What is Strategic Pricing and Why is it Important to your Business?
What is Strategic Pricing?
Let’s start with what strategic pricing it is NOT – it is not simply about raising prices or just setting the right price!
What strategic pricing is about is building a foundation for long-term profitable growth. Your pricing strategy supports your business in achieving its corporate and marketing objectives. It has a significant impact on your financial results.
It is about growing sales and margins by using strategies that capture the true value of your products and services. It is also about recognising and accepting that your business cannot be everything to everyone and therefore you must be selective about which customers you choose to serve.
The objective of strategic pricing is to maximise profits by understanding, creating, communicating and capturing value within the constraints of your competitive environment, company costs and organisational capabilities.
Strategic pricing is:
Value-driven: it requires you understanding the value to your customers and how value differs across market segments. Customers will not necessarily understand the value delivered by your products and so value communication is critical.
Pro-active: it is about changing expectations and ingrained behaviours amongst customers, competitors and employees by communicating and establishing consistent policies and not reacting to market demands.
Profit-driven: the ultimate goal of your pricing strategy is to increase profitability. It will require establishing policies that move away from ad hoc discounting and one-size fits all pricing to making difficult decisions that may result in the loss of market share.
Strategic pricing is about creating value profitably. It is about understanding customer needs and also understanding how and when to satisfy those needs.
Why is Strategic Pricing Important to your Business?
Pricing is the most powerful growth and profit lever your business has. It has the power to drive or destroy margins in your business quickly. A study by McKinsey shows that a 1% increase in price delivers 11% increase in profit. Most businesses experience much higher increases.
Tragically though, most businesses invest little time, money and resource in pricing. Pricing decisions are being made tactically, reactively and in haste and this is resulting in many companies leaving money on the table.
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
Warren Buffet, CEO Berkshire Hathaway
Pricing touches everyone in your business and it is influenced by several functions. Each department will attach different importance to pricing and this will place constraints on your pricing decisions. From Finance, Marketing and Sales to Operations, each department will have different objectives and this will limit your company’s ability to get paid for the value you create for your customers. There is often conflict between departments as goals are not aligned resulting in unprofitable pricing decisions being made.
Strategic pricing aligns with the overall business objectives and supports the business in achieving and delivering these objectives. It integrates information about costs, competition and value to customers across functions.
Through a deep understanding of your customers’ needs, market dynamics and the value of your offering versus competition, and by developing a strong and compelling value proposition, you will deliver solutions that add value to your customers. Solutions that your customers will pay for. All this profitably whilst capturing a share of the value in your price.
Pricing can make or break your business. Are you leaving pricing to chance or are you investing in developing your pricing strategy? Done right and you will thrive.
