It is estimated that only 3-5% of all businesses have captured the profit margins they truly deserve through their pricing schedules and policies. This statistic indicates a lot of untapped potential given the typical improvement of 2-4 points realized when a company begins approaching pricing from a strategic view. Our price consultants experience supports these findings.
Ask yourself: Are there price improvement opportunities in your business? Where?
Before actually conducting data analysis to definitively identify price improvement targets, examine some of the situations within your business that might be early indicators of price improvement potential. Do any of the following circumstances apply to your business?
Complex Pricing Environment – Does your business sell a large number of items or SKUs? Are there many customers and a variety of markets? The combination of these factors quickly creates a complex pricing environment. Even 500 SKUs, 500 customers and five markets creates a potential of 1.25 million different price points. How do you assure that every price for every customer is on target and within the market range? If this situation exists in your business and you are not employing pricing technology to manage pricing, you are likely leaving money on the table and losing sales due to under-optimized prices.
Sales Reps Setting Prices – Many businesses rely heavily upon the sales team to arrive at executed prices. Sales reps can have great insight into specific accounts and competitive factors. However, asking reps to rely on their own individual experience to set prices does not optimize the prices you’re receiving. What if, instead, each rep had the collective experience of the entire team of reps to set prices? A centralized pricing structure that uses historical pricing data can deliver optimized prices to every rep, helping ensure higher close rates and improved margins. If your business is relying on individual sales reps to determine prices, there is likely room for significant improvement.
Cost Plus Pricing – If your business uses a cost-plus pricing approach – that is, cost plus a pre-determined margin – then it is highly likely that you are leaving money on the table and losing sales opportunities. This is a clear signal for price improvement. Three things can happen when prices are set on a cost-plus basis, two of which are bad. In one case, the price is set lower than the customer is willing to pay and you leave valuable money on the table. In the second scenario, prices are set higher than the customer is willing to pay and you lose the sale. Finally, in the third case, the price just happens to be optimized and you realize maximum margin and close the deal. Unfortunately, this scenario happens only a fraction of the time.
If any or all of these situations exist in your business, then it is highly likely that you are underperforming in price and margin realization. Your next step is to conduct pricing data analysis to identify specific price targets. This analysis will almost inevitably reveal some low-hanging fruit that will provide a quick return on your effort and minimize any risk to your business. Then you can determine how to move forward in optimizing your pricing and maximizing your return for the long term.
If you need help in analyzing your pricing the price consultants at PricePoint Partners can help. Just give us a call and we can guide you in the right direction. Call 330-342-0923 and ask to speak with a price consultant.