Bringing Science to the Art of Pricing™
by Ryan White, Price for Profit

Price Management can be a complex and confusing topic for management teams, marketers and product managers to tackle. There are numerous approaches and strategies and even more books, articles and consultants to guide you. How does a company know where to start? What elements of pricing are relevant to your business and warrant the commitment and energy to implement? Better yet, what impact will price management initiatives have on your bottom line?

At the end of the day, a firm’s primary objective is to maximize profit through the satisfaction of targeted customers’ needs. Key strategies and initiatives, many focused on efficiency and effectiveness, are then deployed throughout the organization to deliver on that primary objective. So what does this have to do with Pricing? Pricing is the single most important and often most overlooked lever your company can utilize to maximize your profitability. Effective price management typically results in a 1-3% increase in revenue, delivered directly to your bottom line.

Although complex, price management can be simplified and easy to understand. There are three key elements to successful and effective price management: Price Leak Elimination, Pricing Process and Pricing Strategy.

Element One: Price Leak Elimination
Let’s start tactical. How often does a customer dispute an accidental overcharge? How many invoice adjustments occur each month due to price discrepancies? A typical business spends time and energy researching errors; fielding and placing phone calls and adjusting and resending invoices, in order to correct discrepancies between the negotiated price and the incorrect price that ended up on the customer’s invoice. Of bigger concern, often only the overcharges are brought to your attention. However most discrepancies are a result of undercharging your customers due to common business practices that promote ‘add on charges’ for extra services or features (such as a minimum order fee or expedited freight service). Despite best intentions, these charges are the most frequently overlooked and the least likely to be corrected. Element One focuses on identifying and eliminating price leaks from your business. The result is an increase in invoice and collection accuracy through improvements in processes, procedures and systems resulting in a reduction in needed rework and invoice adjustments. These improvements enable you to capture and funnel pure profit directly to your bottom line and build a foundation for further price management improvements.

Element Two: Pricing Process
Are you effectively incorporating customer behavior into your pricing decisions? Can your sales team price the same situation consistently from rep to rep? Clearly no two customers or sales reps are the same in their preferences and skills, and most quoting processes require a tremendous amount of customization, interpretation and experience to identify the most appropriate price. Element Two focuses on understanding how a customer’s choices about price attributes (payment terms, freight terms, rebates and other off-invoice discounts) will affect their overall “pocket” price to your business. In other words, after the invoice is paid, pocket price is the value your company receives for the product and additional services provided. It enables comparison across multiple customers, products, or markets. Providing pocket price and other relevant information in easy-to-use tools enables your sales representatives to make more confident and consistent pricing decisions. Effectiveness at Element Two focuses your daily business decisions to be more consistently aligned with your customer and product strategies, resulting in dramatic profitability improvements.

Element Three: Pricing Strategy       
How difficult is it to establish the correct pricing strategy for a particular product or market? Pricing is often referred to as an Art and many of the best marketers rely on intuition, relationships and experience to determine appropriate product and market pricing strategies.

“Pricing is the moment of truth – all of marketing comes to focus in the pricing decision.”¹

Element Three is about understanding product and market positioning strategies for your products and services. It is about understanding the value a customer places on your product and determining the appropriate price to charge given the market dynamics. It’s about pairing data you already have with competitive and industry trends to make insightful and strategic positioning decisions thus bringing science to the art of pricing.

Like traditional efficiency and effectiveness goals, price management requires tactical and transactional continuous improvement efforts, paired with analysis and strategic positioning. By understanding the three key price elements and focusing on improving them individually, you can make significant improvements to the profitability of your business in a relatively short period of time.