Pricing Strategy to Maximise Sustainable Profits
In many businesses, Product pricing is the biggest opportunity available to optimise your profitability.
A comprehensive Real-Life Study (Hinterhuber 2004) examined the effect of implementing a 5% Value-based price increases on a sample of Fortune 500 companies.
It found that typically a five percent increase in selling price, increased operating profit by an average of 22 percent – far more than any other tool available to management.
For most companies, having an effective pricing strategy is undoubtedly the most beneficial way to increase profit compared to any other tool available to operational management.
There are three broad pricing strategies, commonly known as the” 3 C’s of pricing”, used to define the product pricing process:
- cost-plus,
- competitor-based, and
- customer value-based.
Whilst there is general agreement that Customer Value Based pricing is conceptually likely to achieve the highest level of profitability, not all businesses are able to apply value-based pricing and the complexity and timescale for implementation is higher in B2B than
Each of the 3 pricing strategies has its place in business:
If you’re running a petrol station for example, petrol is effectively a commodity based on the cost per barrel of oil in $US terms, with very slim margins for the petrol station owner, you’re probably paying cost-plus pricing.
If you are in the retail space, pricing in line with your main Competitors and eCommerce sites offering identical or easily comparable products will be close to the price the market can sustain.
If your products serve multiple markets, you must consider the sensitivity of each market as well as the product.
You must understand that your customers care about value – and nothing else
Value-based pricing means setting a price your customers will be willing to pay based on their perceived value to them of your product or service – not on the cost of providing it.
Can you connect with your customers in a way that goes beyond mere products? If you can, you will be able to price your products higher than any of your competitors that can’t.
Simplistically, you need to set a price that’s high enough to ake you a decent profit, but low enough to entice the customer.
Value Based Pricing Strategies in B2B Industrial Marketing
There are different market-specific challenges when comparing B2B and B2C transactions.
In B2B transactions companies face competition from competing suppliers.
You need to understand from the outset that will take time to build closer relationships and a high level of trust with your biggest customers.
For B2B Companies currently using a Cost-plus pricing strategy there is an alternative, more gradual approach to moving to value-based pricing.
This is explained in detail in the Financial Control program.
Value Based Pricing in B2C Businesses
At this stage there is no generally accepted strategy for the Customer Value Based Model in the B2C sector, but companies in some niches are creating successful strategies, which are far less structured and more intuitive than the B2B model.
Clearly, getting buy-in from individuals who are considering buying, or continuing to buy your product when you increase your price, is a completely different scenario to getting buy-in from your B2B Customers
In Conclusion
If you think that the Product and Pricing Strategy Program might be right for you at this time, you can book a free 30-minute call with me personally, so we can explore whether it is a good fit for you and your business at this time.
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