Maximize Profits with a Transformational Pricing Strategy
As a pricing consultant, I tried LinkedIn's polling features to understand how business people view the benefits of maximized profits with an optimized pricing strategy. Using that feature, it is possible to launch a one-question survey with up to four short answers. I discovered that almost 85% of respondents want to use pricing to transform the company they work for. I applaud that position as it is the same as my company and me - to use better and optimized pricing to transform a company and move it to the next level. I mean that better and optimized pricing uses a pricing strategy focused on maximizing profit rather than sales volume. As I'm sure you already know, driving to maximize profits gives a company the resources to elevate itself. Maximizing profits enables a company to develop more products, define more services, and increase the number of resources and budget for marketing and sales. Higher profits even allow a company to hire the best and most expensive people.
Almost all the individuals who responded to my poll work professionally with pricing. These individuals typically (but not always) focus on better pricing only from a sales transaction point of view. This means they are primarily looking at cost and price from a minimum margin point of view to ensure these minimum margins are met. Sometimes they experiment with changing the price to see what happens with sales volume at different prices. This is easy to do, primarily if they use pricing software to support their work. There's nothing wrong with looking at a price from a cost and margin viewpoint; it certainly has its benefits. Still, it rarely yields substantial growth in profits enough to transform a company to the next level. Or maybe I should say it will take a long time. The reason is relatively straightforward. Analyzing sales transactions only reflects existing customers, not the entire market. Think about it in this light: every company goes to market with a specific focus on a particular type of market vertical or customer profile. They do so with a specific position and with certain marketing channels and marketing messages. Companies also go to market with a specific sales channel and methodology and, finally, with a price that, more often than not, has been derived from cost-based pricing, from looking at a competitor's pricing, or simply by guesswork. Some companies go to market with what they call "market price" because they "know" what "the market" is willing to pay. Unless they are in a market where prices are published, there is no reliable way to know what "the market" will pay. So, the market price is a euphemism for guessing. It may be an educated guess, but it is still a guess.
This means that the company gets customers from the market vertical the company targets and only those individuals or companies that accept the company's position and marketing. And herein lies the problem. The company and its customers live in a bubble. There may well be other market verticals that would support higher sales volume and higher prices that could be accessed with an alternative customer targeting and with different marketing messages, different positions of the company, or a different sales methodology. But unfortunately, by just analyzing sales transactions, the company will never know.
People talk about the "power of the percent" in pricing, meaning that pricing has the highest leverage on the company's ability to maximize profits. For example, for an average company, increase the price by 1% or decrease discounting by 1%, generating an 11.3% increase in maximized profits. This is a much higher growth rate than increasing sales volume a single percent or decreasing costs by a single percent.
Sales transaction analysis typically yields margin improvements that are counted in a percent or two of revenue. And this leads to long-term incremental business results improvements, which is good, but it is still a long way from transforming a company.
For a company to be transformed by pricing, a different methodology must be used. It does not replace sales transaction analysis in any way but is instead a methodology that would be in addition to it. That methodology is to conduct willingness to pay research and, of course, for a company to act on the results.
Willingness-to-pay research means that the company polls the entire market and accurately measures what the market (as opposed to only its customers) is willing to pay for a product or service. This initial measurement is segmented by a legion of attributes that yields the following:
Understanding the customer profile with the highest willingness-to-pay will support higher prices simultaneously as it leads to higher sales.
An understanding of how competitive positioning affects willingness to pay so that the company can position itself as the most desirable choice for potential customers in the market—driving higher sales volume with support for higher prices.
Understanding what marketing channels and messages lead to the highest conversion rate and generate the highest demand for the company's products or services.
An understanding of how different sales methodologies and channels affect what the market is willing-to-pay for said product or service, so the company can select the channel and the methodology that leads to the highest sales volume at the highest prices.
And then, an understanding of the pricing strategies' specifics would minimize sales fiction and maximize profits and revenue. That often means stratifying the pricing strategy according to the most desirable variable in the market.
When willingness to pay results are acted upon, it typically yields business results improvements that are substantially higher than expected from the 1 to 2 percent gain sales transaction analysis. Typical results are a doubling of sales growth and 25%-40% higher margins. But there are also outliers, companies that, within less than a year, more than doubled in size from acting on the information gathered in willingness-to-pay research. And who would not want that?
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