Are You Considering the Three Fundamental Price Drivers When Setting Prices?

Are You Considering the Three Fundamental Price Drivers When Setting Prices?

The price in every sales transaction can have dozens of potential drivers that determine the actual price point. Consider the economy, competitive environment, the buyer’s cost reduction goals, delivery time, etc. We have seen in excess of 30 different drivers for some transactions. Managing the fundamental price drivers is key.

While it becomes difficult to manage and account for each price driver, you may significantly improve your pricing performance by paying attention to just three key drivers. They are product price sensitivity, customer price sensitivity and market price sensitivity.

Price Sensitivity

Each product in your business likely has a different level of price sensitivity. Take the commodity products in your business. These products are typically more price sensitive and will yield lower margins. On the other hand, you may have higher value products that command premium prices and better margins. Take the time to separate all products into categories ranging from commodity to high value and price them accordingly.

The same approach applies to customers. Each customer has their own price sensitivity. Consider the size, location, industry and order patterns for each customer.  Large customers that order large quantities are typically more price sensitive while small customers with infrequent orders are less sensitive.

Finally, market segments typically vary in their sensitivity to price. Consider selling to the oil and gas market compared to selling to the automotive market.

Pricing Structures

Each of these may already be on your radar screen. The challenge is accurately factoring each into the price equation at the transaction level. Our approach is building customized pricing infrastructures that apply the appropriate algorithms for each transaction.

You can start by focusing on just one of the three price sensitivity drivers and applying what you already know about the price sensitivity of each product, market or customer.

Learn more about adopting a culture of strategic pricing management in a One-Day Pricing Workshop with Price Point Partners or engage with a price consultant to determine the ideal pricing strategy for your firm. Call 330-958-4036 for more information..

About the Author

Ralph Zuponcic

President, PricePoint Partners

Ralph is a national authority on strategic pricing. He has been featured in publications including The Wall Street Journal, Fortune Small Business, CFO Magazine and Marketing News.

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