The Pricing Denial Traps: 10 Things to Avoid When It Comes to Pricing

Last week (29th Aug 2012), I was interviewed by Business Essentials for their monthly audio CD. There will be an audio recording in the PricingProphets Press Room soon, but in the meantime, here's a transcript of the interview...

Jon, you say that many businesses fall into “denial” traps when it comes to pricing. Is it because pricing is part art, part science and actually pretty hard to get right?

Those three reasons you’ve mentioned are all factors. But in addition to that there are a number of other explanations….

a)    Some companies don’t even consider the art vs. science debate. Pricing is seen as a cost recovery exercise

b)    As a result, many companies think they can only charge what the market will bear. That's a sign that companies don’t understand and communicate the value they deliver, and finally;

c)    Some companies think pricing is easily reversible, so if they put prices down, they can easily be raised again later on

Business is hard, retailing is very hard, and there are discounts everywhere. In this sort of business environment, isn’t it particularly difficult not to follow the herd in reducing prices?

In some product market, there is no doubt that's the case. Particularly in consumer markets, customers love a bargain, just as much as the hunt for that bargain. What this means is that companies need to look not only at price optimization, but also discount management and containment, omni-channel retailing strategies and differentiation on the basis of non-price factors such as quality, service, availability and after-market sales and support.

To keep our pricing strategies on track, you’ve come up with a list of 10 things to avoid in our pricing. The first no-no is using pricing as a go-to-market strategy. What do you mean?

Its amazing the number of companies that go through a huge product development process, and then when they get to the end of that process, and they are just about to launch, they work out what price they should charge. This is not the best way to do pricing.

A better approach is to actually start with pricing. Ask customer what price they are prepared to pay for a product of service, and then build a product for that price point. This way, pricing is a forethought, part of the product development process, and there is a much greater likelihood that the company is providing value with a product that will sell.

Then, using pricing to fix a profit and loss problem in your business?

This is very common: We’ve got a $1mill hole in the budget, lets fix it with a price increase. Unless that price increase is based on an improvement in value, this approach is company-focused, rather than customer centric, and is unlikely to succeed.

You also tell us that we should always avoid an across-the-board approach when it comes to adjusting our prices. Why is that bad strategy?

Well, most companies sell more than one product. Across-the-board price increases often leave money on the table, as some products will be in greater demand, provide greater value, and can support greater price increase. Yet that value is being monetised by an average price increase across the entire product portfolio.

You’ve warned us before about cost-plus pricing. This is another item on your list. Tell us again why we should avoid it?

Quite simply, customers don't buy from you because of what it costs you to manufacture a good or provide a service. They buy from you because of the value they receive. It is easier to defend a price point based on value, rather than costs.

Then there are dangers about making assumptions about competitors…or following their lead on pricing?

Indeed. Many companies have a very narrow competitive set, when in fact, customers’ choices are much wider. Unless you’re selling a commodity product, there’s a fairly good chance your product is an apple, a competitors product is an orange, but there are other varieties of fruit that customer can substitute apples and oranges for.

What about gut instinct on pricing…isn’t there space for that in working out your pricing?

Yes there is, be that intuition, sales force or customer feedback. But just as important, maybe more so, is hard numbers and quantitative analysis, of historical sales, demand for compliments and substitutes, economic data and so forth.

Many businesses look at price changes at regular points in the year, eg 1^st July every year. What’s wrong with that?

The problem with this approach is that market conditions don’t change on the1st of July every year: seasonal demand patterns over Christmas or summer may not be clear, competitors don’t always launch on the 1^st of July. The fact is that, unless you are in a highly regulated market, any sort of change in market conditions should prompt some sort of pricing review

Then, there’s scenario modeling. Isn’t that quite a good idea?  

There’s nothing wrong with scenario modeling. In fact it is to be commended. Where I see companies in denial is they like a certain scenario because it delivers the outcome they are seeking without any due diligence on the likelihood of those scenarios materialising

And finally, do companies really say price changes are “unfair on customers”?

Believe it or not, you occasionally hear companies say we can’t increase prices because it is “unfair on customers”. You run a business and customers are free to choose whether to buy your product or not. However, if you link your price increases to changes in value, communicate and execute price changes effectively, customer will continue buying from you.

So those are a lot of don’t’s, with some alternative strategies that will work much better for us and our businesses. If there’s one standout message about pricing, though, what would it be?

Pricing is getting really scary for a lot of companies and industries, whether due to the Internet and online retailing in consumer markets, or powerful procurement departments in business markets. In both types of market, companies need to change their mindset from an internally, cost-focus approach, to a customer-centric, value-based mindset.