The Perfect Price

Nov 18, 2010

In challenging times, when profits are essential, your company may be in flux when determining which strategies to implement or improve on. You are likely aware that profit pricing is paramount to business sustainability, and you are likely to put on your competitive business thinking hat for additional strategy planning.

In an attempt to boost profits, many companies have tried to reduce costs through reengineering, outsourcing, downsizing, etc. Perhaps your company is thinking through a variety of mechanisms to enable the coming calendar year to be more profitable. After all, your aftermarket company can be positioned to be a profit center by asserting every functional strategy in the mix by implementing opportunity and bottom-line management strategies.

Think of pricing as an undiscovered weapon in the search for higher revenues.

In looking at recent times, aftermarket companies have not found it easy to increase revenues. Challenges with economic conditions, government policies against small business and increased competition on pricing including producers from less-developed countries have all put pressure on volume and price in our industry. Not surprisingly, companies have turned to levers more directly in their control such as reducing costs and better process management as direct sources of profits.

But those cost process levers, acting as instant fixes, can only go so far in boosting profits. As the specialty aftermarket strives for growth, companies are increasingly challenging revenue performance and realizing that the top line has not received the same close examination and insight as the bottom line. There is a growing awakening to the fact that more opportunity and potential may lie on the top line.

What can be realistically achieved? Is the search for higher revenues a futile battle against macroeconomic and competitive pressures? Academic economic analysis shows the contrary.

Pricing is actually an undiscovered weapon you need in your toolbox. There is significant profit potential for companies in challenging this area, and in reengineering their price position.

Exercise Your Pricing Opportunities 

Choosing the best pricing strategy is always comparable to walking on eggshells. But keep in mind that it is vitally important and should be recognized as a necessary business function, especially during an economic slowdown.

Looking at pricing is, in principle, much more attractive than downsizing. There are no severance costs, no people or organizational issues, no impact next Monday morning. It is a quick win, and revenue flows straight through to the bottom line.

In any event, opportunities to improve profitability through cost and process management may actually have peaked for the time being. Many reengineering projects have actually disappointed many, according to research done in the U.S. and also in the U.K.

Consider the following: very few companies have achieved breakthrough improvements in their bottom-line performance, and less than 30 percent in a recent industry survey claim to be satisfied with either the change process itself or the results.

The Pathways to Effective Pricing

The more you know about which products make money and which don’t, the more easily you can adopt a better strategic and selective pricing policy. Three main pathways can be identified that actually lead to more effective pricing.

  • Exploiting market advantages
  • Changing the decision-making process on pricing
  • Testing whether all the different pricing options are being proactively pursued

In the real world, some aftermarket companies actually enjoy market or structural circumstances that make pricing management easier. Have they just fallen into these situations by pure luck or timing, or have their advantages been effectively engineered deliberately?

In my personal research of which companies are making it, I’ve found some companies utilizing strategic alliances to create market and structural barriers deliberately by locking up a vital supply of key personnel as human capital or developing key relationships with the media to expand maximum exposure. Thus, between leadership management, and the adage of the power of ink, some companies have blossomed in hard times, or at least continue to prosper above the norm.

Even without a market or structural advantage, significant untapped pricing potential exists. How can this be exploited?

Many factors are within the grasp of executive control and can be changed to enable more effective pricing management. For example, internal structures could be adjusted to facilitate more effective pricing.

Also consider that several possible roadblocks can be present within a company’s inner structure such as:

  • Responsibility for pricing being left to the sales department. (Who has ever met a salesperson who wanted to increase prices?)
  • There is little or no finance department involvement to balance decision-making.
  • Senior management’s remoteness from the detailed market circumstances makes it difficult to challenge sales views.
  • No systems or mechanisms are available to easily assess more aggressive pricing opportunities.
  • Data on the true net profitability of individual products/services to the customer is limited.

Not only could companies make structural moves that are more easily within their control; research shows that upwards of 12 different pricing strategies are available. They often appear to be under-exploited. The challenge is frequently not lack of familiarity with the particular pricing option, but about:

  • Having enough management time to check whether the particular pricing options have been fully considered.
  • Understanding the pricing relationship to competitors and what drives it.
  • Examining price opportunities and developing insights on an individual product line basis, rather than across a range.
  • Management’s ability to challenge pricing decisions.
  • The effectiveness and rigor with which the pricing strategies are implemented.
  • The information base and systems needed to do each step.

Simplified Pricing Strategies Options

Many pricing strategy options are geared to medium/long-term profit-building, and few can have an immediate effect. The pricing options that follow are relatively simple illustrations to highlight sources of pricing opportunity avenues and fall into three main groups: customer information management, exploiting structural advantages, and innovation and leadership.

Customer Information Management

There are four approaches to consider:

Category Segmentation – Use detailed product-line profitability and pricing to achieve analysis and insight that are developed separately for each product line. The company A-player list acts as its strong leader.

Customer Segmentation – Use detailed customer segmentation to identify pricing opportunities. This may be a demographic profile including jobber profiling.

Bundling – Use core products to gauge product pricing with add-ons for a more robust buy package. This acts as a reinforcement and value proposition. Consider how some leading Internet software suppliers provide free access software but charge for use of related products and services. The bundled approach is likely a new aftermarket wave in the short term, suitable for both small- and medium-size companies to compete with larger branded names.

Trade Terms Management – Manage the level of discounts given to achieve both the sales and profit margin. As a sales volume method, this option is becoming more of a consideration while still maintaining company professionalism.

Exploiting Structural Analysis

Four options are highlighted:

Lowest Cost/Highest Price – Cost advantages enable companies to price lower and grow share rapidly.

Supply and Demand Management – As an illustration, products dictate demand and create an immediate buy scenario of being first to own. Thus, supply is important to a gearhead. Consider the car club behavior of the need to have it first.

Supplier/Customer Balance of Power – This model can be exploited to ensure that suppliers contribute to gross margin success. Tough management of the supply price provides greater flexibility in end-consumer pricing.

Open-Book and Partnership Pricing – The open-book approach was pioneered in the automotive industry. Sharing information about costs has enabled suppliers to justify and push through selective price increases.

Innovation and Leadership

This area offers the ability to build your company’s reputation while ensuring profitability with these tools:

Branding – Consistent high levels of branding and advertising enable a company to maintain a price premium.

Total Value Proposition – Five strategies can be singled out:

  • Technology-driven: continuous development of niche, technically advanced products can give strong gross margin advantages.
  • First in: continual focus on being first to market gives initial pricing advantages, as well as other benefits.
  • Best at: leadership on all features valued by the customer can give price leadership in both “value pricing” of certain products and “premium pricing” for certain others.
  • Share leadership: restructuring the product portfolio to focus only on market share leaders where you have more control over pricing and other levers.
  • Innovative consumer value: provide a clear mixing of quality, value and service to lead in the eyes of the customer.

There are at least a couple of shorter-term options you might consider as well:

Price squeeze – Consider a 1-percent product line price increase as a potential profit maker, immediately impacting your bottom line. These may be segmented to B-products where lack of resistance is probable.

Price elasticity – Is the price/volume equation effectively analyzed and balanced? For example, low-margin products can be priced relatively aggressively with less impact on contribution from any volume lost.

Using Pricing Opportunities

How can a company check whether it is fully utilizing its pricing opportunities? This initial checklist looks first at the internal questions that are priorities in the pricing decision-making process.

  • What percentage of management time is spent on pricing?
  • How much management time is spent with customers?
  • Is there an information base in place that tracks pricing for each product line and its relationship with volume?
  • Is competitor pricing tracked in similar detail?
  • How frequently is pricing specifically and rigorously reviewed?
  • Is the company organized in a way that ensures that a balanced pricing decision is made?

The following questions are directed at external market potential:

  • Are competitors’ future pricing strategies and plans understood?
  • Is there a clear understanding and alignment between what the company sees as added value, compared to what the customer sees?
  • Does the company have a clear pricing strategy differentiated for the circumstances and market position of each product group and each customer?

As we enter a more challenging global competition, it raises the question of how we do business. Any aftermarket company needs to pay close attention to the details and the micro-management process as it becomes increasingly more important in our business structuring and developing a profit basis.

Discovering pricing and systematizing and institutionalizing its proactive exploitation will become a key distinguishing factor among the more successful aftermarket companies.

Making it Happen Your Way

When seeking to boost financial performance, look at pricing possibilities before cutbacks in costs. Investigate three routes: exploiting market advantages, improving the decision-making process and pursuing all pricing options proactively.

  • Share responsibility for pricing between sales, finance and a fully informed management staff-”even if you are a one-person company.
  • Develop high-quality data on true net profitability of both the company and the customer.
  • Look for price opportunities on an individual product-line basis, rather than across a range of products.
  • Seek superior strategies by managing customer information, exploiting structural advantages, and through innovation and leadership.

Price decisions are too often made by too few people. Only by sharing the responsibility for pricing can managers begin to understand the importance that pricing can have on the success of a business.

Ultimately, decisions on pricing must be measured against other critical factors, such as data on customers. In the final analysis, pricing can be an exercise in both innovation and leadership.

And finally, common within the aftermarket is the internal structure where management is technical in background and playing catch-up on business in our hurried world. I suggest you investigate the options such as your community college or consider education upgrades available at affordable institutions I might recommend.