10 Essential Tips for Cutting Business Costs
Over the last 20 years, we have supported businesses of all types in undertaking cost reduction programs. In this article, we look back on some of these successful programs, and…
When setting a price structure, there’s a few key things you should do to ensure it’s set optimally.
Research the market
Having good intel into competitor pricing (and how they structure prices) is key.
Is your pricing in line with other players? If not, does the difference reflect underlying differences in the product or service?
Do competitors offer ancillary products or services, or incorporate other elements of the pricing structure that you are missing?
Understand your customers
An in-depth understanding of your own customers is also very important. You need to know what aspects of the product or service matter to them, and how important price is in their consideration.
The more you learn about their behaviour and attitudes, the easier it is to identify cross- or up-sell opportunities that might work.
Reviewing their responses to previous price changes can also give you insights into their level of price sensitivity.
For most businesses, their customers are not all identical. Often, you will need to segment your customers into different groups based on relevant factors (e.g. demographics, attitudes, price sensitivity). This may reveal additional pricing opportunities that can be targeted to specific segments.
Analyse past sales
Another way to identify cross- or up-sell opportunities is to review historical spending patterns. In particular, you should be looking out for products / services that have been purchased in the past.
Are there additional opportunities to promote these cross / up-sells to customers? Are their product bundling (or un-bundling) opportunities that might work given past spending patterns.
Most businesses these days have a lot of data on past sales, and kn0wing the right questions to ask can reveal many opportunities to increase transaction value and customer profitability.
Understand product / service profitability
Before making any pricing decisions, you need to be able to work out the likely impact on your overall profitability.
This depends on (at least) two factors.
Ideally, you want to making price changes that improve unit economics without triggering a big volume response.
This is where a full understanding of the possible components of the pricing structure is so helpful. For example, it is common for headline price changes to be a lot more noticeable than changes to other elements of the pricing structure.
Develop a price execution plan
Once you’ve developed your price strategy, you need to have a plan to make sure that everything goes smoothly.
Depending on your business, this might involve all or some of the following elements:
Communicate the price change
Once the plan is in place, you can then notify customers if you need to. This may not always be necessary. It will depend on the nature of your business and customer expectations. But it may be necessary for many B2B businesses, or consumer businesses that rely on recurring regular payments from repeat customers.
Where you are communicating price changes, it is important to be up-front and honest about the price changes, why they have been made, and what it means for customers.
Implement and track the price change
Finally, having done all the hard work, you can implement the plan. Provided you have done the ground-work, and understand your customers, it should go smoothly, and lead to increase margins and overall profit.
But there is always some risk in changing prices. You can manage that risk effectively in most cases by following a disciplined approach to pricing strategy, but tracking is still important.
You need to track the outcome of a price change, especially in the initial stages. It may be that some customer segments are more sensitive than you assumed, or there have been other unanticipated impacts on cross- or up-sales. Tracking allows you to course-correct as required before any real financial damage is done.
Pricing strategy sets out the pricing approach within a business, and how this is used to determine specific prices for products and services. The pricing strategy takes into account the demand characteristics in the market, as well as the costs of production. Given the demand characteristics (i.e. customer demand curves and competitor prices), the pricing strategy considers how pricing will affect demand and what price points will maximize profit.
Pricing strategy should also take into account any discounts or other incentives that impact the price level, as well as potential cross- and up-sell opportunities to increase transaction value.
Pricing strategies can have a significant impact on your business, so it is important to choose the right pricing strategy for your products and services. Consider your target market, the level of competition in your industry, and your production costs when making pricing decisions.
There are four main pricing strategies that businesses can use:
Cost-Plus Pricing
Cost-plus pricing is when you add the cost of making the product plus some extra money to make a profit. This pricing strategy is often used by businesses that want to make sure they are making a profit on their products. Cost-plus pricing is used in industries with high costs of production that can vary significantly, for example construction, manufacturing, and engineering.
Competition-Based Pricing
Competition-based pricing is when you set a price for your product based on what other companies are selling their products for. You want to make sure that your product is priced lower than the competition, but not so low that you are not making any money.
This pricing strategy is often used in markets where there are many substitutes and buyers have a low level of disposable income.
Penetration Pricing
Penetration pricing is when you set a low price to get more people to buy your product. The pricing strategy is used to increase market share and reach a point where you can charge more. The low price may not cover the costs of production, but it will help you gain market share quickly.
This pricing strategy is often used by businesses when they are first starting out, or when they are introducing a new product to the market. For example, when Uber first started, they used penetration pricing to get people to try their service.
Value-Based Pricing
Value-based pricing is when you set a price for your product based on the perceived value of the product by customers. You want to make sure that the price you set is in line with the perceived value of your product.
This pricing strategy is often used for products that are unique or have a high level of customer satisfaction, for example, luxury goods, pharmaceuticals, and other specialty products.
To develop an effective price strategy, you need to do the following:
Firstly, decide whether you need to communicate a price change. Not every change to the price structure requires proactive customer communication. It really depends on the nature of your industry. Generally, B2C businesses with customers on recurring billing arrangements will need to explain changes in price or any terms and conditions. B2B businesses with large customer contracts will also need to be proactive in explaining price changes.
If you are communicating a price increase, it is important to be transparent and explain why prices are going up. Customers are more likely to understand and accept a price increase if they know that it is due to increased costs or improved quality. You should also let your customers know what steps you are taking to minimize the impact of the price increase.
If you are communicating a price decrease, be sure to highlight the benefits of the lower prices. Customers will be more likely to take advantage of the lower prices if they understand how it will save them money.
You should also make sure that your employees are aware of the pricing change so that they can answer any questions that customers may have.
