book.chapter Overlooked revenue enhancer

It's quite remarkable to observe the extent to which companies invest considerable effort in expanding their markets and refining their operational processes, yet often neglect the critical aspect of pricing their products and services to optimize profitability. There exists a misconception that pricing is an element beyond the influence of management. This notion is fundamentally flawed. Pricing serves as a pivotal lever within a business, and it warrants greater attention and dedication towards the development of a strategic pricing framework, underpinned by thorough research that will facilitate its successful implementation. Numerous businesses fall into the trap of setting their prices in an arbitrary fashion or by adopting one of three rather haphazard and overly simplistic methods. The first of these methods is cost-plus pricing, which involves establishing a sales target, calculating the anticipated costs at that volume, and then adding the company's standard margin to determine the retail price. However, this approach is fraught with issues. When customers are drawn to your offerings, their primary concern is the value these provide to them, not your costs. By adhering to this method, there's a significant risk of missing out on potential revenue. Moreover, predetermining what constitutes a 'fair' margin is an arbitrary exercise, as numerous variables can influence this decision. Cost-plus pricing is inherently introspective, focusing solely on your internal operations rather than on the price customers are prepared to pay. The second method, competition-based pricing, involves examining the prices set by competitors and positioning your prices slightly below theirs. Yet, this strategy also presents its own set of challenges. It results in a passive approach, where the focus shifts away from creating offerings that customers will value and towards merely replicating the actions of competitors. This can lead to a reduction in prices to safeguard market share, potentially incurring substantial losses. Often, pricing becomes a perilous game of brinkmanship, where the objective is to see who will capitulate first, typically resulting in losses for all involved. The third method, consumer-based pricing, entails determining the maximum price customers are willing to pay for your offerings and setting your prices just beneath this threshold. While this approach allows for the possibility of charging different prices to different customers, it also fosters comparison shopping, inadvertently encouraging customers to engage in undesirable behavior to save money. Discriminatory pricing often places your most loyal customers at a disadvantage, as deep discounts are used to attract new business rather than rewarding existing customers. This can lead to aggressive and unpleasant negotiations, rather than focusing on creating additional value. It is a fallacy to assume that the market autonomously dictates prices. In reality, marketers with decision-making authority are responsible for setting prices, and this is a critical decision that can significantly impact a company's profitability and, by extension, its survival. A manager has at their disposal only a limited number of levers to enhance a firm's profitability. Research across various industry sectors has demonstrated that a 1% reduction in fixed costs can lead to an average profitability increase of 2.45%. A 1% rise in sales typically results in a 3.28% boost in overall profitability. Decreasing variable costs by 1% can enhance profitability by 6.25%. However, the most striking impact comes from a 1% improvement in pricing, which can lead to a 10.29% increase in profitability. Thus, the potential benefits of leveraging the pricing lever significantly surpass those of the other levers. Moreover, adjusting prices is often simpler than reducing costs or generating new sales. Despite these clear advantages, few managers dedicate sufficient attention to their current pricing strategies, overlooking this effective means of bolstering their firm's overall profitability. The manner in which you price your products or services also presents a substantial opportunity for differentiation. In today's market, many products utilize similar technologies, and service designs cannot be patented. However, your pricing approach can indeed set you apart from the competition. This is particularly true in industries characterized by high initial fixed costs for development followed by low variable production costs. In such industries, pricing can be far more inventive and thus more distinctive than in many traditional sectors. The right creative pricing structure will attract the most profitable customers, initiating a positive feedback loop that amplifies the benefits for your business repeatedly. The key to success lies in identifying the most effective way to metaphorically 'prime the pump.' "Pricing is the moment of truth – all of marketing comes to focus in the pricing decision," states E. Raymond Corey, an author on the subject. For a farmer, the culmination of a year's labor hinges on their actions at harvest time. They rise early and retire late to ensure every grain is collected. Similarly, for a company, the revenues that sustain its existence are contingent on harvesting the value it has created in the marketplace, and pricing is the sole mechanism through which to reap that value. Indeed, it represents the moment of truth for all of a company's endeavors. Jagmohan Raju and Z. John Zhang, experts in the field, acknowledge that while the contemporary pricing environment poses challenges, the situation is far from dire. Companies now have the capability to gather and process a wealth of consumer information, enabling a deeper understanding of their customers. They can tailor their product offerings and provide individualized customer experiences in ways previously unattainable. All that is required for companies to thrive is to employ these new capabilities in a smart and innovative manner.