In my recent blog post, "5 Ways Retailers Sabotage Their Own Pricing and Profit: The Enemy Within, Part 1", I described that a one percent price increase can boost a company’s operating profits by 11.1 percent – much more than the profitability increase a company can expect from a one percent overall reduction in variable costs (7.8 percent), a one percent reduction in fixed costs (2.3 percent), or a one percent increase in volume (3.3 percent). (Cited in Deloitte, Getting Pricing Right; and The Problem With Pricing, It's You).
And just as we talk about the ultra-transparency today, there's no area of your company that isn't affected by pricing, and vice versa. What's paramount is to integrate the capabilities of your organization and make them work together. Deloitte cites a 2007 study showing that those who integrated their pricing efforts outperformed those who didn't, boosting their stock prices by an average of 66 percent (outperforming the Standard & Poor’s (S&P) 500 index by an average of 40 percent).
Effective pricing and profitability management depends on coordinated efforts of the following areas, each important in a company’s ability to set and enforce profitable prices:
1. Pricing Strategy. Pricing strategy comprises the principles behind your company's efforts to price goods and services, i.e. creating a set of strategies or a blueprint of how you want to maximize your company’s profits. (See 5 Wizardly Ways To Maximize Profits With Competitive Pricing Intelligence & Competitive Pricing). And, as we've discussed at length in our blog posts, pricing strategies may also be defined for a combination of specific products, channels, customer segments and geographies. This is also where you might define your position, such as "Everyday low prices," “We will not be undersold,” "Top of the line," or “Our products never go on sale.”
2. Price Analytics and Optimization. Using this information, companies can develop profit-boosting strategies such as discontinuing unprofitable products or customer relationships, changing pricing policies, or adjusting prices upward or downward. “Optimization” refers to the use of information regarding the most profitable price for a good or service based on historical information on customers, marketplace and competitors.
3. Pricing Execution. After your strategy and analytics, comes your pricing execution -- the tactics and tasks, policies and procedures by which your company delivers its prices to the marketplace. A lot of the information you need is discoverable through competitive tracking, competitor price monitoring, competitive pricing intelligence, etc. A pricing intelligence tool can give you the data you need to optimize and analyze, then make the best business, pricing, and promoting decisions for your company.
4. Pricing Technology. Pricing technology today gives retailers capabilities they never had before. Pricing intelligence tools make it easy to analyze and understand how to price to beat your competition. Powerful analytics features provide you with the means to quickly judge how competitive your pricing really is. With a powerful price intelligence solution you will be able to price monitor you competitors 24/7 and understand how to price more competitively on a regular basis.
5. Tax and regulatory considerations. Taxes should be taken into consideration for the impact they will have on your bottom line; and for restrictions they may have on your sales. One example you might have to know is that selling goods in different countries might put you under regulatory mandates that prohibit companies from selling the same product to competing customers at different prices.
The role of coordinated pricing is to help a company take a strategic view of pricing and smoothly carry out its day-to-day pricing activities. As we said in our blog post (7 Tips To Make Your Business Irresistible To Online Shoppers). Retailers should have an organization that defines and executes consistent pricing, supervise the flow of price information through the company, measures and reports on price performance, and sets pricing strategy. Don't forget today's ultra-connected consumer; and the changing demographics that will bring an influx of millennials as customers and staff, people you need to help with your analysis and technology.