Pricing is one of the most important drivers in order to achieve growth and sustainable profitability. How you price your product or service will determine the level of your organization’s competitive advantage. The key to achieving and maintaining a distinctive competitive position is understanding your market place and how it is constantly evolving. In other words, having a good working knowledge of your company’s products, processes, customers and competitors.
In addition to that, there is need to understand your organization’s cost structure (fixed, variable or step-variable costs) and the associated cost drivers. It is therefore advisable not to price your products or services below your cost base just to gain market share, but to charge a price that will both cover costs and also generate a profit for your business.
Strategic pricing involves having the ability to identify which products or customers are profitable and responding effectively and efficiently to changing customer tastes. When customers buy a product or service from your organization, they are paying for the value created. Thus a value-based approach to pricing should be considered for profit maximization.
Knowing what kind of value customers place on your products or services will help you determine the appropriate price to charge. If you overprice, there is a risk of losing a sale that would have been profitable at a lower price. If you underprice, you make an unprofitable sale. Price appropriately, you make the sale as well as a profit. Remember higher sales do not necessarily equate to high profit.
A recent report by Deloitte, identifies ways in which organizations can differentiate themselves through sustainability pricing. According to the report, building sustainable pricing requires recognising the importance of having access to detailed data (on products, customers, competitors, and processes), making strategic use of that data and making sure that human and cultural factors do not derail pricing efforts.There are six critical success factors for pricing transformation:
1. Evaluate Pricing Maturity: There are four pricing maturity phases each with different characteristics – Primitive, Reactive, Adaptive and Pre-emptive. Your organization should define the end goals in terms of maturity and establish short and long-term measures of pricing success.
2. Create a Compelling Shared Vision: This involves creating a pricing organization where organizational structure, roles and responsibilities are aligned to maximise pricing return on investment.
3. Stakeholder and Leadership Alignment: Executive level leadership should drive the mandate to adopt sustainable pricing. Their authority, power and influence to visibly support and lead the change is key to solidifying the company’s culture and overcoming the resistance to change.
4. Communications and Engagement: Employees should be actively engaged in building a sustainable pricing organization. They should be provided with timely, complete and consistent information on pricing responsibilities, ownership and accountability.
5. Pricing Organization Structure: This involves designing organizational structures, performance metrics and resources that support pricing transformation and reinforce new behaviours.
6. Managing Pricing Talent: Employees should be equipped with the tools and skills to execute the pricing strategy. That is, they should receive the practical training necessary to perform in line with departmental goals.
To access the full report by Deloitte, please click here