9 Signs You Need to Review Your Pricing Strategy
Pricing is a journey, and you should always be looking to tweak and fine-tune your pricing, as well as seeking to understand if your overall pricing strategy is working. This post covers 9 indicators that may be telling you it’s time for a change in your pricing plan.
1. You’re winning every order
If you’re winning every order or the majority of orders, then you may think you’re onto a winner. While on the surface this is good news for your business, as you’re likely making a reasonable margin, underneath it is a sure sign that you’re underselling yourself and should be looking to increase prices.
There is no definitive percentage of quotes that you should be winning, there is a sweet-spot to be found. If you can raise prices and keep the same volume of sales, then bingo, you’re already on your way to price optimisation. If you can increase your prices, take a hit on volume sold, but overall revenues and profitability are still up, then again, this is a positive step in the journey to price optimisation.
2. Competitors are charging more or the same for inferior products
It can often be tempting, especially if you’re new a business, to just match or undercut your competitor’s price. However, as Tim Smith, Managing Principal at Chicago consulting firm, Wiglaf Pricing says: “if you offer a superior product, price it accordingly”.
He uses the example of 5 Hour Energy, a 59ml energy shot, which is priced at £2.99. 5 Hour Energy main competitor is Red-Bull, who sell a 473ml energy drink at £1.99. It would have been all too easy for 5 Hour Energy to match or undercut, but their pricing strategy has been bang on, as they have gone from a nobody to a £600 million business in less that ten years.
3. Your cash-flow is down
If your cash flow is taking a turn for the worse, it can be a clear sign to review your pricing strategy. It is important at this stage to analyse your current position and take stock. You need to get to the bottom of whether pricing is a key contributor to a decline in cash.
Have your costs increased? Have your competitors changed their prices? Have your competitors started to adopt different pricing techniques e.g. bundles or special promotions? You may find that pricing has no link with the change in cash position, but you must rule pricing out.
4. You’re selling using a Cost-Plus Pricing strategy
Cost-plus pricing is a simple to use method that ensures you’re making a margin and profit on the goods you’re selling, but it can be a devil in disguise. Let’s take some examples to emphasise this point.
A Hamburger at McDonald’s costs £0.89. A Hamburger at an upmarket hotel can cost as much as £30.00! The profit margin on the hamburger at an upmarket hotel is likely to be much larger, as they do not follow a cost plus approach. You are paying for the added value i.e. the ambience, the service, the quality of ingredients etc.
5. You do not have visibility of the margin leakage
If you are not reporting and analysing on the success of your pricing, then it is time to review your pricing strategy. Your company and profits may be growing, but what if you could achieve more, by doing a small amount of additional leg-work in the pricing department?
You could run an exercise on a repeatable basis that assesses what products are heavily discounted, plus find out what margins each sales rep is giving away — you will start a process of identifying where you can put pricing stops in place to halt this profit margin leakage.
If two sales reps are selling the same product in the same location, they should be achieving the same range of prices. Likewise, if you’re giving away bigger discounts to new customers, this is a prime pricing review opportunity.
6. Discount codes drive your discount codes
Discount codes are fantastic tools that encourages customers to spend, and also keep your competition on their toes when it comes to their pricing. If you’re finding that discount codes are increasingly driving more and more of your business, that could be an early warning sign that it’s time to review your pricing strategy. You should not be over-reliant on these codes.
7. You change prices once a year
Possibly you adopt this strategy for convenience purposes but really you should be looking at your pricing at the very least on a weekly basis. You may set prices once a year for specific contracts, but aside from this, you should seek opportunities to carry out pricing tests and monitor the impact on volume sold to find your pricing sweet spot.
8. A decline in your average selling price
If you’re not refreshing your products, it is likely that you will inevitably see a decline in your average selling price. A small decrease in price may just be temporary and should be ignored, but a large decline is likely to be a sign that the market is changing.
9. Your pocket price is decreasing
Your pocket price is the price you receive after all discounts are considered, such as rebates, if a particular volume of goods are sold in a financial year. If there is a decline in the average pocket price, or on certain products, it may be an indication you need to win back control of offers that are given to your customers.
You should think carefully about the various metrics and data sets you have available to spot trends and identify areas for improvements in your pricing strategy. Speak to one of our Pricing Specialists today to help you spot opportunities to improve your pricing strategy.