultant of this kind does, is that they're very, very good at calculating the actual cost of a product or a service. Then often, either they add that rule of thumb industry margin we just discussed or attempt to find competitors' prices and use that as a base for price setting. Some companies have what they call a "margin corridor," meaning the price is not supposed to be too low (and kill margin) or too high (and kill sales volume). How a company figures out what these margin points are, I don't know - I just know that they will be different for different products or services. And for different customer segments and different customer circumstances. This isn't taken into consideration. Neither is what customers are willing to pay.
There is also an activity called a Price Waterfall. This means doing a detailed review of the entire business process, from the price on a price list or a quotation to the price of an invoice and further every detailed step down to the pocket price, which is what the company gets in the bank. It is about identifying process gaps where profits "leak out." This could be off-invoice rebates and kickbacks such as SPIFFs for a company selling via a channel. It can be manual data entry steps - on average, 1% of manual data entries are erroneous. It can be the wrong quantity discount being applied. A customer may buy 150 units of something and get the "over 1000" price. Or services that have a price in the pricelist and are given away. Sometimes the wrong shipping cost is applied to an order. The details will differ for each company depending on its business model and complexity. Once these leaks are identified, a company can do something about them. Train people. Add or revise the process. Possibly even add software that better supports the process. In a typical company, when it first does a Price Waterfall, some 3-4% of revenue can be recovered. This needs to be done at least annually as people and processes change. In a subsequent Price Waterfall, 1% - 1.5% can typically be recovered.
Sales transaction analysis is about understanding the relationship between sales volume and gross margin for various attributes of how your company goes to market and the market itself. What this means is to understand that relationship for:
- Different sales channels
- Different sales territories
- Different sales managers and salespeople
- Different discount rates
- Different lead generation channels (if known)
- Different brands (if appropriate)
- Different product families and products
- Different product quantities sold
- Different product bundles
- Different payment terms and history for returning customers
- And other variables that make sense for your company and are available to your company.
Consequently, sales transaction analysis identifies underperforming products in terms of margin, underperforming pieces of the sales and marketing organization, and especially the sales organization, where the organization can hold prices and discounts too much. This then provides an opportunity for the company to train people better and understand where profits are leaking out throughout the organization.
Now, in the first category, we talk about the pricing process. In the second, we talk about sales and transaction analysis; these activities typically add a few percent of revenue as pure profits to the company. This does not sound like much, but when this is compounded over several years, it starts to make a real difference.
The third type of price consultancy is what we do in my company. And we're unique. We do willingness-to-pay research. This research can accurately predict sales volume and revenue at different price points. We can identify psychological price points called Price Walls where small price changes substantially affect sales volume or revenue.
But that's just the very first step. Because then, take that prediction and segment it by different customer categories to advise our clients on what customer category or persona will lead to the highest sales volume and revenue. We do the same with product or service features, functions, and benefits. We can identify which of them leads to the highest sales volume and revenue. And we advise our clients to use these in promotions because it will lead to the highest sales volume and revenue. The same applies to marketing. We can identify the marketing channels and messages most effectively driving the product or service demand. We can identify the sales channels and methodologies leading to the highest sales volume and revenue. And finally, from that prediction, we can assess and develop the pricing strategy that will lead to the lowest level of sales friction and the highest possible sales volume and revenue.
Thus, our work becomes a recipe to elevate a company to the next level. When our advice is acted on, it's not about adding a couple of revenue percentages. Instead, it's about a complete company transformation; it could be increasing sales volume by 25- 40%! It could increase profitability by 50%. There are outliers, of course. The growth rate of some companies easily doubled or more in a year, and with this rapid growth also comes a substantial improvement in shareholder value, which is very important for the company's owners.
So, in closing, pricing consultants bring a level of expertise that relatively few companies have, and they will always make a difference. That difference depends on the size of the company, the business's complexity, and the activities the consultant focuses on.
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