Product and Service Pricing for Investors
Why a Pricing Strategy and Corporate Valuation are Inseparably Linked…
CEOs are Unaware of Pricing as a Profit Leaver
Investors know that, among average companies, research has shown that a 1% increase in price or an equal decrease in discounts generates an 11.3% increase in EBITA. This is considerably higher than an increase in sales volume or a reduction of cost by 1%; 3.5%, and 5.5%, respectively.
Data shows that many CEOs are unaware of this fact. The results from polling 561 qualified CEOs show that 82% believe that a higher sales volume is the best way to increase EBITA. 6% believe a lower cost is the best way to increase profits, and 12% say that higher prices or lower discounts have the highest impact on profits.
We can speculate on why that is, but the bottom line is that most CEOs are simply uninformed or even ignorant about the value of their pricing strategy in driving profits. Investors, however, are not.
Capital Providers Know the Importance of Pricing
Sjöfors gains most of our business from capital providers such as venture capitalists, private equity groups, and family offices. Organizations that are better in tune with how profit affects valuation compared to many companies.
Let's examine how to develop a pricing strategy that works as a driver for both profit and sales volume. First, pricing needs to be based on what customers are willing to pay for a product or service. Secondly, what drives that willingness to pay and what features/functions/benefits lead to a higher willingness to pay must be understood.
It is also important to understand what marketing and sales messages, channels, and methods are most effective in driving a high willingness to pay. If the right approach is used, all of this can be discovered with high accuracy in marketplace research.
Consequently, when following best practices and when pricing strategy is based on willingness-to-pay research, companies have a lot to gain.
Pricing Strategies for Unsurpassed Growth
Companies, and investors, will often enjoy a more than doubling of valuation thanks to a rapid increase in profits, typically a 25% - 40% increase in EBITA, and a doubling of sales growth.
• Speed: Companies can alter their pricing and discounting strategy to gain more profits overnight.
• Resource utilization: Companies spend vast resources on cost control and driving higher sales via marketing and sales organization. Better pricing performance can be as simple as updating discount policies and a price list or updating a website.
• Customer segmentation: Companies that follow best practices gain a detailed understanding of the segment that will lead to the highest sales volume at highly profitable prices.
• Marketing efficacy: Companies will know what marketing channels and messages lead to the highest sales volume and revenue.
• Sales efficacy: Companies will know what sales channels and methods will lead to the highest closing rate.
• Pricing strategy: Companies will know what pricing strategy leads to minimum sales friction and the highest sales volume and revenue.
Download our Guide to the 7 Easy Steps To Successfully Increase Prices.
Contact a pricing consultant to fix your pricing issue today.
