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Posted 28 Sep, 2017 | Posted in: Pricing | Tagged: , , , , ,

As a pricing professional, I always love to quote the study that a 1% improvement in price leads to 11% in operating profit, whereas a 1% increase in volume sold improves only by 3.3%[1]. If the business case for managing and improving price is so apparent, why don’t more companies do it?

There are multiple factors why a price improvement doesn’t reach its potential – but the top reason is often fear of customer loss. The concern is genuine; if you purposefully increase the price, the customer might get upset, stop using your service, or worse, switch to a competitor. The result can be painful: reduction in revenue, market share, profitability and a host of problems from Wall Street.

But there is a bright side: price improvement holds tremendous potential for profit improvement if the fear of failure with customers can be overcome.

There are three things you need to focus on building the confidence you need to minimize the risk of customer loss and ultimately improve price and profitability.

Know the value of your product and services

Most companies we deal with are unable to understand their true differential value. Companies fixate on common value (value that is common between you and your competition) and start to think that their product is a commodity. Understand true differential value of your product, for some it is superior technology for others it is superior service. Once you understand your differential value next step is to identify customers who benefit from them. These are the customers where your risk of customer loss will be the lowest.

Calculate your tipping point

Do the breakeven analysis and customer level profitability analysis. The breakeven analysis will tell you how much volume you can trade-off for gains in pricing. The customer profitability analysis will tell you which customers you should start with. According to a Harvard study, 20% of your customers are responsible for 225% of your profits.[2] So for the 80% of your customers who are unprofitable, start by improving their price and keep an eye on the tipping point.

Have an execution plan

Knowing the right customers to improve price is the easy part, it can be done with value research and data analytics. The real issue is the execution. Is there a sales person in your organization that would love to talk to customers about price? Especially when you want to improve it? I have never met one and I believe it is not the easiest of conversations either. So, to build confidence, give sales teams the right tools for the effort.  Often fear is created from the unknown: will the customer get angry?  Will they leave?  Planning is the antidote to fear.  Better public and value communication to customers, negotiating skills, and value Give-Gets are keys to building a solid plan, reduce fear, and realize pricing’s potential.

As experienced pricers, we have worked with clients from professional services to manufacturing, hi-tech to data services, Fortune 500 to medium businesses, each one of them benefitted financially from understanding their value, subsequent pricing improvements and they achieved all this while minimizing risk of customer loss.

What’s holding you back from realizing your pricing potential?

 

[1] “Managing Price, Gaining Profit,” HBR, 1992, by M. Marn and R. Rosiello

[2] “Profit Priorities from Activity-Based Costing” HBR, 1991, by R. Cooper and R. Kaplan

Saad ShahzadWritten by Saad Shahzad

Saad Shahzad is a Business Consulting Manager at Holden Advisors.

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