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So You Want to Price Strategically – What Do You Do Next?

By Scott Francis on 21 July 14 Uncategorized

Old Way, New WayYou’ve read enough to understand your current cost-plus approach to pricing is nowhere near best practices and you want to price strategically, but your real challenge is deciding how to get there.  It is not a trivial effort, but you can begin to make progress in developing your strategic pricing process by incorporating these major elements:

Customer Segments

The first step in strategic pricing is to segment your customers into groups with common buying characteristics.  Segmenting customers can identify areas of unmet customer needs and provide valuable insight into customer buying practices as well as helping you develop a strategic pricing model.  Use your existing customer data to identify their needs, past behaviors and demographics.  You can segment based on industry, geography, customer size, whether a customer purchases premium or discount products more often, when they normally make purchases and other behavioral information.  These will not all be right for you, so analyze your data to determine the groups with real differences.  

Product Classification

Once you have determined customer segments, stratify your products into groups where the drivers of customer value are similar. Some criteria that may help determine these groups include:

  • Competitive intensity – The more companies competing for customers who need a certain product, the more pressure you are likely to experience on prices.
  • Product specialization – Commodity products are by definition not differentiated, and as a result, substitutes are readily available. However products with more value-added engineering and specialization have fewer substitutes. As customers buy more specialized products and depend on them in their operations, they are less likely to switch to alternatives. Products with fewer substitutes generally have more pricing power than commodities.
  • Price sensitivity – In general buyers have less price sensitivity when the amount they will spend for the product or service is low compared to their total income, impact on the customer’s operations is low, or there are few substitutes that will work. Importance to customers is not necessarily the same in each segment, so evaluate this for each segment.

Set Target Prices

The next step in the strategic pricing process is to set target prices based on your company’s strategy (how you compete and win in the market), the values in each customer segment, the product classification, the prices of alternatives in the market, and how well those alternatives meet the customers’ needs.  Target pricing can be set based on the segment and product or on the customer and product. If you are just starting and coming from a one-size-fits-all approach or a tiered prices, setting targets at the segment and product level is a good start.  To set your targets, analyze transaction data to determine the ranges of prices that have occurred for each segment and product, the circumstances of the transaction, and the volumes purchased.  Compare these results to the price premiums or discounts you would expect given the segment, product classifications and the differentiation of your products versus alternatives. Opportunities for improvement generally reveal themselves in this step.

Implement

Once you have established price targets, it is important to provide the tools and materials necessary to support them. It is critical to provide training throughout the organization so that each person understands what is required and can develop the necessary skills. Implementation also requires that you enforce the targets and processes (they can’t be optional), and offer rewards for achieving targets and goals.

Measure and Adjust

Strategic pricing is not a one-and-done exercise.  It should be an on-going fluid process.  Be sure to measure the impact at each step and adjust your targets based on the results.  You can make significant profit improvements by taking measured steps and gradual improvements in this journey.  If you need help, Strategic Pricing Solutions can provide you with the knowledge and tools to develop specific, actionable price changes.

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