In the rush to cut, trim and re-assess business practices in a lean economy, one critical area is often left untouched - pricing strategy. And yet, price is the most visible part of corporate strategy. Any improvement in margin can have an immediate and significant impact on earnings. Here are three common pitfalls that, when addressed, can improve pricing optimization and increase that bottom line.
Pricing Compression
Over time, prices can end up "compressed" within a narrow band around average margin. This can be attributed to sales people "playing it safe" or simply not having the information to set prices. Unfortunately, a "middle of the road" pricing strategy can leave money on the table in the form of underbids on low price-sensitive transactions. Most businesses lose money by underbidding special orders and small volume orders by failing to evaluate "cost to serve". On the flip side, overpricing large volume customers can undermine a competitive edge. A successful pricing strategy must take into account customer type, volume and other market factors to maximize margin per transaction, across the board.
Incidentals
Research shows that when frequently purchased, high volume items are locked into fairly fixed margins, the key to significant profit opportunity lies with optimizing prices for incidental, low volume sales. Top performing distributors are very savvy in how they approach incidental sales. It is difficult, however, for an individual sales person to evaluate the optimum price for each of the thousands of incidental sales a business may get each year. Therefore, it is necessary for the business to set up a systematic approach for handling incidentals. Pricing software or help from a margin optimization agency will be critical to take advantage of this key profit area.
Stay on Top
A concerted effort may increase profitability in the short term, but to maintain margin point gains, sales data must be continually maintained. Prices are most effective if they are reviewed quarterly. New opportunities need to be targeted to replace prices that have become too high. Industry experience shows that more than half of prices need to be changed at least annually. Maintaining a successful pricing strategy in a very dynamic industry requires ongoing dedication of resources. The rewards, however, can lead to robust margins and a sales force that trusts their pricing goals.
Profit2 helps firms gain significant and lasting margin increases by specializing in margin optimization. Patented analytical tools allow customers to evaluate the price charged each customer for each item, quickly capitalize on opportunities, and improve pricing in new, profitable ways.
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