Price Smarter on the Net

As companies seek ways to grow faster and increase profits, they are finding that some of the strategies they have favored in the past are not as effective as they would like. When companies are focused on cutting costs to meet financial targets for the next quarter, it can have negative consequences for employees and company culture, and it doesn’t usually lead to growth. Although developing new products is important for growth, it is difficult to predict when the next breakthrough innovation will occur. It may take several years for investments in other strategies, such as branding and new distribution channels, to become profitable. However, pricing is a different story and executives are quickly learning that it can be their most effective strategic weapon.

In fact, a recent A.T. A study by Kearney of North America’s largest companies shows that a price increase of one percent leads to a profit increase of more than seven percent. In addition, a one percent price increase is three times as effective as a one percent cost reduction, making the case for increasing prices quite compelling.

Pricing has the advantage of being immediate. The company Wal-Mart responded to not having many shoppers during the holiday season by cutting the prices of popular items. By taking such quick action, it regained lost ground and reported an average same-store sales increase of 4.3 per cent over the previous December. It regained lost ground by taking quick action and reported an average increase of 4.3 percent in same-store sales from the previous December.

Other benefits, however, are just as important. By changing your price structures, you can improve relationships with customers and also get rid of unprofitable customers. This means that a company is more likely to see an increase in profit from a price increase than from a cost reduction.

But there are complications. Pricing is an emotional exercise for a management team. The chief of marketing is concerned that a value increments will cause customers to flock away. The CFO is scared of losing revenue and how complicated it would be to implement a new pricing policy. The CEO believes that losing any customer is bad for business.

Determining value

To develop a new pricing strategy, you need to understand how customers perceive the value of your product or service, and how much they are willing to pay. Value is a subjective concept that is best described on the surface. It is impossibly vague at worst. The most difficult part of creating a pricing strategy is figuring out what the customer is willing to pay. If the seller does not know the full value their product or service brings to customers, the set price will be inaccurate. The same goes for customers who are unfamiliar with the product or its value. If they’re not given a good reason to invest in the product, they’re not going to buy it.

In order to be successful in value-based pricing, there are three key principles that need to be focused on.

A. The definition of value must come from the perspective of the buyer and not the seller. Many companies make the mistake of overemphasizing the features of their products, when they should instead focus on the hard and soft benefits that their customers perceive. A product that is not part of a larger system is not usually strong enough to be worth the value pricing. Value-based pricing is a pricing strategy where companies charge based on the perceived value of their product or service. This can be done by enhancing products with services or offering flexible financial solutions. Improved products not only generate more customer value, but they are also customized for particular customer groups.

B. The offering’s value must be much better than competing alternatives or else the price will be set by the least knowledgeable competitor or the most pushy. And, in either case, the competitor will undercut you on price, making it hard to compete and effectively destroying the market. If a company cannot differentiate its product or service, it will not be able to use value-based pricing.

C. The company must be certain that it has found all of the ways that it can provide value to the customer, and it must communicate these advantages to the customer in a way that makes sense to them. What would happen if you brainstormed with your senior management team to come up with the highest possible price you could charge for your product? You might be surprised by the sources of value you come up with. The process of understanding your business customers’ models and aspirations, as well as the economics of their processes, can become complicated in business-to-business markets. The company needs to assess how a product or service is going to be beneficial to a customer before it can present that information clearly and accurately.

Pricing Smarter with E-commerce

eCommerce provides companies with new opportunities to test prices, segment customers and respond to changes in supply and demand. I’m sorry that so few companies are taking advantage of the opportunities available to them.

Two very different approaches to pricing—neither optimal—have dominated the sale of goods and services through the Internet. Some start-ups offer very low prices in order to get an advantage over their competitors. This has caused many incumbents to simply transfer their prices from offline to online. Some companies believe that their brand is strong enough that they don’t need to compete on price. Others feel pressure to have an online presence, but are not prepared for the complexities of pricing across multiple channels.

Both approaches cause companies to miss a big opportunity. The Internet enables companies to pricing more accurately than they could offline, and to generate substantial value in the process. Transparency and efficiency, after all, go both ways. Companies can easily track customers’ behavior and adjust prices accordingly, just as customers can easily compare prices on the Internet. Organizations must act quickly to change their online policies before it becomes too difficult or disastrous.

The Reality of E-Pricing

In the absence of hard data, companies are using intuition and supposition to drive their Internet pricing strategies. Observers insist that the internet will make it so prices are driven down to the lowest possible level and that customers will only choose the option with the lowest prices because of the Web’s transparency. In the end, they argue that price will be the most important factor that differentiates products and services for on-line consumers, and that it will outweigh quality, service, and reputation. When asked, online consumers say that the most important factor motivating them to buy online is lower prices.

But their behavior tells a different story. A study recently done by McKinsey & Company has found that most on-line buyers do not shop around very much: 89% of on-line book buyers purchase from the first site they visit; so do 84% of those buying toys, 81% buying music, and 76% buying electronics. About 90% of North American consumers in a separate study do not turn out to be aggressive bargain hunters. Many people stick to the same websites when they shop online.

Nor is price the main consideration for corporate buyers. The main reason businesses buy things online is to reduce the amount of money they spend overall, but price is not always the biggest factor in how much something costs. Only 30% of B2B purchasing managers identified lower prices as the key benefit to buying online. The main advantages of e-commerce come from lowering transaction and search costs, such as reducing paperwork, and from automating purchasing information to track inventory and make better purchasing decisions. buyer said they expected prices to go down, which would reduce supplier profits. This is contrary to what they said, that both buyers and suppliers should have reduced transaction costs.

In business-to-business settings, buyers are more likely to follow through on what they say they will do in surveys, compared to individual customers. Reverse auctions have not been especially popular, despite all of the press they have received. Fifteen percent of companies that make purchases over the internet have tried them. If these statistics are accurate, it seems that very few business-to-business buyers prefer reverse auctions to other approaches, and even fewer intend to use them in the next year. Despite the lower prices that could be acquired through reverse auctions, half of the companies who use this method do not choose the low bidder. Additionally, 87% of those companies stay with their current supplier despite the higher prices they could be paying.