Essential tips on pricing - Reviewing http://www.qed-consultancy.co.uk Copyright Jeremy Thorn QED www.qed-consultancy.co.uk en-us Note that few pricing strategies or tactics are likely to be sustainable forever So check whether you are achieving your original goals (eg market penetration or market skimming?), make sure you know what your competitors are doing and who else has entered the market, and check how your market share might change over time. Making 'good profits' may not be enough for business security alone. The secret is to make sustainable business profit. Engineering Adventures Ltd 2007-03-25 Examine whether economies of scale or greater efficiencies might be used to pass on advantages to your customers e.g. by price cuts, to keep competitive demands in balance. Engineering Adventures Ltd 2007-03-25 Explore whether all sectors of your chosen markets are reacting in the same way to pricing changes If they react differently, maybe you can price differently. Engineering Adventures Ltd 2007-03-25 Re-develop (or repackage) existing products if they start to lose their lustre This tactic may well recover lost margins, but note that the re-vamped life-cycle may not necessarily last for very last long, especially if your market is changing fast. Engineering Adventures Ltd 2007-03-25 Consider the possibility of re-launching old products, especially those that fail to meet your original business goals But if this tactic is attractive to you, be sure to price in the light of current market trends, not the original ones! Engineering Adventures Ltd 2007-03-25 Expect thin margins, but some price stability, in mature markets If you think you need to leave a market, or eliminate an old product, plan your exit strategy carefully. The last thing you want is unsaleable stock on your hands! Engineering Adventures Ltd 2007-03-25 Expect market shares to consolidate in more mature markets In such cases, it takes hard work just to hold onto market share, and dramatic change to win improvements. Reducing the price might be one such change, but most often other significant competitors will follow you. And don't be fooled by thinking you might 'burn off the competition' by low prices. Experience shows it can take a very long time to persuade competitors to abandon an unattractive market! Engineering Adventures Ltd 2007-03-25 Anticipate mergers or take-overs of smaller suppliers in mature markets This could be to your advantage, or otherwise, but plan a long game. Friends will not always be what they seem. Strong competitors rarely respect weak competitors, ill-informed competitors are rarely forgiven and your enemy's enemy may often prove to be a friend - of sorts. But of greatest importance, especially in mature markets where business may be tough, know that price collusion may be tempting but highly illegal in most countries, and there are major penalties attached. Engineering Adventures Ltd 2007-03-25 Note that market leaders tend to be price leaders Smaller players often get hit twice, through higher costs and less ability to command the same price level, unless they have something very special to differentiate themselves from the rest Engineering Adventures Ltd 2007-03-25 Be aware that smaller players usually lose more in an economic recession than larger ones, and rarely recover this lost share later Planning to be a 'niche' market player may seem attractive but, by definition, this means you will probably only have limited growth potential. And if this is not true, you won't remain a niche player. Engineering Adventures Ltd 2007-03-25 Recognise that market shares are much harder to shift in stable markets, and it is always easier to lose share than win it Don't think that you can always recover market share by reducing your prices, because equally determined competitors are more than likely to follow you. Engineering Adventures Ltd 2007-03-25 Remember that most buyers are conservative, and yet few may be loyal You need to work constantly to retain their loyalty - don't take it for granted! Engineering Adventures Ltd 2007-03-25 Understand that if you have a low market share, it is likely that even fewer customers will be loyal than if you are market leader So be warned how unstable markets can be: they need constant monitoring! Engineering Adventures Ltd 2007-03-25 Note that the greater your market share, the more you will probably need to advertise to keep your first-choice buyers With low market share, you will need to work harder at making your product the first choice. Engineering Adventures Ltd 2007-03-25 Test your pricing strategy carefully in independent areas, market segments and product applications You may be very pleasantly surprised that some of these will be very much easier to sell to, at the price you want; and possibly disappointed that others will be much more difficult. So be flexible! Engineering Adventures Ltd 2007-03-25 Know that research suggests that many repeat buyers are most susceptible to advertising after they have made their purchase, to reinforce the wisdom of their choice So in planning your long-term business strategy, don't fool yourself that you can afford to reduce your promotional budget in due course, if you aim for repeat business. Engineering Adventures Ltd 2007-03-25 Select stable, representative markets to test your prices If your test market is not representative of your broader target market, the information may be of little value. Where prices are generally changing rapidly, you may find it very difficult to separate the influence of your pricing strategy from other, possibly wider, considerations. Engineering Adventures Ltd 2007-03-25 Isolate as many variables as you can during new product trials, to make sure you can interpret accurately the results If possible, run your trials in more than one location, perhaps through several sales channels. Engineering Adventures Ltd 2007-03-25 Run any pricing trials for long enough to evaluate the results fully Sadly, many excellent products have been withdrawn in the past because they were not tested for long enough. Engineering Adventures Ltd 2007-03-25 Ask for past and recent actions from your buyers, rather than their future intentions, when doing your market research The former are much more reliable! Engineering Adventures Ltd 2007-03-25 Ask price questions obliquely or indirectly, most especially when selling to the public Few will admit to a market researcher that they buy cheaply, or do not buy 'the best', however that is perceived. Engineering Adventures Ltd 2007-03-25 Try to establish how sensitive your chosen market is to price, both relative to your competitors and to the added benefits you may hope to offer Assuming you want to maximise your profit, it is especially important to track not only the volume you sell at given price points, but also what sort of customers buy, to guide your subsequent pricing strategies. Engineering Adventures Ltd 2007-03-25 Monitor carefully the response of your test markets to price changes Markets are dynamic, and react not only to absolute levels of price but perceived changes relative to others. Engineering Adventures Ltd 2007-03-25 Be aware that, whatever trials you run, your competitors will almost certainly notice So if your product is very dependent upon secrecy or relies upon short-term novelty to maintain its price, be warned. Uniquely, in such cases it may perhaps be better to run no preliminary pricing trials. Engineering Adventures Ltd 2007-03-25 Go and see for yourself what is happening in the market place First-hand knowledge and understanding is hard to beat. But don't assume you can ever know for sure what is happening - markets can be very fickle! Engineering Adventures Ltd 2007-03-25 Know that raising prices is usually difficult So be very wary of adopting an initial low-entry price strategy, for all its apparent appeal. It could be that you may never manage to raise your prices to the level you hoped for later on. Engineering Adventures Ltd 2007-03-25 Be aware that price movements can often send signals to your customers which you never intended Think these through carefully before you act. Engineering Adventures Ltd 2007-03-25 Note that your customers may think that lower prices might represent good value for money, but they could also signal that that you offer low value, poor service or quality Or that there may be some hidden extras which will have to be paid for; or even that your business might be in difficulty and future spares, service or product guarantees might be in jeopardy. Engineering Adventures Ltd 2007-03-25 Recognise that buyers might see increasing prices as reinforcement that the product or service is especially good, or perhaps a shortage is coming But they might also signal that you are being greedy, that you may have greater room to negotiate a flexible deal, or might even be inefficient and that there are better opportunities to buy at lower-prices else-where. Engineering Adventures Ltd 2007-03-25 Time your price changes carefully Most buyers will check what they paid previously when you change a price, test the general market price and take a new view on what is a 'fair' price. So try to avoid raising your prices when other key suppliers are not changing theirs. Engineering Adventures Ltd 2007-03-25 Be more aggressive in raising prices when your customers' expenditure on your product or service is not that significant to them, relative to their total expenditure The less they spend on purchasing the products or services you provide, the less important it will be for them to challenge any increase, and usually the less time they will have to spend doing so. Engineering Adventures Ltd 2007-03-25 Win higher price rises from 'richer' customers who have greater disposable income, for whom price is less of a concern than quality For example, or sell to customers who perceive that changing suppliers might be at a greater risk than the cost of your price rise. Engineering Adventures Ltd 2007-03-25 Give good and persuasive reasons why you need to change your prices, so that you are not seen either to be greedy or desperate No buyers like doing deals when they think they are being ripped off! Engineering Adventures Ltd 2007-03-25 Signal any change of price in advance, so that your customers are not surprised Remember, most business transactions are reliant on goodwill and trust. Helping your customers to plan for major price changes may often be more welcome than the concern you might raise when you increase your price. Engineering Adventures Ltd 2007-03-25 Offer a tactical delay in raising your prices to key customers, to maintain goodwill If a rise is signalled well in advance, this tactic need not cost you very much and may well be worth any short term loss in revenue to keep their business. Engineering Adventures Ltd 2007-03-25 Raise prices in small steps, rather than large ones, neither too rarely, nor too frequently Large or infrequent changes inevitably produce panic reactions in some buyers. Engineering Adventures Ltd 2007-03-25 Consider the market advantages, and risks, of not moving your price when other suppliers do But if you decide to hold prices when other competitors are raising theirs, be sure to negotiate an increase in due course, or you may never recover the lost margin. Engineering Adventures Ltd 2007-03-25 Win less obvious price rises by making charges for extras that used to be free eg delivery, overtime, after-sales service, guarantees. Or by changing volume discount structures, reducing your minimum order sizes, seeking quicker payment, making charges for late payment or cancellation, making surcharges for proven raw material price increases, or just perhaps by offering reduced quality, quantity or service for the old price. Engineering Adventures Ltd 2007-03-25 Plan your price increases carefully Note that most professional buyers are trained to challenge all price increases as a matter of routine, and then to seek something back in return, whether it might be a tactical quality complaint or a delay in implementation of the increase. Engineering Adventures Ltd 2007-03-25 Be prepared for a buyer to check out published prices, cost indices and even talk to other buyers, before accepting your price rise Equally, be ready for them to offer to help you to hold prices down, perhaps through value analysis, supply-chain partnership, etc. And in many cases, if your price rise is seen to be exceptional, expect even your loyal customers to test the market with invitations to new suppliers to quote for their needs. Engineering Adventures Ltd 2007-03-25 Discuss pricing strategy at the highest level in your organisation A sound pricing strategy can have greater impact on your profitability than almost any other issue! Engineering Adventures Ltd 2007-03-25 Make sure your colleagues are all committed to your pricing strategy There may well be reversals in your sales fortunes and you will need your colleagues' support to persevere with what might be a perfectly sound strategy. Communicate your pricing policy clearly to your team so that they understand and support it, rather than try to undermine your efforts and hard work - by offering unauthorised discounts for example. Engineering Adventures Ltd 2007-03-25 Ensure that your pricing policy is adhered to, including discount policies, throughout your organisation You may for example find that your most junior administration staff are giving discounts to customers from their sales desk, and you might never know until you find profits are plummeting. Engineering Adventures Ltd 2007-03-25 Keep a close watch on changing market demand, preferences and competition If circumstances change, so also might you strategy need to change! Engineering Adventures Ltd 2007-03-25 Understand how your costs vary as volume demand changes If the market demand is increasing and prices start to fall, you too may well have cost savings that are worth passing on to stay competitive. Alternatively, if market demand starts to fall, once-profitable products might now be unprofitable and may require a new burst of promotion - or may possibly even need to be abandoned. Engineering Adventures Ltd 2007-03-25 Be flexible. Make sure your organisation is responsive to changes in the market place Good deals can become bad deals very quickly, and vice versa. So think ahead, think aloud, think a lot - and be ready to think again! Engineering Adventures Ltd 2007-03-25 Copyright Jeremy Thorn QED www.qed-consultancy.co.uk Jeremy Thorn is a prize-winning author and Chairman of Quantum Enterprise Development (QED), a multi-functional management consultancy and development company based in Doncaster, England, dedicated to making good businesses better, encouraging customers to be more loyal and to helping employees and suppliers be more effective. Engineering Adventures Ltd 2007-03-25