Here's a story about a company that was struggling with profit margins but then applied intelligent pricing strategies to realize an additional $200 million in operating income.* What the $9 billion annually company did was group their 800,000 products into categories based on their level of differentiation in the market. For their most highly differentiated products with little or no competition, they raised prices substantially. Then they implemented less dramatic increases for more competitive categories.
Before we go any further, let's get the subject of cost-plus pricing out of the way: Under the old cost-plus model, your profit margin remained the same, meaning you could leave substantial revenue on the table -- even when customers were willing to pay more!
So whether you have 80 or 80,000 products, the proper strategic pricing adjustment can help you capture revenue that you’re leaving on the table.
In old-think, a price increase could be very risky. The thinking was, when you increase prices, you should expect a drop in sales volume. But the real question retailers must ask is: By how much might that volume rise or fall?
For example, if you raise prices 10% and your volume drops 20%, you’re in trouble. But if it only drops 5%, you’ll generate more profit at the higher price point.
The same is true if you’re lowering prices: If your volume increases at a greater rate than your price cut, you’ll generate more profit at the lower price.
Here are 7 ways the $9 billion company modified their pricing strategies and realized an additional $200 million in operating income:
1. If your pricing strategy and value proposition aren’t aligned, you’re contradicting yourself, confusing the market and limiting your opportunities. So, know your value proposition.
2. Group your products/services into categories: Such as: Commodities, partially differentiated, substantially differentiated, custom. Take into consideration that your opinion may be different than that of your target market – so while you may view your products as “highly” differentiated, the consumer may be thinking, “partially” differentiated.
3. Evaluate your competition for each group of products. How do your prices compare to those of your competitors? Know that it is the bread and butter of sophisticated business intelligence service providers to do this.
4. Narrow down what you need to know about reactions of your customers. You need data to find out whether consumers will buy from you at different price points, whether existing customers would buy more/less, etc.
5. What is your total estimated profit at each price point? Calculate your total current profit at your existing price(s). Then look at your surveys and estimates and calculate the number of additional units you could sell (or lose) over the same time period.
6. Set up a statistically valid test to evaluate your new pricing before you implement a pricing change.
7. Communicate The Price Changes Wisely And Well. Depending on the size and type of your business and the size and type of price changes, you may need to overcome objections or bad publicity, especially if you’re raising prices. Look at how Amazon recently raised the cost of its Amazon Prime membership. Consider giving existing prospects a window of time to buy at the current price, give good reasons (rising costs), and, be sure that, ultimately, the raise should sound fair to the consumer.
Bottom Line For Retail's Bottom Line:
It's really important to get a general estimate of the results your new pricing strategy might bring -- and test it before you roll out a new pricing strategy.
Sophisticated retail intelligence companies like Upstream Commerce have the tools in their Retail Intelligence Suite that include: Pricing Intelligence, Assortment Intelligence, Lifecycle Intelligence, Dynamic Pricer, and Business Scenario Manager, melded with capabilities such as real-time execution, executive manual or automatic decision making, ease of use, and more -- to help assess, determine and make changes wisely, accurately, quickly and easily.
*(Thanks to Pricing News Daily for passing along the article from Market Management Company, MarketingMO).