When was the last time you took a serious look at your company’s service pricing strategy? I worked with a client last year who hadn’t many any significant changes to their pricing in almost 20 years. While they made minor adjustments over the years to reflect competitive pressures, they never re-evaluated the basic assumptions and core calculations around their published price list. They realized they might have a pricing problem when they noticed that they weren’t wining as many competitive bids. In addition, the bids they did win were not very profitable.
It might be time for your company to re-examine its pricing strategy if you find yourself in a similar situation. Before you rush into a complete overhaul of your price book, it is important to have a clear objective of what you are trying to achieve with your pricing. Remember, pricing is a marketing function and marketing is all about perception so how you price your services will influence your outcomes in the market. For example, your objective might be to take market share from a well-entrenched competitor. Alternatively, it might be to avoid leaving money on the table. It might be to accelerate penetration into a new market or it might be to simply cover your costs and/or subsidize another part of your business. It is very likely that the pricing will be different depending on which objective you choose. Once you have determined your objective you can start work on establishing your pricing strategy. There are three (3) perspectives you need to consider when determining your optimal price.
• Competitive Price: This is the price that your competitors charge. It is best if you can build or get access to a database on competitive pricing. This will help you understand what the highest, lowest, mean and median price points are within your market.
• Market Perceptions: It is important that you have a good grasp of market price sensitivity. You’ll want to understand at what point the price is perceived to be too cheap that quality is questionable, a bargain, getting expensive, or too expensive to afford. The answer will help you understand the optimal range at which you can price your services. One of the best ways to obtain this information is through survey research.
• Your price & cost structure: It is important that you consider your current cost when re-evaluating your price strategy. Obviously, you must know this if you are going to set prices high enough to cover your cost if that’s your objective. You’ll also have a better understanding of how much margin you can achieve under different price scenarios when you have this information at hand.
These perspectives provide the constraints you need to optimize your objective. For example, if your objective is to take market share from a competitor through a more aggressive price strategy, than you need to not only know where your current price is in relation to your competitor(s) but you’ll also need to know what price range the market (i.e., customers, prospects) perceives as optimal. You may run the risk of pricing your service too low that the market perceives the price as too cheap to be of any value. On the other hand, it may be difficult to win business by raising your price if the market already perceives your price as too expensive and your price point is already significantly higher than your closest competitor. However, you can justify an increase if you are perceived as a bargain even if your price is higher than your closest competitor.
Hopefully, it is becoming clear to you why these perspectives are so important in establishing your pricing strategy. Let’s get back to the client that I mentioned at the beginning of this post. I took them through a similar analysis and we were able to establish a new pricing strategy that has resulted in them winning more business at a higher margin. It was surprising to learn that they didn’t have to lower prices across the board to remain competitive. In fact, they could rationalize a price increase for some of their services and still remain competitive.
In summary, the key takeaways when it comes to developing an optimal price strategy are 1) get clear about your desired outcome, 2) make sure you have the relevant data points you need to evaluate pricing alternatives, and 3) adopt an analytical approach. Think you might need to overhaul your pricing strategy? Feel free to schedule a free consultation to discuss how we might be able to help.