Top-Line Growth: The 7 Steps to Effective Pricing
Pricing may be one of the most underused strategic tools that businesses have in their toolkit.
That may seem like a bold statement but considering the average amount of time companies spend on setting pricing versus strategy and marketing, there is significant unexploited growth potential within pricing.
In any business environment, the price is what you charge your customers. Seems like a basic transaction, you create and market a product or a service, you put a price on it, and you sell it.
However, pricing can pull customers in or push them away. Your pricing strategy provides an indication to your customers of the value of your products and services. In addition, pricing impacts your revenue generation and can deliver or subtract substantive value to your business.
A strong pricing strategy will convey value to your customers based on what you are offering and the price you have set, and this value perception will convince them to buy your product or service
Common Pricing Models
There are several pricing models that you can deploy and your choice of model with be dependent on your business, the most common of these models are:
- Value-based pricing: the value your customers think your products and services hold
- Competitive pricing: relative to what your competitors are charging
- Price skimming: highest possible pricing initially that is lowered over time
- Cost-plus pricing: the total cost of the product with and added percentage
- Penetration pricing: going in at the lowest possible price
- Economy pricing: like penetration pricing, pricing below competitors to drive the economies of volume
- Dynamic pricing: constantly changing pricing to match the current demand which is challenging to manage and not always supported by customers
Each strategy has benefits and drawback, and while we will not be delving into those in this article, we will be looking at how to best set your pricing.
7 Steps to Effective Pricing
If you are to approach pricing as a strategic tool, where should you start?
We suggest that pricing cannot be set in a vacuum without considering your strategic priorities and your pricing should be analysed within the context of your value chain. Based on this we recommend a 7-step approach to strategic and effective pricing.
Step 1. Business and Product / Service Strategy
Assuming that your products or services are aligned your business’ strategic focus areas, start with reviewing this strategy.
How will these products or services deliver against your strategic priorities? What is the role that these offerings will or do play in your business? In traditional FMCG terms are you looking at recruitment, retention, frequency, upsell or upscaling with these products and services?
Your strategy will determine how you competitively differentiate your business and related offerings. You will also need to assess that your offerings match this strategy and differentiation focus.
Step 2. Understand your Customers, Competitors, and the Market
Here you will look at:
- What pricing can the market sustain considering the macro-economic conditions?
- What are your customers willing to pay based on the value you are providing?
- What are the competitive benchmarks?
Sufficiently differentiated offerings will allow you to command a premium in the market, however, if there is little tangible differentiation, you will need to moderate your pricing expectations.
You will need to have a deep understanding of your target or ideal customers to understand the utility that your offerings hold for your customers. This will enable you to understand absolute price points and translate these for your business requirements.
As part of your business strategy, you should have established your sales quantities requirements and you can test these against the total market and competitive landscape. Your pricing should be reflective of your targeted market positioning and your market share strategy.
Step 3. Understand the Channels, Margins, and Investment Requirement
The investment expectations usually vary by channel, so you will need to identify your key channels, and determine the margin and investment requirements for each channel.
Your pricing must be able to sustain your market, channel, and investment requirements.
Step 4. Finalise your Value Chain
If you are a more traditional FMCG company, you will detail your costs of goods sold here. This will be where you capture the costs of manufacturing, producing, or creating and distributing your goods or services.
You will include any marketing investments to support your price realisation and any other associated fixed and variable costs. You should be aiming to be as accurate as possible here to capture all relevant costs to avoid hidden losses for your products or services
Step 5. Review Sales, Profits, Revenues and Model Scenarios
Once you have captured all the numbers above you can review the revenue and profit impact of your offerings to determine the ability to achieve your financial and strategic goals.
You will be able to model pricing and sales quantities scenarios to determine various revenue and performance outcomes.
Remember here that a change in your pricing will impact your sales volume so you will need to apply price elasticities to your sales volume growth forecasts. For a product with an elastic demand this means that a change in an economic factor such as price, may substantiality change sales volume demand.
Step 6. Set & Implement your Price
Now that you have set your targeted sales quantities, revenue and profit levels and aligned your business on the ideal price by each product or service, you need to set your price and implement it in the market.
Step 7. Track, Measure and Adjust
Pricing should not be approached as a once-off process.
You should have disciplines around monitoring pricing in relation to forecasted sales quantities and revenue targets. Your pricing actions will not occur in a vacuum and your competitors will react to your pricing and you may need to adjust accordingly based on market conditions. Regular pricing reviews should be an integral part of your business tracking if you aim to achieve your strategic goals.
Effective pricing strategies and tactics can support the achievement of your business’ strategic priorities and your growth agenda. These should be a vital discipline and capability in your business. Failing to focus your efforts on relevant pricing actions can, at a minimum leave “money on the table”, and at worst can cost you your business’ success.
Pricing is a highly nuanced subject and should be approached strategically to drive optimal top-line impact. These 7 steps will elevate your approach, enabling optimal price realisation from your products and services.