Opinion

A long-running television game show rewards contestants with prizes if The Price is Right. Winning companies also understand they must have the correct pricing to sustain profitability into the future.

In last month’s article, I presented an approach to broadening awareness of your product to more customers. Once more customers are aware of your product, the biggest challenge is either a disjointed approach to the pricing process or lack of ongoing understanding of the drivers of your pricing. Simply, your winning game plan must include your distinctive value proposition, your understanding of the current pricing environment, your pricing strategy, and then implementing the correct pricing tactics.

Let’s consider this approach carefully. Effective pricing involves a structured assessment of internal costs balanced with an understanding of market dynamics and customers’ willingness and ability to pay. And their willingness to pay is based on their assessment of value; not yours.

With this in mind, the process to creating effective pricing begins with knowing the fixed and variable costs applicable to each product or service that you sell. Ensure that your finance department provides accurate costing data. The primary variable costs are the raw materials, direct labour, cost of running the equipment to create and assemble the product, packaging, and sometimes shipping. Your finance team can provide the appropriate fixed costs to include as you determine your total cost to produce your product. You must include all costs into your unit costing.

Next, you must determine your pricing strategy. Are you an everyday low-cost provider? Are you a premium-priced product? Do you want penetration pricing that will help drive total sales at a lower profit to capture a larger market share?

In order to be effective when you go to market, you must determine your pricing approach to attract customers and to stand out from competitors. And your pricing must be relevant to achieve the appropriate demand for your product. Priced too high and you may underachieve your targets. This has an impact on spreading your fixed costs over a smaller customer base and will reduce profitability. If your price is too low, your demand may be higher but will reduce your profit margin per unit. Running different demand models and price sensitivity analysis can help you understand the overall impact that different sales levels and pricing options will have on profitability.

Carefully gather and analyze competitive data on the prices charged for comparable products. Make sure you are tracking regular price and not sale price. While gathering sales price data is also important, you need to start with the everyday price.

Then determine what your markup will be. This can be a set percentage that you apply to all products as part of an overall corporate strategy. Depending on the level of demand and the type of product (fast-moving or long-selling cycle) you will need to establish your target profit. Generating profit, with fair and ethical pricing, is necessary to stay in business.

When you add your costing to your target margins you will create your first selling price. Now you have to go back to your competitive data and see where your price stands relative to the broader category. What adjustments should you consider, if any? Before you look to reduce your selling price, how will the price of your product compare to the price of comparable products? Are you hoping the customer will see it as an apples-to-apples comparison? Or is your value proposition distinctive enough to justify a higher price point?

This is the crux of costing and pricing. What is the perceived value that the customer sees? If there is enough value, they will pay the asking price. If there is insufficient value, the customer may select an alternative. In addition, be wary about putting your product on sale or allowing your sales team to automatically drop the price “just to win the business.” If you adopt this tactic, you will diminish your profitability; the critical measure of your long-term viability.

Your winning game plan includes additional guidelines for your pricing strategy. Bear in mind that the pricing “P” is the one element of the marketing mix — uniquely complementing the other Ps of product, place, and promotion — that clearly drives your revenue. You can guard against negative impacts on profitability by ensuring your corporate pricing guidelines have been carefully considered to include all elements in your costing and pricing process.

We tend to buy emotionally and reinforce our decisions logically. Your pricing needs to be not too low, and not too high, but just close to what the customer is willing to pay…without going over. Just like in the game show. Apply this approach to ensure that for the customer, the price is right.

Tim’s bits: Price is often the forgotten P of the marketing mix. Marketers need to be fluent in basic financial metrics to ensure they can guide the pricing strategy. Your winning game plan brings a complete understanding of your costs combined with knowledge of consumer price sensitivities and competitor prices.

Tim Kist is a Certified Management Consultant, authorized by law, and a Fellow of the Institute of Certified Management Consultants of Manitoba.