What is “right pricing”? It is pricing not to maximize your margin but to maximize your profits. Many companies price their products and services to get the highest margin rate. This is great as long as the market will accept you process. As a pricing leader you can very often set prices and that is an enviable position to be in. but how many companies are in a position to do this? The answer is very few. The vast majority of the time one must deal with the realities of dealing in a competitive environment, where you may have some intrinsic advantages but are in no position tom dictate prices. You nay be able to avoid pure price commodity pricing where you do offer the basically the same thing as everyone else, but can offer better payment term, have a sales rep with great connections, are really nice pe3ple to deal with, have a liberal returns policy, etc, but when it come down to it you may be able to get 1 or 2 points in higher prices then your competition.
So what are you alternative? The answer is right pricing. There are various ways to do this, recognizing that what follows is but the simplest of examples.
Case A, is the 3 status quo where ones revenue is 1,000 units of anything, with a $50/unit price and a 20% margin, generating $10,000 in margin.
– Option 1, is to fragment the market into regular clients, selling 800 units at the normal $50/unit price and 20% margin which will generate $8,000 in margin, and discount prices from $50/unit to $47/unit, with a corresponding 15% margin. This will add $1,750 in margin. The total margin generated will be $9,750 or 2.5% less margin then we stated with which would be counter productive and not generally a wise strategy. un less there
– Option 2, would be the same as above as far the 800 units sold, but as is based in greater price-volume flexibility, dropped prices to $46/unit with a 13% margin and selling 400 more units. The total margin would be $10,400 or 4% higher margin then Case A. We assume no increase in fixed cost and not setting pricing precedents that would impact the 800 units sold and might be a good strategy.
– Option 3, gives us the same results as the prior case but at the same overall volume, selling the additional 200 units at $52/units at a 23% margin.
Whatever one does should be based on current conditions as to price and volume sensitivity and setting prices based on the most profitable course of action. Time change and what worked best yesterday might not be the option best today. Test marketing new policies allows one to check out “right pricing” on a small scale first before making global changes.
We welcome your questions as to the challenges you face in order to grow.
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