In many organizations, Pricing suffers from neglect, resulting in one of the following sina:
- Prices remain unchanged for far too long
- Prices are based on simplistic rules – typically cost plus a certain margin or the manufacturer’s suggested retail price (MSRP) – with no regard to whether this makes sense for the business
- Prices are set based on “feel” or “gut”
- Prices are set based on what competitors are charging
- Prices are inconsistent with the company’s goals (e.g., prices are set low for products where the company wishes to convey a premium image)
The first of these sins is sadly quite common. Many companies have tens or hundreds of thousands of products and putting any real consideration into the price of each product, much less doing so regularly, can seem like a huge endeavor.
The second sin is sticking to simplistic rules. While these are easy to implement, they can reduce profitability and make the job of the supply chain team harder. A required 25% markup on a given product may result in a far lower price than customers are willing to pay, leaving money on the table and potentially even resulting in product shortages. The same markup, on another product, could result in prices that are far higher than what customers are willing to pay, leading to a product that languishes in the warehouse.
Pricing based on gut has a similar problem; prices could be seriously wrong in either direction. However, gut feel also has implementation issues: it’s awfully hard to apply gut feelings to more than a handful of items at a time.
Basing one’s prices on the competition can seem like a panacea: let the competitor do the hard work of figuring out what the price should be, and simply copy their prices (potentially adding or subtracting a small amount). This approach can make sense in environments where products are relatively undifferentiated and prices are primary driving of purchasing decisions, such as sales by some online storefronts. In other situations, however, it involves a series of poor assumptions. First, it assumes competitors know what they are doing, and are setting their prices correctly, which is rarely true. Second, it assumes prices that make sense for one company also make sense for another. But that makes very little sense for companies with very different business models, strategies and reputations. Worst of all, this particular sin often leads to a race to the bottom as companies try to undercut their competitors.
The final sin is setting prices that aren’t compatible with the company’s strategic objectives. Prices can easily create mixed messages that confuse or even irritate customers. Customers of budget retailers, for instance, are unlikely to respond well to premium prices.
Avoiding these sins, and employing systematic, data-oriented approaches to Pricing always leads to the best outcomes. We can help you do it right.