Price Consulting: Why a Price Consultant Service is Crucial
The need for price consulting is considerable because most companies choose to use a pricing strategy that leaves money on the table. Furthermore, such a pricing strategy often becomes the first step into the commoditization death spiral. In a commoditized marketplace, customers perceive their purchase choices as equal, and low price becomes the most important purchase driver. Something you probably want to avoid as it zaps the resources a company needs to delight its customers with the best product or service and the ability to create the highest possible market awareness.
We have to consider that profit drives every company. It provides the resources for the company to grow; for example, to develop more and better products, define more appealing services, spend more on marketing and sales, increase competitiveness, and even hire the best people. In short, profits fuel a company's growth rate and drive shareholder value.
We must consider that a company's resulting profit comes from only three variables. Those variables are the total cost of the company's operation, the total sales volume or what the company sells, and the price of what is sold.
Reducing costs will increase profits and sales, assuming the price stays the same. An increase in price or a decreasing discount and rebates also increases profits. But of these three, pricing has the highest leverage on profit.
Let us examine these two:
Sales Volume Increase: If the company can increase sales volume at unchanged prices, the cost of goods sold (COGS) also increases. So, the percentage margin stays the same while the dollar profit increases. But an increase in sales volume probably requires a company to spend more resources on marketing and sales. And most companies already spend as much on marketing and sales as they can afford, so it is unlikely the company would be able to or willing to pay more.
Lowering Costs: Like in "sales volume" above, companies already spend a considerable number of resources, infrastructure, processes, and effort controlling costs. However, should the company be able to lower costs, it is from a dollar number smaller than the price number (assuming that a product or service is sold above its cost). Furthermore, it may require the company to increase staff or infrastructure software spending.
Any improvements can take a long time to be realized in either the sales volume or the lowering cost case. Increasing marketing to increase sales volume does not happen overnight, along with process changes or infrastructure software that may be needed to maintain control over cost.
But what about price, then?
Well, first, let us consider that pricing affects the topline. Then, suppose we do a mental experiment to change these three. In that case, the cost, sales volume, and price by a single percent, keeping the other two variables unchanged. A one percent increase in sales volumes for the average company has been shown to increase profitability by 3.5%, and reducing cost by one percent increases profitability by 5.5%. Still, increasing prices or decreasing discounts by one percent increase profitability by 11.3%. Thus, pricing has the highest leverage on profitability. The reason is straightforward: any price increase goes directly to the top line.
And this is where price consulting comes in. Companies typically do not put very much effort on pricing. And even those who have staffing dedicated to pricing or have installed pricing software still only pay a small fraction of what they spend on controlling the cost and increasing sales volume.
This is because many companies feel unsure about pricing and the impact pricing can have on revenue and profit. For example, there is a common misconception that if prices are adjusted only one percent, as in the example above, sales volume will take a nose-dive. Or similarly, companies often believe that reducing the discounts and rebates their salespeople and managers can give away will sharply reduce sales.
This eventually leads to a situation where many companies ignore pricing as a profit driver. Instead, they decide on a price or a pricing strategy and do not change it. Often a straightforward pricing strategy inevitably leaves money on the table because they feel they do not have the resources and expertise to develop a more comprehensive strategy that is more effective in driving the company forward.
And this is where a price consultant comes in - to provide expertise on a pricing strategy that few companies have internally.
In general terms, price consulting activities fall into three categories:
Pricing process and best practice
Sales transaction analysis
A holistic approach to pricing based on willingness-to-pay research and detailed customer insights and segmentation.
Let's examine these in some detail:
The first category, process, and practice are about asking questions and finding answers. Such as:
What is the current pricing process? What resources are available for pricing? Are those sufficient? What is the appropriate process for a specific company? What authority does the pricing function have? What authority does it need? Does the company have the right software and data to make the pricing process efficient? If not, what software and data need to be made available?
One process activity is Price Waterfall. The entire process (in detail) from the price list (if one exists) or how the price is communicated to a customer through every step is examined until the pocket price is established. This includes on-invoice and off-invoice discounts and kickbacks. Make sure that manual steps (if any) can be removed or minimized, that minimum order volumes with discounts are enforced, and that shipping costs, shrinkage, and cost of payment terms are considered. Also, ensure that currency conversion (if appropriate) uses the right rate and that payment processors use the correct fees.
When looking at pricing from a sales transaction point of view, it is mostly about ensuring that the cost of goods sold is calculated correctly, and then a minimum margin is added to the cost. A minimum margin often comes from a rule of thumb in the company's industry. However, there is a value from sales transaction analysis over and above, just making sure prices cover the cost of a product or service. Such as:
Slow-selling products typically meet a specific need among customers, and if competition for such products is low, prices can increase considerably over the cost-based price. Sales will still be slow, but profit per sale will be high.
By examining the correlation between sales volume and discounts among the sales organization, it is possible to assess who discounts too much and too habitually—both on an organizational, individual, and sales channel level. Once known, corrective action can be applied.
Product categorization from "pure commodity to unique" provides the company with the option to stop all discounting on those products that are unique and increase their prices.
Knowing what products or product categories are more profitable than others provides information on what products should be promoted more than others and where the price can be increased. It also includes information on optimizing the product offered to increase corporate profitability.
Suppose prices are changed, and the transaction volume is high enough. In that case, it is possible to get a hint of a product's price elasticity and understand if pricing can increase over and above the company's sales volume and margin goals.
Finally, we have a price consulting that focuses on willingness-to-pay research and a detailed understanding of what a marketplace wants to buy and is willing to pay. The benefits of this are numerous:
Companies will understand who their most desirable customer profile is. This customer profile or segment will generate the highest sales volume and revenue so that the company can focus its marketing and sales efforts on that customer profile.
Companies will understand the best product-to-market fit - particularly the features, functions, and benefits that will yield the highest revenues and profits. These can be used in customer communication and, if not yet developed, be developed.
Companies will understand how to market efficiently and what marketing channels, methodologies, and messages will generate the highest demand at the highest prices, driving the highest possible revenue.
Companies will know what sales methods and channels are most preferred by customers, leading to the highest revenue and support of the highest possible prices.
Companies will know the pricing strategy, structure, and price levels that will generate the lowest sales friction and lead to the highest revenue.
So now that we know the different activities available from a price consultancy, what is suitable for you? Well, it depends on your company and circumstances.
First, focusing on the pricing process and sales transaction analysis leads to minor incremental improvements in a company's revenues, which means a few percent increase in revenues. This is not bad; with a few percent higher revenue yearly, it adds up. Adding profits and more resources to grow the company faster.
On the other hand, willingness-to-pay research often leads to transformational changes for a company. What I mean by transformational changes is to take a company to the next level quickly. I know this sounds too good to be accurate, but I have the data to back this up. When the information gathered in willingness-to-pay research is acted upon, the results will often lead to increased revenue by 50% to 100% for a small company and increasing revenue by some 20% - 30% for a larger company. Then, of course, there are outliers, companies with even more significant and a few with smaller gains from the willingness-to-pay research.
Request pricing consulting services to find growth opportunities today.
