Pricing is a lot more than just price point

When many people think of pricing they are focusing merely on the price point of product or service offerings. However, effective pricing addresses several additional areas that should be resolved before price points are optimized.

A best practice is to first address pricing-related leakages. This provides quick return and receives less resistance from customers than directly increasing prices. Examples of ‘leakages’, i.e., situations where value is provided for free (or at too low price) include: little or no profit from small customers or small deals, too much time spent by the sales force on small opportunities, unnecessary discounts provided by sales force, not charging enough for freight (e.g., express deliveries), not effectively addressing revenue opportunities from spare parts, not bundling offerings where there is a profitable opportunity of doing so, unnecessary promotions, etc.

Effective pricing also needs to address how value is communicated to customers (rather than focusing on price), having effective tools or other means of monitoring net prices (e.g., after back-end rebates) and profitability, and having clear pricing ownership and governance structure to continuously working with pricing.

Most companies have gaps in several of these areas. Unless these are first addressed, it is usually not as beneficial to address price points. What’s the point of raising prices, anyway, when value is given away through leakages?

Specific opportunities are best discovered through a structured pricing diagnostic. A pricing diagnostic identifies potential gaps in the above mentioned, and additional, areas. Input to a diagnostic may include:
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• internal interviews with management and sales force (inside and outside  sales) and sometimes channel partners such distributors, reps, retailers, etc., if applicable, 
• transactional data analysis, and 
• external customer interviews.

Sometimes, an external assessment of the competitive environment and specific competitors is also needed (depending on internally available knowledge of competition).

The results from a pricing diagnostic include identified ‘leakages’ and other related opportunities as well as recommendations on how to address them. A recent client experienced a three percentage-point margin improvement in less than one year from undertaking a pricing diagnostic and addressing leakages—without adjusting price points. In a second phase, they are now addressing price levels.

It is usually recommended that the majority of opportunities identified through a diagnostic being addressed before price points are optimized.