Getting your pricing right is important. It doesn’t matter if you are running a small legal practice in Adelaide or running marketing for a multinational retailer, missing the mark on your price points can have an outsized impact on your business.
How can you achieve pricing success? A quick search on the internet shows there is no shortage of tools and approaches but in many cases, they are narrow in focus. Furthermore, dynamic pricing has become something of a Holy Grail in pricing circles these days in that it is often talked about but rarely achieved. This is especially true if decision makers lack access to the right data as the application of dynamic pricing could do more harm than good.
However, it doesn’t need to be this way and you can set your prices with confidence if you follow these six steps for successful pricing.
Step 1: Have the Goal in Mind
Before you set out to overhaul your company’s prices there is one thing that you need to know above all else – the goal. In some cases, a price change is meant to win back market share, whilst in others cost increases drive a price change, or it could be an attempt to optimise profitability.
The reality is that most large-scale price changes are probably a combination of all three. As such, starting the goal will give you and your team an idea of the result you are trying to achieve.
However, it should be more than just having a vague concept of what the future should look like. Instead, starting with the goal in mind should act as your Southern Cross – or North Star for those in the Northern Hemisphere – in that it will point you in the right direction throughout your journey.
Step 2: Know Your Customers
Some pricing strategists will say that the second step is determining demand, but it goes deeper than this.
The reason is simple – your customers are the primary drivers of demand. Sure, marketing and advertising can impact customer perception but at the end of the day, it is the customers who decide for themselves whether they want to buy whatever it is that you are selling.
As such, if you want to successfully set your prices you need to know your customers better than they know themselves. For example, why do they visit your stores or buy your product? Do they use their mobile phones to check your prices while visiting your stores? What times of the day and days of the week are the busiest?
Having this information will give you the context needed to better interpret how your demand curve functions and this will set you up for running several experiments. These include in-store pricing experiments, surveys, and even competitor analysis.
Step 3: Know Your Costs
Whilst this sounds simple, you would be surprised to learn that most organisations don’t know their costs.
Sure, they know their what their payroll, rent, utility costs are, and they even have a relative idea of their cost of goods sold. However, very few companies know what their total cost is and this puts them at a massive disadvantage when setting price levels.For example, if you are a retailer trying to survive on razor-thin margins, then a rounding error in your pricing formula could mean the difference between success and bankruptcy.
Once you know your costs then you can either use a cost advantage, such as lower logistics costs, as a differentiator or as an element of a target pricing strategy which levers a predetermined profit margin to set price points for critical SKUs.
Step 4: Know Your Enemy
Okay, this comes off as a bit Sun Tzu, but there is a tremendous advantage to knowing your competitors – not only what have they done in the past but also what they are likely to do in the future.
Competitive intelligence has become standard practice and the idea is to go beyond benchmarking competitive price points. Instead, you want to know how they are likely to react to a price adjustment, and what impact will this have on the move you are planning to make.
Step 5: Have a Method
Any chef will tell you that you need quality ingredients to make a great dish. They will also tell you that you need a recipe.
When it comes to successful pricing, this means having a tested method in place.
In fact, there are many ‘pricing methods’ out there to choose from, including markup pricing and perceived value pricing but the key to success includes:
a) knowing which method best fits your market and;
b) using it consistently as this will give you the data needed to determine if your method is working or not.
Step 6: Make a Decision
You’ve done your homework by getting to know your customers, understanding your costs, and running pricing experiments. You’ve even gone the extra mile by determining how your competition will react. The next step is to make a decision regarding your pricing strategy. Remember your goal and put your new prices in place with confidence.
Summing it up…
Successful pricing doesn’t happen on its own, it starts by having a goal in mind and knowing your customers, your costs, and your enemy – the pesky competition.
Managing a pricing program is a bit like being a scientist in that you are constantly running experiments to see what works and what doesn’t. Another similarity is the need to have a method as this will help you to gauge the impact of your experiments.
Lastly, don’t be afraid to make a decision as the success of your pricing program hinges on it.