7 reasons why your price increases fail (and your bottom line suffers)
“When it comes to the prices we pay, we study them, we map them, we work on them. But with the prices we charge, we are too sloppy!”
pricing is the most important driver of profit
But unfortunately managers and entrepreneurs seem to neglect the issue. In one of our global pricing studies we asked over 3,900 high-level decision makers from all major service and manufacturing industries around the world how they set their prices. The main findings in a nutshell: many of them don’t get the money for the value they deliver. And weak pricing cuts their profits by 25 percent.
untapped pricing power = lost profits
Every company has the ability to achieve high pricing power. If a company can offer its customers real value and communicate that through a top brand, this will translate into money.Asked what or who is responsible for their weak pricing, managers often blame “tough competition”. Another favorite is to blame customers, and stating that the customers are very consolidated and have tremendous negotiation power is very common. These are all excuses that avoid getting to the bottom of the problem. Poor pricing performance is not a question of fate; it is largely up to each company to either become a pricing champion or go the road of devastating price wars.There are no structural reasons for pricing weakness, but three fundamental causes that make the difference:
- insufficient monitoring
- a lack of pricing know-how
- and poor strategies
A few simple steps can help tremendously when it comes to pricing.
1. By focusing on market share, you start price wars
“If you ask your people to strive for volume, you should not be too surprised when you end up in a price war.”The effect of price wars on profits is disastrous for all sides. There are no winners— except the customer. That’s why companies should avoid price wars if at all possible and it’s up to their managers and owners to encourage their employees to strive for profit, not for market share.
2. You underestimate inflation threat
Neglecting prices and being weak at pricing will also prove devastating with inflation around the corner. What will happen if you are weak at pricing, you will typically achieve only half of your targeted price increases. That means you only get 53 percent in the end, although you wanted 100 percent of your targeted price.
3. You give discounts and goodies in return for price increases
Although price increases are essential for survival in inflation periods, managers and entrepreneurs are mostly insecure about how to plan and implement price increases. There are a few steps though that can help them.
First and foremost, you need a consistent and systematic process for pricing. For every single activity companies have detailed processes with descriptions and explanations, but when it comes to price increases many don’t exactly know what to do. Such a process includes starting with the price increase targets, selecting the right instruments, preparing the price increase and, finally, executing it.
Price increases are often accompanied by “goodies”, discounts, give-aways, customer-friendly payment terms, etc. Many fail to factor in the effect of these customer-friendly measures.
4. You don’t fight hard enough for the necessary price increases
5. You don’t think creatively enough about prices
Also, it helps to think creatively about prices. Besides a classical list price increase, there are tens or perhaps even hundreds of price instruments available. The key is to go through the list of possible instruments, analyze which one fits your specific situation the best and then make a conscious decision as to which instruments to take – be it discounts, shorter payment terms, smaller package sizes and so on.Take this example: the price of a one-liter bottle is known by most consumers. Almost nobody overestimates the price of a one liter bottle of water. But customers have a much lower price awareness of the small pack. More importantly, 50 percentoverestimate the price.
If you want to increase the price of your water bottles, the solution seems clear: don’t touch the price of the one liter pack, but apply a disproportionally high increase for the small pack. This is a general message that applies to B2B as well as B2C companies:set different price increases by product/customer groups based on the level of price elasticity.
6. You weren’t the first to set an ‘anchor’ price
Companies often ask us whether they should be the first ones to make a price move. If a company is or wants to be the leader of an industry, then it must make the first move and set the anchor price.
Many but still too few companies are doing that. When you knock at your client’s door and ask for higher prices, the clients are already informed, they already know about the price change, and the bad news has already been communicated.
7. You don’t reward your sales team right
Implementing the new price is the job of the sales department, but very often sales is struggling with this task. Either they only manage to implement a small part of the planned price increase or they give away goodies and discounts in exchange for the price increase; the bottom line being that nothing is achieved.