The Power of Better Pricing
For almost every business, improving your prices will have a more dramatic impact on your profit than anything else. Better pricing drops directly to your profit line – new business drives turnover, not profit, and improving overheads has a much lesser impact.
The McKinsey Global 1200 Pricing Study revealed that achieving a price rise of just 1% (other variables remaining constant) would increase profit by an average of 11%. But the actual percentage increase in profit can be much greater.
Typical pricing issues?
Each organisation will have its own challenges, but there are some very common ones. Very often, you might be using a “cost plus” pricing approach – this means that when deciding your price you use the cost of production, plus a profit element. Combine these two and you have the price to charge. While it is important to know cost, the key element in price is value. This means what is it worth to your client or customer? Understanding value, and more importantly how you can increase value, is one of the foundations of better pricing. Here are some of the challenges that we work on with our clients in Europe and North America:
- Clients are shopping around, getting several quotes, then playing you off against the lowest.
- Do you understand how to have a detailed scoping meeting with a client, even where the work is unstructured and impossible to price in advance?
- Procurement professionals are threatening to take you off the approved suppliers panel unless you agree to extra discounts or longer payment terms.
- You are launching a new product but are not sure how to price it – will you end up asking too much or too little?
- Market prices are dropping due to new, or desperate, competitors – clients just won’t pay what they were paying last year.
- You find it awkward to talk about money. So clients are left in the dark about the total cost, or you give a low optimistic quote at the beginning.
- Your costs are going up year on year, but you are facing clients who are always looking to get more for less. You are caught in the middle and profit is dropping.
- If you are not sure what your client’s budget is, how do you make a sensible proposal, without risking being way too high, or too low?
- What alternative pricing offers can you make that offer the opportunity to tie in the client longer term?
- Do you end up with fixed prices, even when the scope of work is very vague?
- As you approach the end of a piece of work, you realise that you have gone way over the initial budget because there were numerous changes to the work scope.
- At the sales end, you have people with monthly targets to achieve, and will readily agree to discounts or extra specs to close the sale, but at a lower profit.
- Are you missing opportunities to earn extra profit because you don’t understand what the client would happily pay extra for?
- Do you have a culture of over delivery, saying yes to clients when they want extra, but not talking to them about any extra charges in return?
- Do you chase every opportunity rather than understanding which are the best opportunities for you, so you end up wasting time and money on no hopers?
- Do you lack confidence in talking about money with your clients, avoiding this not just at the outset, but throughout your delivery to them?
- How do you negotiate with big clients who are used to demanding and receiving substantial discounts? Can you hold the line?
- Should you offer a low price to get a first piece of work from a client then look to change more, once they have seen how good you are?
- Do you know how to have a “difficult conversation” with a long term existing client, where you really need to bring their prices up to date?
How to improve prices...........
without losing sales
A typical Price Improvement Project has four stages.
In Phase One we start with a series of structured interviews with key personnel. People on the front line as well as those in finance, marketing and operations. The purpose is to fully understand the realities of pricing in your organisation – what are the challenges, what’s works and what doesn’t? We use this data to enter
Phase Two with a Learning Harvest. This document draws out the themes discovered in Phase One in order to identify priority actions that will have the strongest effect on profit and on client satisfaction. We use the Learning Harvest to uncover the key issues and agree the best solutions with you. This enables us to combine your deep knowledge of your business, your sector and your clients, with a pricing toolkit designed specifically for your organisation.
In Phase Three we develop Workshop and Training interventions so that your key people regain confidence in their pricing and learn the skills to enable them to discuss and agree prices with clients in ways that work for both of you.
Then Phase Four involves ongoing coaching support, giving you and your front line staff the opportunity to continue to learn, to share what’s working and to address new challenges. This execution phase is where “the rubber hits the road” and we ensure that we are available to give real time support whenever needed.