Do you consider re-pricing products and services to increase revenue productivity?
|A.||We haven’t considered this …|
|B.||We are always trying to get the best price we can, but have no specific targets.|
|C.||We occasionally review options to re-price products and services to increase revenue productivity.|
|D.||We regularly examine options to re-price products and services to increase revenue productivity.|
|E.||We continuously evaluate options to re-price products and services to increase revenue productivity.|
|[Score: A=0, B=1, C=2, D=3 and E=4]|
Why is this question important?
Some businesses may win business away from competitors by offering lower prices – thus following a ‘low-cost strategy’.
Raising prices can be a quick and easy way to increase profits – but only if customers continue to buy the same quantities as before. Remember what your customers will pay sometimes has little enough to do with cost. It is best to try and understand the buyer’s motive.
In implementing price increases there are two hurdles to overcome:
- informing your customers in a manner which they will readily accept
- overcoming ‘price increase paralysis’ in yourself and in your sales people
Very few customers buy on the basis of price alone. Quality, reliability, performance, backup service, reputation, etc. are all factors which can be as important as or more important than price.
You are probably familiar with the following quote:
“When you buy on price you can never be sure. It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much you lose a little money, that’s all. But when you pay too little, you sometimes lose everything. Because the little you bought is incapable of doing the thing it was bought to do. The common law of business prohibits paying a little and getting a lot. It can’t be done. If you deal with the lowest bidder, it is as well to add something for the risk you run, and if you do that, you will have enough to buy quality”.
Remember also there are ‘other’ indirect ways you can increase prices – change the discount terms, decrease fulfilment costs, increase minimum order sizes, charge for delivery, etc.
If the increase in prices results in the loss of some turnover, it is essential that the overall effect is positive for your business.
Remember also that if there are volume effects, your underlying cost structure will impact on the effectiveness of increasing prices.
Looking at the other side of the coin – dropping prices may also lead to increased profitability if sales volumes rise sufficiently. Through increased sales volumes there may be lower production or fulfilment costs, again increasing margins.
Deciding to Raise or Lower Prices
The price of your product will vary depending on a number of factors such as
- the price that the market is willing to pay
- the general perception of your product in the marketplace
- the price that your competitors are charging and
- expected sales volume
One of the first things you should do is to analyse which of your existing products are profitable and which are not. You should also pay close attention to your costs, and whether your costs are too high rather than your price being too low.
When raising prices you don’t want to alienate your existing customer base by raising prices too high too soon. Instead of increasing prices suddenly, it is better to have a strategic plan over a few years where you gradually increase your prices, for example, 5 to 10 per cent.
Usually, lowering prices is not a good practice unless you are using this strategy to gain market share, or if all of your competitors are lowering their prices. An alternative to lowering price is to offer less for the same price which will effectively reduce your costs without appearing to reduce the value to the customer.
Monitor your pricing …
A key component to pricing your product or service right is to continuously monitor your prices and underlying profitability on an on-going basis. You have to focus on the profitability of every product and service you sell; it’s not enough to look at overall profitability. You have to ascertain the extent to which each product and service is contributing to your profit.