You...
- ... have tiered-structure pricing that differs by market and category.
- ... know there are opportunities to raise prices but want to be careful not to price yourself out.
- ... relied heavily on the sales organization to recommend rates in the past.
- ... been wanting to do a stringent analysis on prices but encounter major challenges obtaining the right data.
Sound familiar? You are not alone. That said, companies that address these problems are have better margins.
When identifying areas to increase prices consider the following...
- The value each customer/vendor is getting for a given product within each tier, market, and category
Measure the value your products deliver by looking at it from the customers' perspective. For instance, if your customers are advertisers on your on-line platform, the value is NOT measured by quantity of leads delivered but quantity of converted leads delivered and the related financial return to the advertiser. When looking for opportunities to raise prices, you want to be specific. If you increase prices by a fixed percentage across all markets, categories, and tiers you risk over-pricing and loosing sales not only in areas where prices have become too high but also where increases may have been justified (see Pricing Psychology below). You will want to understand the specific value that is delivered to your customers for each combination of market, category, and tier to pinpoint the specific areas to raise prices. Data analysis that leverages past sales transaction detail along with customer interview data will surface the relevant information. These tasks are typically data-intensive and require expertise in data science and business analytics.
- Competitive Alternatives
Review the price and value of the competitive alternatives to identify your pricing thresholds. If you are the market leader you may be setting the price for the market. If so, will your competitors follow or possibly lower their prices to capture lower-end market share? What will their new price-to-value ratio be? How do you compare? Scenario analysis will help identify risks of increasing prices and guide your decision.
- Strategy for new vs. renewal including a roll-out plan for existing customers
How will your customer react to new prices? To understand this, you must have a understand the price sensitivity of your customers. Facilitating customer interviews and graphing churn rates during past-periods of price increases are ways to measure your customers' price sensitivity. Depending upon the results, you may choose to increase rates for new customers and stagger the roll-out to existing customers over a period of a time. Keep in mind, it is important for new customers to adopt the higher prices as it becomes onerous to move them up to current prices at the time of contract renewal. Understanding the value delivered and the competitive alternatives will provide confidence to remain steadfast in your decision to increase prices.
- Discounting Practices & Promotions
What is the discount rate during the last six quarters by product, category, market, and tier? Do not ask your head of sales, this analysis should be done independently. If you see wide swings in discount practices across markets, strengthen procedures and enforcement. It will be best to adjust prices by market in a way that allows for a consistent discount cap across all markets. This consistency will help with messaging to customers and training your sales force.
- Seasonality of your business
Identify opportunities where it may be beneficial to vary prices throughout the year. Increasing prices during times at which demand is high can significantly increase your top line; the key is knowing when to increase and when to pull back. Do not assume that all products in all pricing tiers and markets respond to seasonality in the same manner, allow analysis to cut through any assumptions you may have.
- Sales Cycle
Identify all areas of the sales cycle that make it difficult for customers to purchase and eliminate them! If your products are sold on-line, understand a successful on-line system should collapse time and distance; meaning the customer should not have to wait to purchase and it should not matter where the customer is located. There is significant value in removing barriers in the Sales Cycle. If you can remove barriers, you can capture that value with an increase in price.
- Technology and the use of Quote to Cash (QTC) software
Technology Technology Technology - use it! If your pricing is formulaic and repeatable based on standard inputs from customers, invest in QTC software. This quality of software in this space has increased exponentially over past five years however, there are still a few duds on the market to which you should steer clear. Ensure you form a cross-functional team to draft detailed business requirements prior to reaching out to software vendors.
- Pricing Psychology
After quantitative analysis is complete, review the outputs with pricing psychology in mind... make adjustments as needed. It is important to consider the history of the relationship you have with your customers. For instance: How soon was your last price increase and was it above or below expectations? Do you have a solid communication plan in place and have you allowed enough lead-time to implement a price increase? Have there been other transition challenges in recent history that have customers in a defensive stance? Although the quantitative analysis may indicate your are delivering high value at a low cost, a sharp and immediate increase in price may lead to a significant loss of customers, be sure to consider your customers' past experience and strike the right balance.
A successful Pricing Strategy factors all of the above. It may seem like a daunting task however, there is something magical when you craft a thoughtful pricing strategy... Increased Revenue and Profitability!
When all is complete, be sure to implement dashboards and automated reporting that will allow you monitor progress and help you identify when adjustments are needed.
For more information on pricing strategy and the data science required to "get it right", contact us using the form below.
