Photo © Yobro10 – iStock.com
Many organizations begin their annual pricing process in July to be ready to start invoicing Jan 1st. There are many factors that drive the timing, including annual budget cycles, customer notification periods, customer pricing blackout periods, printing price books and catalogues, and updating system prices, all of which make this seemingly innocuous process a major exercise.
We often see companies who tie themselves in knots over the bureaucratic processes and miss the strategic requirements of the exercise altogether. Or worse yet are the companies who say: “We have a gap in next year’s P&L, we are going to need a 3% price increase.” My question is: if 3% is good, would 3.5% be better? What about 4%?
Many organizations cannot afford the cost of a price optimization study, but instead of looking at other approaches they simply default to picking a percentage and applying it to everything. As an alternative we recommend a process that integrates information from a number of different perspectives to make the most of the information that is available. Let me share some examples.
Low margin products:
One food products company was producing a range of low innovation, products requiring high cost ingredients. Not surprisingly margins were below 15%. In this case a price increase of 3% more than their cost inflation meant a substantial improvement to margins. The bet was a pretty safe one, because with such low margins, as long as they lost less than 16.7% of their volume they would come out ahead!
High equity products:
An industrial safety products company had created substantial equity in their brand through their ability to help companies save money in Health and Safety costs by using their specialized products. However because they also competed at the low end of the market they had adopted the mentality that they had to match competitive pricing. By identifying and quantifying the value of their premium product lines they realized these products were worth a substantial premium, and thus slated these for a substantially larger increase.
Always Remember Pricing Power
Warren Buffet once said that he would rather have a business with pricing power than good management. The Oracle of Omaha isn’t about to accept weak management but he can replace managers. If a business has pricing power it has the ability to push through price increases. We often see businesses that have a product line with one competitor, a broad customer base, product differentiation and barriers to entry, but their pricing process doesn’t highlight the opportunity to seek a price increase that is any different than another product line where they are the number 4 player in an 6 player market fighting it out over 10 global customers.
These are just three of what I would say are the 9 considerations for reviewing your product portfolio as part of pricing season. By developing a pricing strategy as part of your annual planning process you can achieve profits well in excess of just taking a uniform increase.
Article written by Paul Hunt, President of Pricing Solutions. Pricing Solutions is an international pricing strategy consultancy dedicated to helping clients achieve world class pricing competency. Paul also writes for the Pricing Solutions Club. Article also appearing in the Financial Post