Good product, superb service but wrong pricing can short-change your profit level in business, you need to find out the facts behind any figure

Of all management tools, pricing is undoubtedly the strongest tool for the control of profitability in all enterprises by my opinion. Very small upward changes in average price translate into huge changes in operating profit. In the past when the economies were buoyant and demand was strong, there was little need to develop pricing skills and to use the pricing as a means to increase profitability.

Pricing right is the fastest and most effective way for enterprises to grow profits. The right price will boost profits faster than increase in sales volumes, whereas, the wrong price can shrink profits just as quickly. Entrepreneurs favor tools such as price reduction to boost sales volumes and reduction in operating costs to improve profitability. Neither of these tools is viable to achieve the desired results. A reduction in operating costs is rarely attainable because entrepreneurial businesses are usually running on the lowest cost possible. Increase in sales volumes have increased cost implications such as increase in raw materials, finished stock, inventory and bigger budgets for manpower, research and development and marketing.

If you have ever imagined that reducing prices to gain market share and increase profit may be a sound strategy, it is not, unless you have a dominant cost advantage i.e. a cost that is at least 30% below the price reduction will not avail much. Such cost advantages are realized by new technology,  process changes or monopoly benefits.

It has been proven by research that a 1 % improvement in price will lift operating profits by 11% and a 1 % reduction in average pricing brings operating profits down by just as much. This is called the “pricing lever double-edged sword”. This is an unfortunate situation for entrepreneurs that resort to keeping prices low. This acts as a barrier for leveraging the possibility of profit increases. It also initiates profit loss by frequent engagement of promotions that include discounting prices to stimulate sales. Both of these practices allow profits to slip through their hands.

Entrepreneurs are of the opinion that prices are uncontrollable and unmanageable and that the market, customers or unreasonable competitors set the prices. However, there are ways as illustrated in this article to use pricing in a manner to obtain advantages that remain unused by entrepreneurs.

For entrepreneurs, the reasons they have been unable to use pricing to their advantage is due to our ignorance of how pricing can affect the bottom line. Beliefs that pricing is unmanageable and the fact that data to support pricing decision does not exist are some of the reasons for our hindrances. Other factors may be that the information needed is inaccessible or in some cases, errors made in pricing have gone undetected by our untrained eyes and are causing damages we are still unaware about. In cases where some profits are being made, we entrepreneurs have no incentive to stretch the enterprise for more profits.

As entrepreneurs, we have to consider the following levels of pricing management to overcome pricing obstacles. Starting from the least complex, overall industry price levels, then price positioning relative to competitors, and lastly, the price to assign to each and every customer transaction. These all reinforce one another and support enterprises in excelling at pricing issues, opportunities and threats.

TAKEAWAY

To get the right price, we need to have a better understanding of the supply and demand: 90st and other trends that affect the overall industry price levels. We have to proactively encourage the trends that favor the industry rather than passively accepting what the industry throws our way. Some of the things we can do is to avoid long term fixed prices and take advantage of deals just before expected market changes occurred, or by adding new capacity in a way to match expected increase in overall demand.

Price positioning relative to competitors is important. It is pertinent to understand that the focus here is the value specific to a customer segment, particularly on setting list or base prices by segment. Differentiating prices will help us get the right price all the time. Prices should be assigned to each and every customer transaction depending on the volume of sales, payment plan and the demand in the market at the time of the transaction.