Are Your Pricing Practices Hurting Your Profits?

Author: Valerie Dennis

On Friday, I was with two colleagues and our conversation turned to a small business that is developing their pricing methodology, after the fact. They think they are leaving money on the table. They probably are. This isn’t a blog on how to set your price; it’s about ancillary factors that affect profit. If you ignore things such as pricing analysis, pricing practices vs. policy and guidelines, you’re probably leaving money on the table. 

Surprisingly, the cost component is sometimes oversimplified, which negatively affects your profits. Pricing models are dynamic; they should be reviewed on a regular basis to make sure they represent the current cost of doing business. When was the last time your labor costs went up, the price of gas, rentals, leases, insurance, facility and equipment costs, fleet expenses, miscellaneous expenses, etc? And when was the last time you adjusted your pricing to reflect those changes?

Take a surgical look at your contracts; this is another area where profit escapes. It’s not unusual for grandfathered contracts to freeze pricing levels—for years. Same goes for evergreen contracts, they get lost in old files, along with outdated pricing terms. Customers generally accept pricing changes when they are justifiable and anticipated. If you have multi-year contracts, specify the frequency and amount of your price increases so your customer can budget and plan for it.

Charge customers for the services or products you provide. Pretty simple, huh? Well, think about the ancillary services that you provide—the ones you don’t charge for. You may find a viable income stream here—for now, it is an expense straight off your bottom line. There’s adding value and then there’s giving your services away for free—which are you doing?

Market equity should be considered. Not all customers are alike; they don’t spend alike and it is unlikely that they cost the same to serve. The challenge is that without guidelines and analysis, you can have two customers with the same spending levels who have markedly different discounts or pricing. You can have one customer with higher spending levels, only to find that the lower revenue customer has the better deal. Try explaining that to a strategic or high-revenue account.

A comprehensive pricing analysis will help you determine pricing guidelines, and anything that doesn’t fit into the guidelines will be the exception. Just make sure you have rules around the exceptions…I have seen some great sales people justify a better discount for a client that belongs on a standard program.

In some companies, practice overtakes policy or policy is non-existent. Your systems and processes may give unintended access. Pricing changes are made over the phone by calling Customer Service or through direct computer access. Every sales person wants to close the sale and they want to do what is best for their client. But not all of them understand the impact of pricing decisions to the bottom line—or they do, and they don’t care. Too much authority without the associated accountability and visibility will lead to pricing decisions that can make a profitable customer unprofitable. Create and communicate policy to all affected departments and employees.

Rest assured, if you lack the right policies, guidelines, analyses, and accountability to support pricing initiatives, you invite risk to your profits. The risk is you’re either overpriced for your market and don’t know it, or you’re enabling every sale to close on price alone—not your value.  Your customers will love you and so will your competitors (if you’re over priced)–your shareholders or partners, not so much…

 

Technorati Tags: Pricing,Profit,Business,Sales,Contracts