Sophistication in pricing by management and salespeople is an excellent driver to grow earnings rather than just looking for ways to cut costs.
Instead of growing their profits with sophistication in pricing, many businesspeople miss growth opportunities when they mistakenly cut muscle – usually in human capital and branding.
It’s long been a Biz Coach caution. Even in a weak economy, a secret to success is to expand marketing. Not only will you maintain market share, you will grow it when the economy improves because your competitors cut their branding investments.
Training about operational costs and understanding human nature on the customers’ willingness to pay are vital in pricing for profit.
The training should include experiential, real-world role-playing exercises.
Otherwise, you risk pricing your products and services too low. This means you lose opportunities in revenue. Or you risk pricing too high, which means you lose customers.
Companies that employ mere order takers instead of savvy, professionally trained staff miss opportunities for growth. Or worse, the companies go out of business.
(Scroll down to the “Coach’s Corner” for tips on pricing and training.)
Now, a McKinsey & Company report (www.mckinsey.com) also points out how to turn pricing power into profit. It was authored by Jay Jubas in Stamford, Connecticut; Dieter Kiewell in London; and Georg Winkler in Berlin.
They eloquently argue in favor of taking five steps to leverage a better pricing approach for profits.
They cite a case study:
An international provider of technical gases had a problem. With a large, highly fragmented product portfolio of more than 500 SKUs, customers in a range of industries, and a broad segmentation of customers by size, prices varied widely even for the same product. And while managers believed there was room to increase prices overall, they had no rational basis from which to challenge current pricing practices.
The solution? An analytical tool to pinpoint new price drivers, redraw customer segments, and recommend updated prices. After piloting, the tool was rolled out in seven diverse markets. The company supported this new approach with intensive sales-force training and eventually reset up to 100,000 prices for 150 SKUs per country — resulting in an increase in return on sales of three to five percentage points, without significant changes in volume. The whole program took just three months.
The authors strongly assert that such an approach can provide a permanent solution for earnings growth. Agreed.
Here’s an edited excerpt of the authors’ five recommendations:
1. Provide meaningful transparency into pricing data
When raw-material prices rise, sales reps don’t know which prices should go up, by how much, and how quickly. Without that knowledge, profit opportunities evaporate. The front line needs meaningful transparency into price levels, discounts, and other leakages at different levels of granularity and over multiple time periods.
2. Understand what customers really value
For all the sophistication provided by advanced analytics to master a complex array of prices, the price of a product or service ultimately depends on how much a customer thinks it’s worth—that is, “value pricing.” The best companies augment pricing analytics with detailed customer insights to identify all the key buying factors that determine how much a product is worth to a given customer, understand how those factors compare with competitors’ offers, and quantify the value created for the customer.
3. Move from sales reps to ‘value negotiators’
Determining the best price means nothing if sales reps can’t convince customers to accept it. For this reason, it’s critical that sales reps have important pricing capabilities, such as sound judgment to manage time, negotiate thoughtfully, and adjust pricing guidelines in order to maximize value and minimize the risk of customers defecting.
4. Provide on-the-job training to build confidence
While most companies understand it’s important to build the pricing skills of their people, few move beyond basic training in classes or online. Successful companies, however, use adult-learning techniques, such as experiential learning, to embed the new skills in the front line.
5. Change the culture
In our experience, even the best pricing programs will fail in the long term without a deliberate commitment to overcome the entrenched habits and shifting priorities that doom most change programs. Ingraining pricing success over the long term requires putting in place an “influence model” that includes role modeling, fostering understanding and conviction, developing talent and skills, and implementing reinforcement mechanisms.
While all aspects of the influence model are important, pricing leaders should pay particular attention to developing talent and skills by coaching their people.
Well put.
From the Coach’s Corner, here are related tips for pricing, sales training negotiating:
For Stronger Profits, Avoid 11 Typical Pricing Mistakes – In general, how can you manage the sweet spot – between your price-optimization and costs? Many companies make 11 pricing mistakes.
To Cope with Rising Costs, Review Your Pricing Strategy – Increased costs weigh heavily on the bottom line. If you’re being pressured by costs, it’s probably time to review your pricing strategy. You’re not alone. No business is immune from rising costs in fuel; rent or real estate; labor; health insurance and ObamaCare; marketing; and equipment. Lest not you forget all the taxes.
The 7 Steps to Higher Sales – Secrets for sales success – seven steps to higher sales, five value perceptions that motivate customers to buy, and the three-step process for overcoming sales objections.
Top 18 Attributes of the Best Salespeople – What’s needed to be effective in sales? Merely having a gregarious personality will no longer cut it in the 21st century. Here are the top 18 attributes of the best salespeople.
Your pricing reflects everything you do as a business.
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