The days of easy money are over
Have you noticed that money is getting a lot harder to come by?
Interest rates have been at historic lows. As a result, everyone starting piling on debt to spend, spend, spend.
- Venture capitalists threw cash at ridiculous business ideas.
- Businesses paid their vendors whatever they demanded.
- Customers willingly accepted ridiculous prices.
And who could blame them?
Sure, spending tons of money felt a little strange as first, but as the years dragged on, the insanity just became normal.
Now times have changed, and the buyer's mindset has shifted.
Decision makers who were happy to spend their dollars, euros, and yen are now hesitating to make even the smallest of purchases.
Now companies that have never had to think about old-world concepts like profitability and economic sustainability are heading into a world of hurt.
Does that mean we just need to work harder?
Many people mistakenly believe that, at worst, they will just have to produce even more.
It never even occurs to them that they can work smarter.
- Imagine losing money on every sale and telling yourself that you'll make it up on volume.
- Imagine seeing your customer demand shrink and telling yourself that it's because you're not producing enough.
- Imagine realizing that there's literally nothing about your offering that is different from any other and telling yourself that it's not worth worrying about.
Working harder involves increasing your firm's cost, effort, and risk.
Do you really want to do that in an increasingly difficult and complex marketplace?
But we have a great product! We deserve to succeed!
There's a dangerous idea floating out there that simply refuses to die.
People believe that great products inevitably lead to great profits.
Unfortunately, it just isn't true.
McDonald's makes more money than any other burger vendor. Do you believe that it makes the best burgers?
Business success takes more than just focusing on creating a great product.
It requires the design of a strong business model and its pricing strategy.
When businesses lose sight of this simple fact, they sow the seeds of their own demise.
Consider the case of a "free-money machine" that provides $10,000 to anyone who approaches it.
The device would become quite popular in the marketplace.
- Customer usage would increase rapidly.
- User ratings would be extraordinarily high.
- Retention dates wouldn't ever drop off.
Despite performing well against popular metrics, this offering would lead to financial ruin for its owner.
Yes, this is an over-the-top example, but many businesses are judged in a similar fashion.
Offerings that made sense in a market in which money was flowing like water may prove foolhardy just a few years later.
Pricing strategy is the key to business success
Many business leaders think of products as being good or bad.
In reality, products should only be considered as being good or bad for the price at which they are offered.
A product that is the object of ridicule at one price might be a treasured possession at another.
So is pricing just a matter of picking the right number?
A strong pricing strategy is based upon an understanding of your customers, your competitors, your reputation, and the marketplace itself.
This knowledge drives the selection of features that you offer, the methods by which you describe them, the way in which you package them, and how you connect with customers.
Selecting a number is just the most visible part - and it's one that almost every company gets wrong, because the secret is that a product has multiple correct prices.
Water, for instance, can be offered at a wide variety of prices:
- At a dentist's office, it's free
- At a supermarket, it's a buck or two
- At a concert, it might be $10
The above represent three instances of the same product, each instance priced appropriately in its own marketplace.
Treating pricing as a simple number is the second-most expensive and dangerous mistake that a business can make.
Nevertheless, it happens over and over again.
Far worse is the all-too-common decision for firms to drop prices as soon as demand begins to fall. Almost every textbook in economics teaches readers that this is the only approach to a drop in demand.
While doing so many shore up a customer base in the short term, few texts go on to describe the inevitable costs that these firm firms will inflict upon themselves: reduced margins, damage to their reputations, and erosion of their abilities to command higher prices in the future.
Your competitors probably never gave strategic pricing a thought
If pricing is so important, why isn't it discussed more often?
It's a little known fact that pricing is one of the most important parts of firm's marketing strategy. Nearly fifty years ago academics presented the four Ps framework for marketing strategy. It consisted of the most important focuses:
- Promotion
- Place
- Product
- Price
Let's face it, the first three are fun, and can be discussed by experts and laymen alike.
Entire industries have been build around them.
- Advertisers love to talk about promotion.
- Real estate agents love to talk about place.
- Product managers love to talk about product.
So why does pricing get the cold shoulder?
- Schools don't teach pricing.
- Employees don't study pricing.
- Businesses don't have departments for analyzing pricing.
Pricing is hard. It requires a complex mix of skills that few have bothered to assemble.
In good times, when money is flowing freely and no one else is focused on pricing, business owners can keep their heads in the sand. Those times are coming to an end, and the importance of pricing strategy will soon become obvious.
Signs that you need a strategic pricing consultant
There are a couple of signs that your current pricing strategy is hurting your business and a consultant could help:
- Your customers see your offerings just like everybody else's
- You don't know what customers value most about your offerings
- You set your prices once and never gave them a second thought
- You know you need to raise your prices, but you're not sure how to do it
- You have many offerings and aren't sure if they are competing against each other
What does a pricing consultant actually do?
Every situation is different, but here are some examples of how a pricing consultant can help:
- Analyze competitors to understand strengths, weaknesses, and gaps in their pricing strategies
- Tier existing offerings into multiple buying options
- Reduce product line cannibalization and intracompany competition
- Differentiate offerings for increased profitability
- Prioritize feature development for product releases
- Model consumer personas and buying preferences
- Search through sales data to detect patterns in customer behavior
- Develop a tripwire strategy to help sell expensive and complex products
- Design a workflow for bidding on custom projects
Can strategic pricing help your business?
Pricing strategy is the most powerful level for the success of your firm.
My background in business, accounting, economics and product management provides me with a unique perspective on product pricing that can solidify your economic future.
If you need help with your pricing, contact me for a consultation.