Pricing Strategy to Drive Growth and ProfitPricing Strategy to Drive Growth and Profit https://rockcreekcg.com/wp-content/uploads/2022/08/WordPress-Featured-Image-August-2022-1024x536.jpg 1024 536 Rock Creek Consulting Group Rock Creek Consulting Group https://secure.gravatar.com/avatar/973a7b183816ab690817ef5b070658aa?s=96&d=mm&r=g
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In some ways, from a financial perspective, managing a business isn’t so difficult. You grow revenue by attracting more customers or selling more to existing customers. You also try to ensure that income greatly exceeds expenses – in which case profits are high!
Simple, right? But what’s missing from this analysis?
Let’s talk about pricing, something often neglected by management and something we’ve been discussing a lot lately. As a business owner, you may find yourself torn between increasing pricing or not. You may be wondering if you’ll lose customers or clients if you do. If you’re thinking these things, you’re definitely not alone. Today’s inflationary issues can make that decision all the worse, yet a sensible price strategy can have a significant positive impact.
Let’s consider a business with $1 million in annual sales. By raising prices by 5%, that business will have $1,050,000 in sales after the price hike. Importantly, that extra $50,000 flows directly to the bottom line because no extra costs are associated with generating this additional revenue.
But wait, nothing that’s simple. We also must consider how this will impact customer demand. Will customers continue to buy your products if you increase the price? Will you attract new customers at the same rate? At some point, too much of a price increase will result in REDUCED revenue. Different markets will have different levels of price sensitivity, or what is known as “price elasticity.”
There’s no formula for determining price, but here are some factors which should influence your decisions (again, depending on your business and industry):
- ‘Positioning’ of your business, for example, as a ‘premium’ seller or a ‘commodity provider.’ If your customers perceive you to be high-end, you’ll be able to charge more. But this perception needs to be earned. What are you doing to differentiate your business? Many of our clients have conducted customer surveys that provide valuable insights into how their companies are perceived.
- Value-based pricing. By understanding what your clients REALLY value, you can link your price to that value. For example, if you offer the opportunity to attend an event full of celebrities, you could charge a high fee PROVIDED the audience values association with those celebrities.
- Competitor analysis. In all markets, your customers are choosing between you and your competitors. Therefore, you need to think carefully about how your pricing and value proposition will be perceived in the context of the competition.
- Psychological pricing. If your customers perceive they’re getting a bargain’ or some advantage, that can encourage them to buy. This explains why are so many products are priced at $9.99 instead of $10.
- Dynamic pricing. In this case, you change the price based on time or seasonal factors. (Airlines and Uber are good examples, where the price for an identical journey can vary considerably!)
- Penetration pricing. Here you aim to attract customers away from competitors through aggressive discounts and promotions.
- Production costs. Over the long term, your sales revenue must exceed production costs to generate a gross profit. In other words, your sales must exceed the direct cost to make the sale. So you need to have a really good handle on these costs.
- Market demand. Generally, your customers will quickly tell you if your products are priced too high. Ideally, you can test different price points and then respond to the market accordingly.
Some of the above factors may present opportunities for your business. Also, keep in mind these Best Practices regarding pricing:
- Forecast based on changes in the price you are considering. This educates you on the potential impact and helps identify the best options while eliminating the wrong ones.
- Test your ideas through formal research, where possible. This is what the largest, successful companies do before they modify prices. Informal research can also give valuable insights. Asking a few customers or colleagues for their views is a starting point.
- Review prices at least on an annual basis. To make the process more efficient, develop policies or guidelines so you’re not starting from scratch each time.
- Get some help, especially to understand expenses, cash flow, simulations, and forecasting. Business is dynamic, and many variables can change quickly. Having a good forecast that considers all the variables and different scenarios is critical to help guide your decisions.
Remember, a pricing strategy can have a significant impact without additional expense. That’s why it should be on the management agenda!
Don’t miss out on potential profits. We can help you create a forecast and pricing plan that fits your business needs. Call us today. We’ve helped hundreds of businesses, and we can help you too.
Rock Creek Consulting GroupAll stories by: Rock Creek Consulting Group
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