The Power in Pricing
The Power in Pricing
You can really taste the words: “pricing power.” Can’t you? To be honest, it tastes really good, doesn’t it? You need to know that your pricing gives you power. You might be asking, “What is pricing power?” Well, an expert in the field, Warren Buffet, hit the nail on the head when he explained what pricing power is. He stated:
“Pricing power is the most important criterion for investing in a business. Pricing power is the ability to increase prices and not lose sales volume.”
What do you think about that? Raising pricing and making more sales. Pretty powerful stuff, isn’t it? When this self-made multi-billionaire and world-famous investor says pricing is essential for your business, especially pricing power, then it’s time to prick up your ears and take onboard this free advice. Warren Buffet has a current net worth of $82 billion and he made his fortune from zero. He did it by searching for and investing in companies that had no realization of the pricing power they possessed. This man knows what he’s talking about. So, we should take notice and executives should carefully examine what’s going on in their companies. They need to ask a very pertinent question: “Do our products or services have pricing power?” A consequence of having unrealized pricing power is pretty much the same as leaving money on the table, and in many cases, a serious amount of money is left on the table unnecessarily.
Nearly almost all companies, that have been in business for some time, will have products or services that have a degree of uniqueness about them, as well as some products or services that are just commodities and some other products that take up the middle ground between being a commodity and unique. Now most companies, most of the time, will have a pricing strategy that deals with these three categories of products or services in the very same way. For instance, they use the same markup from cost or even try to find comparable services or even from their competitors (this is near-impossible to achieve when a product or service is totally unique!), and then they go and set the exact price as the competition. What often happens with this type of pricing strategy is that the unique products are often grossly underpriced, and at the same time, the commodity products are overpriced; when this happens the company will end up leaving money (sometimes a significant amount) on the table for their unique products or services and have a less-than-optimum sales volume for their commodity products. This is definitely not the type of situation you want to find yourself in! So, what’s the solution?
Well, the solution to this problem is often quite simple. The first step you need to make is to identify which of your products or services are unique or commodities or those somewhere in-between. The latter means those products or services that may have some aspects that are unique but may also have elements that are more of a commodity.
Once this categorization is completed, the time has now come to implement a completely different pricing strategy for each of the various categories of products or services that is on offer to your customers.
By definition, there is real tangible pricing power for products or services that are unique. What makes them attractive is that there are few or even no alternatives to the unique products or services in the marketplace at this current time. So it makes total sense to stop discounting these unique products and services or at least reduce any discount to the bare minimum. Also, the practice of offering discounts to purely close sales is totally unnecessary. It’s well-known that many salespeople are compelled to give a discount for a twofold reason: they feel good and the customer feels good receiving a discount. But you know what, adding a discount might not be necessary to close a sale when you're dealing with a unique product or service.
The second step is for you to realize that you need to increase the prices for your unique products or services. There are some factors that you need to take into consideration when looking at the amount of increase for your unique products or services. It’s preferable that you take a measurement and model how the price will affect the sales volume so that you can identify the price that will yield the higher sales volume and the price that will generate the highest revenue and then you will be able to set a price for each unique product or service. It is paramount for you to determine at what price there are price walls (psychological price points where small changes in price can cause substantial changes in sales volume). When you are armed with this information, your company can set the right price for your unique products or services. The “right” price may differ based on each company’s strategic goals – for instance – it may be set for maximum revenue or profits or sales volume or even a combination of all three.
Also, you need to understand that a completely different strategy needs to be implemented when it comes to your commodity products or services because commodities are sold by price alone, meaning that there’s nothing that differentiates these products or services compared with your competitors), and thus, commodities lack any kind of pricing power, except for price and brand.
The next thing that should happen when you have identified your commodity products or services is for your company to ask itself a few direct questions. Such questions that need to be asked for each individual product or service can be like some of the following examples:
Does this product or service generate any kind of contribution margin? If not, is this a product or service that we really need to sell? Does it add any value to our unique products or services? Do we really have to sell this in order to deliver a complete product or service to our current clients? And, do our clients expect to buy this product or service from us?
If after asking these questions you get a “no” answer, then you need to discontinue that product or service, because it is a distraction for your company. However, if you get a “yes” answer to any of the questions posed, then there are two possible actions open to you to take. The first possible action is to work relentlessly to take the cost out of the product or service – but you have to be incredibly careful not to reduce the quality or the benefit that it provides to your customers. The second possible action is to strengthen the brand because a stronger brand will definitely lead to a higher sales volume of commodity products or services. Also, an added benefit is that a strong brand always leads to some level of pricing power, even for commodity products and services. Thus, ensuring you have a strong brand will allow your company to increase the price even for those types of products or services, even if it is just by a minor increase.
So, now we have reached that point when I want to discuss the strategy for those products or services that are classed as “in-between.” These are the products or services that you identified that are not truly unique but they might have some unique aspects attributed to them. You now have two options available, you can either make the product or service totally unique, or you need to increase its “uniqueness.” Also, at the same time, the questions mentioned earlier are highly applicable again to be answered and will serve you well in this process.
In closing – do I allude that gaining pricing power is an easy process? Not at all. However, what I’m saying is that executives in your companies need to be fully aware that there is something called “pricing power” that needs to be attained for the products and services that you offer your customers. The very fact that “pricing power” exists, means that you can, relatively easily, put in place the process I’ve suggested above. If your company has a dozen or so products or services, then this can be a relatively quick process. If, however, you have 10,000 SKUs and dozens of services, then this process will take a long time, but the earlier you start, the better, and the earlier you will begin to reap the benefits of gaining “pricing power” for your products or services. Since the market that you are involved in is in a state of constant change, this is not going to be a one-off process but an ongoing one. It is a process that you will need to regularly evaluate and subsequently reevaluate according to the current climate in the marketplace, sales volume targets, as well as the products and services of your competitors, etc.
So, now the ball is firmly in your court, the reader, to gain more pricing power for your products and services. Lastly, be confident; you can do it!
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