Is it time to rethink your pricing strategy?

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Is it time to rethink your pricing strategy? by Mind Map: Is it time to rethink your pricing strategy?

1. Companies differ substantially in their approach to price setting but most fall into one of three buckets

1.1. Price setting: price orientation, concerns the methods that companies use to determine final selling prices.

1.1.1. Cost-based pricing

1.1.1.1. Influenced primarily by accounting data, with the objective of getting a certain return on investment.

1.1.1.1.1. Advantage: the data you need to set prices are usually easy to find.

1.1.1.1.2. Weakness: aspects related to demand (willingness to pay, price elasticity) and competition (competitive price levels) are ignored.

1.1.1.1.3. Examples: cost-plus pricing, target return pricing, markup pricing or break-even pricing.

1.1.2. Customer value-based pricing

1.1.2.1. This method is based on the understanding of customers' needs, perceptions of value, price elasticity and cusyomers' willingness to pay.

1.1.2.1.1. Advantage: direct link to the needs of the customer

1.1.2.1.2. Disadvantage: data is hard to find, the prices may be relatively high, and may allow competition to enter the market.

1.1.3. Competition-based pricing

1.1.3.1. Uses data of potential and/or actual competitors to determine prices. Useful when the price is the most important criteria for buying a product.

1.1.3.1.1. Disadvantage: the demand is ignored. A strong focus on this method may lead to a price war.

1.1.3.1.2. Advantage: the competitive situation is directly considered.

2. Competition, costs and price sensitivity within a market affect the parameters within which companies set prices, superior pricing is almost always based on skill

2.1. Companies that had achieved better pricing all had top managers who championed the development of skills in price setting (price orientation) and price getting (price realization).

2.1.1. Without managerial engagement, companies typically use historical heuristics, such as cost information, to set prices and yield too much pricing authority to the sales force.

2.1.1.1. Pricing abilities into five major categories:

2.1.1.1.1. Pricing power zone

2.1.1.1.2. White flag zone

2.1.1.1.3. Value surrender zone

2.1.1.1.4. Price capture zone

2.1.1.1.5. Zone of good intentions

3. Pricing has a substantial and immediate effect on company profitability

3.1. Studies have shown that small variations in price can raise or lower profitability by as much as 20% or 50%.

4. Price getting

4.1. Price realization: capacity of a firm to ensure the price it get's is as close as possible to the one it sets.

4.1.1. Negotiation capabilites, pressure to accomplish sale quotas, lax price-variation policies, clear targets prices, and the ability to walk away from unprofitable sales are all needed to accomplish this point.

5. Next steps for improving pricing capabilities

5.1. Pricing Power Zone

5.1.1. Manage costs and complexity; ensure sustainability and innovation in pricing.

5.2. Value Surrender Zone

5.2.1. Improve consistency of price realization; focus sales personnel on price realization.

5.3. Price Capture Zone

5.3.1. Quantify and capture customer willingness to pay through customer value-based pricing.

5.4. Zone of Good Intentions

5.4.1. Increase customer orientation; further improve pricing capabilities.

5.5. White Flag Zone

5.5.1. Increase executive awareness and sponsorship of pricing; improve pricing capabilities.

6. How to Rethink Your Pricing Strategy

6.1. Differentiate from competitors

6.1.1. How?

6.1.1.1. By learning how to create, quantify, communicate and capture customer value

6.2. CEO involvement

6.2.1. Critical requirement for ensuring that changes in a company