In the world of pricing management, the adage “Don’t believe everything you hear” holds special meaning. Myths run rampant here. If you allow any of these myths to influence the price decisions you make every day, you risk leaving far too much money on the table.
Here are three of the most potentially harmful pricing myths that our pricing consultants hear every day. Avoid them to ensure you’re making smart decisions that drive margin improvement:
Not necessarily. We’re taught in business school that any change in price has a corresponding change in unit volume purchased. This stems from the concept of elasticity of demand where a buyer could be stimulated to buy more when prices are lowered. This might be true in consumer markets for items such as soda pop or sweaters. But in the business-to-business sector, demand tends to be set based on business requirements. Reducing price will not cause the buyer to purchase more widgets than they need. While lower prices from Supplier A may steal volume from Supplier B at a given account, it won’t stimulate demand.Similarly, increasing prices slightly typically does not chase volume away. Would you lose business by increasing prices just .5 percent? Not likely.
While sales reps may be closest to the customer, they are not necessarily in position to make optimal price calls. If your business resides in a complex pricing environment, your front-line team may find it impossible to manage all the possible prices. A business with 5,000 SKUs, 1,000 customers and five markets will have up to 25 million different possible prices. It’s impossible for anyone to manage this level of complexity.Who should set your pricing then? Your executive management team – aided by pricing technology that performs the necessary calculations and takes into account the price sensitivity related to each deal. This type of program is vital to your price optimization success.
Few products are true commodities. Think oil, orange juice and natural gas. These are commodities. Claiming that your product is a commodity is often an easy way to avoid the hard work of differentiating your offering and selling the value. Yes, commodity volume responds tremendously to price changes. The vast majority of other products don’t. We see price drops of 20-30% required in order to get significant improvements in volume for many products. Does your product have that much margin to give away? Not likely. Price drops typically just give away margin and disrupt the competitive environment.
When you’re in the heat of battle in day-to-day business, it’s easy to fall victim to myths such as these – to adopt and incorporate popular fallacies into your pricing strategy. But stop and look at the big picture: Breaking away from harmful myths means moving a giant step closer to optimizing your prices for maximum profitability and growth.