How to develop an effective pricing strategy for your business
Pricing strategy is a set of guiding principles you can set to help your business determine the best price to charge for your products or services. So, why is pricing strategy important? Overcharge and you could turn potential customers away. Undercharge and you risk devaluing your product or service to equally damaging effect.
In pricing strategy, striking the right balance and landing on the best price can be influenced by a number of factors that are specific to each business – from market demand and competition to the company’s goals and their customer’s perception of value. On top of this, the most effective pricing strategies also take into account production costs, profit margins, differences in customer needs as well as brand positioning.
Pricing strategy doesn’t stop with simply landing on a figure however. Even when a price is set, regular reviews will help keep them relevant, while pricing psychology, pricing design and communication planning can also help boost sales. According to research, just a 1% improvement in pricing results in an average increase of 11.1% in operating profit. No other business lever has that impact.
As pricing experts, we work with companies all over the world to help them define and develop effective pricing strategies to drive sales and see long-term results. Here we’ll walk you through those all-important first steps to building a successful pricing strategy for your own company to thrive.
Why is it a mistake to overlook pricing strategy when building any business?
Pricing touches virtually every area of every business. Be it the cost of product development or whether your price is accurately reflecting your brand vision, a clear pricing strategy can have far-reaching effects on your business.
Plus, pricing strategy isn’t just for big companies looking to grow. Everyone who owns a business that charges a fee or sells products can benefit from applying a clear set of principles when it comes to pricing. Yet, while we’re sure you’ve got an eye on your marketing and sales, so often pricing comes low down the priority list. This traditional approach to business planning is leading companies to miss out on the untapped potential of pricing strategy.
Even if your prices are set in stone, there are many ways that other elements of your pricing strategy can be used to boost sales. From how you display prices and communicate choices to leveraging the psychology behind buying habits, a pricing strategy can drive sustainable growth, help you stand out in a crowded market and unlock hidden revenue.
When should you think about your pricing strategy?
There’s no time like the present! However, if you need more convincing, here are some of the many triggers that drive our clients to turn to us for pricing strategy advice.
- A feeling that there is more money to be made (especially out of certain clients)
- A need to price new products or services
- A lack of confidence to adjust prices
- Under pressure to become more profitable
- Under pressure to strengthen competitive position
- Products are constantly discounted
- Strategic challenges or bottlenecks (poor conversion, revenues too spiky)
- Awareness that prices need changing but don’t know how
- The brand needs a refresh
If pricing is on your mind, fear not. We have the tools to help kickstart your own pricing strategy.
Using our Pricing Strategy Blueprint to get started
From the smallest of start-ups to global tech firms, the very first thing we do with every new client is to work through our unique Pricing Strategy Blueprint. This 360˚ pricing audit is a 2-part process that forces our clients to examine every aspect of their approach to pricing, before we use our expertise to help them outline the principles and processes for how pricing will be set and managed in the future. Once completed, the Blueprint captures the current and future state of your pricing. There is no one ‘right’ answer. But the Blueprint helps companies to make better informed decisions moving forward.
So, before we get too deeply into the end results, let’s start at the beginning. The Blueprint asks teams to question why and how pricing decisions have been made historically. And crucially, requires the buy-in of everyone involved across the business. Here’s where you can start to shift your thinking on pricing and start to shape your own pricing strategy.
Questioning, for example, when you use discounts, how you measure performance and what you use pricing to incentivise. All of these questions will help you and your team to get greater insight into the processes, or indeed lack of process, involved in your pricing decision making.
However, even without the Blueprint, there are three critical questions that need answering before you can really start your own pricing strategy.
What are the three most important pricing strategy questions to ask your business?
Although our unique Blueprint tool goes into a great deal of detail, there are three key questions that give us instant insight into any company. These are critical to establishing a pricing strategy. We’ve outlined them for you here alongside why they are so important and how you can use them to build your own plan.
How did you come to your current pricing?
This one is a real eye opener for many teams. We’ve heard it all, from being 100% led by the competition to companies that don’t even remember who was responsible. In one question you’re able to get a quick measure of where your company’s thinking on pricing currently stands. Crucially, it often exposes a lot of gaps, and opens up a lot more questions – which is precisely the point!
The issue:
Your pricing could be dramatically impacting your profitability. By understanding who or what, if anything, is guiding the current approach to pricing you can start to see where you could make improvements.
The biggest red flag that this question raises in many teams is that there is no system in place for price setting. Not only is the lack of a pricing strategy potentially damaging, you’re also missing out on lots of untapped opportunities to raise income.
The action:
Be completely honest and take a closer look at what your prices should be led by. It might not be one single thing, and it doesn’t have to be a long-term fix, but by having the conversation and making a start is a huge step in the right direction.
How frequently do you review your prices?
Pricing changes can have a big impact on how customers see you. Are regular price changes a good representation of your brand? For example, premium brands on constant discount just won’t sit right with consumers.
The issue:
Understand the triggers driving you to change your pricing strategy. Are these triggers the right ones for the right reasons? If you’re being led by competitor prices, how regularly do you review what others are doing and how often are you changing your prices? Importantly, consider what this knee-jerk process is doing for the perception of your brand within your audience.
The action:
Do your research. Be objective. Make a plan. When should pricing decisions be made? How often should you research the competition? What external factors should be allowed to influence pricing and what shouldn’t? Don’t be afraid to raise your prices. Set out a clear process moving forward.
Who is accountable for your pricing decisions?
Where a strong pricing strategy isn’t already in place, the answer to this is often split between two camps; those who don’t know who’s responsible for pricing, and those who think pricing is everyone’s responsibility. Both answers are problematic.
The issue:
An effective pricing strategy cannot exist without someone who is accountable for it. But avoid bringing too many cooks in when it comes to decision making and implementation. From regular reviews to seeing through changes, it’s essential that someone takes ownership of pricing with the support of a smaller team from across the business. The whole company will benefit.
The action:
Work with your team to find the best person for the job.* Then, so it’s not all on one person, ensure that an approval process is put in place. It’s important that pricing is discussed across departments regularly. Schedule frequent (bi-monthly) meetings with a smaller cross-functional pricing taskforce to gain a broader view of the business and track progress.
Ready, set, pricing strategy a-go!
So, there you have it, our quick-fire guide to getting a pricing strategy off the ground. Of course, this is just the very tip of where pricing strategy could take you and your business, but it’s a great place to begin. If you’re inspired to know more about pricing strategy or for a pricing consultant to help you make a deeper analysis of your approach to pricing, we’d be happy to take you through our unique Pricing Strategy Blueprint in more detail and lend our expert opinions and insights to your unique situation. Pricing is all about finding the right balance, and there’s no harm in experimenting with several different methods. Start your journey and discover that untapped source of revenue. You won’t regret it!
Pricing strategy help is always at hand
If you’d like more expert advice on how to approach pricing or are looking for support to redesign your pricing strategy, we’re happy to help. Explore our services or get in touch. We can’t wait to hear more about your business and help you unlock new growth.
* We haven’t worked with www.pragmaticinstitute.com personally, so we can’t vouch for their work, but we love what they have to say in their pricing strategy ownership article.
