What is a Pricing Consultancy or Pricing company
It is no exaggeration that pricing decisions can produce significant consequences for an organization. With pricing, businesses can set value for their products and it represents one of the important considerations for several customers. After all, the future of a company’s product – as well as its acceptability and profitability – depends on pricing. With this in mind, this article will provide a deep insight into pricing consultancy, its importance, and more.
Why Is Pricing So Important For A Business?
Pricing represents a tool for competition since businesses can attract customers based on the value they set on their products or services. Besides this, pricing determines the products’ profit margin. Some of the importance of pricing for a business are introduced as follows:
Pricing regulates demand
Pricing has no equals when it comes to the ability to generate results in the economy. In terms of regulating product demand, it is a powerful tool adopted by marketing managers. The price of a product determines the demand for it. Generally, the higher the price of a product, the lower the demand it generates. In contrast, lower prices attract higher demands, which increases sales and profits.
Price has a unique contribution in most countries with a higher marginal value of money than other advanced nations. Different pricing strategies can be implemented to meet the high demand for commodities and services. They are handled by those with sufficient knowledge of the dangers and possibilities that are involved with its implementation.
This is because an ill-planned pricing strategy can have an adverse effect on a business by totally rendering a well-conceived marketing program ineffective. In fact, it is capable of sullying the reputation of a good product while increasing the popularity of a bad commodity.
Pricing is a weapon for competition
This is an important benefit of pricing. Different organizations employ the use of pricing to determine if their products will be priced below, equal to, or above their competitors. For companies that decide to provide products at higher prices than their competition, they must raise the quality of their products or services to command the same level of demand. In other words, many businesses adopt the prices of their competitors as a framework on which the value of their products can be set.
Different stages require different kinds of pricing strategies to provide the best results. The lifespan of products is directly linked to the competitiveness of the product. For this reason, pricing should be done to reflect the current competitive conditions of commodities.
Pricing is critical to a company’s success
It must be stressed that a wrong price decision can result in an organization’s downfall. The importance of setting the right level of price once proper research about the market, as well as competitors’ strategies, is done cannot be understated. It is true that low prices attract customers. However, it becomes harder for a business to raise the products’ prices in the future. Correspondingly, even though higher prices make it possible to attain a higher profit margin, sales volume is reduced. With this in mind, it is crucial to find the right balance and fix the appropriate price to maintain profitability and volume of sales.
Pricing Creates First Impression:
The first factor a customer considers before purchasing a product is price. Even though the customer’s satisfaction may be based on the general benefits derived from the product, they often evaluate the perceived value of the product through the prices. Once they learn about the price, they can start learning more about the qualities of the product.
It is easy for customers to lose interest in a product if its price is too high. On the other hand, if the product is affordable, a good impression is created and the customer might decide to learn more about it. For this reason, setting the right price is essential in influencing the decision of a buyer.
Crucial Sales Promotion Element
Price represents a flexible – yet an important – component of sales promotion. To increase sales, marketing managers often reduce the price. There are certain goods with a demand that is sensitive to price. In this case, a slight decrease in price can result in a high volume of sales. Yet, to ensure that sales are stimulated, prices must not vary too often.
What is Price Consultancy?
Price consultancy involves pricing professionals providing tactical advice on future pricing plans. Examples of pricing consulting include price optimization for target customers, price tiers optimization for different customer segments and deeper insights.
Oftentimes, a lot of pricing decisions made by businesses are shots in the dark, without proper analysis or quantitative input. However, when a price consultant is involved, it becomes easier to make use of better pricing methods to change the pricing processes.
There are a number of ways that a price consultant can work with products or services. The most common method is to determine the optimum price that can maximize profits made from the customers. Oftentimes, these customers are eager to know what the right price is. In this case, dynamic pricing is adopted through the use of complex algorithms and market data.
Typically, pricing consultancy involves helping business owners understand the possible causes of their pricing challenges. Pricing consultants also make inquiries on the pricing goals of a business and how this affects the larger objective.
Pricing Strategy Business Plan
It is possible for a company to have the best commodities or services. However, if there is no solid execution plan and strategy, the business will fail. Having a good pricing strategy for your business can play a crucial role in creating brand awareness, customer nurturing, and lead generation. The importance of the 4 Ps – Price, Products, Promotion, and Place – as a key component in a marketing approach has been well-documented. Oftentimes, price takes the most prominent role and by picking the right pricing model, you can quickly turn your business goal into reality. The following steps can help you make informed decisions that will enhance your pricing strategy business plan:
Figure out your business goals
Goals are powerful and setting one can help you place considerable attention on attaining profitable outcomes. While these goals are set to keep a company moving in the right direction, as well as providing motivation, they must be measurable, timely, achievable, and specific. To determine the basis of pricing, the following business goals are worth considering:
- Enhance cash flow
- Increase profitability
- Ensure market penetration
- Boost revenue per customer
- Introduce new products
- Trump competitions
- Larger market share
- Employ the use of resources
- Boost prospect conversion
- Increase prospect presence
- Attain new segment
Carry out a detailed market pricing analysis
Even though the first step is based on the business goals, this step makes it possible for the pricing strategy to consider how your product or service will compete in the market. In many cases, the broad audience is often captured by low-cost providers. On the other hand, high-cost providers market to a certain audience. If the marketing of products and services is done to a broader group of people, it is more likely that several players with similar products or services will ensure that you compete on prices. To secure a maximum profits margin, a company must keep operational costs down.
On the other hand, if there is a high value, high differentiated product or service, any offer may become more conducive to premium pricing. It is also worth pointing out that a superior product makes it essential to emphasize specifically the high quality of customer service and marketing.
Determine the target audience
This ensures that you can find an answer to how and why your customers can make use of your product or service, depending on their urgent needs. Pay attention to an essential question: what is the value that my products or services bring to customers? What are their needs? How can my products or services be tailored to satisfy their demands? What will be the benefits of making use of my products?
Again it is important for you to align your pricing model and all promotional campaigns with the reason customers would go for your products. For instance, value-based premium pricing is perfect for any product that will specifically meet the urgent demands of your customers. Do not be tempted to create low-cost promotions or any form of giveaways that can confuse your customers, shrink your profit margin, or undercut your value.
Profile your competitive landscape.
Be it a differentiated vendor or low-cost provider, a strong pricing strategy influencer is the pricing model and price point that your competitors adopt. Certain approaches should be employed for indirect and direct competitors. It is important for you to identify multiple competitors and pay close attention to the structure of their pricing. You are permitted to ask certain questions: Do your competitors support heavy discounts? Or do they associate themselves with other products? Do they adopt the use of value-based pricing in which a percentage of the total perceived ROI is paid by the customer?
Furthermore, it is also important not to ignore the substitutes – while setting prices – that customers might turn to in order to solve a problem that your products or services can tackle. Figure out the cost of these indirect competitors. Yet, sometimes the “no” word might be your indirect competitor: Never forget that.
While you consider a pricing strategy, create an execution plan
After considering all possible competitions that your products and services may face, there are various pricing strategies that you can employ, depending on the competitive analysis, market, and customer. Some of these are explained as follows:
- Penetration pricing: This is a marketing strategy that is employed by businesses to gather the attention of customers to new products by lowering the price during the initial offering while initiating the word of mouth. Lower prices make it possible for the new commodities or services to penetrate the market as it attracts customers away from competitions. The price penetration strategy is aimed at captivating customers to focus on new commodities with the hope of keeping them once the products are raised back to the normal prices.
- Economy pricing: This strategy involves assigning setting prices to products due to the production costs. This form of pricing can be employed in various businesses that deal with earning revenues from sales. This implies that you can make use of it in food services or other companies that generate proceeds by selling products to consumers. Simply put, this strategy gives goods with low production costs lower prices.
- Premium pricing: This pricing strategy involves tactically and consciously setting a higher price for your products than your competitors. This tactic is meant to inculcate a sense in the market of a commodity that makes it appear a bit higher in quality than others. If successful, this strategy can result in greater profit margins. This has proven to be an effective pricing strategy for business plans. It improves the brand value while enhancing the perception of your company.
- Price skimming: This is a strategy that companies adopt when they wish to introduce a product or service for the first time. This has become a popular practice among managers as they raise prices of commodities high when they are introduced but dropped – once their competitors also raise their products – over a period of time.
- Promotional pricing: This is a sales tactic that involves brand temporarily lowering the price of products or services in order to attract prospective customers. When the price is reduced for the short-term, the value of the products or services is raised when a sense of scarcity is created. Discounts are provided over a period and one-time deals are included.
- Psychological pricing: This is a pricing strategy that involves certain prices having psychological effects. This pricing method ensures that prices are expressed as numbers that are just a little less than a round number. Take, for instance, a commodity that can be valued at $29.99, rather than $30. The price of the product or service can initiate an action.
- Versioning: This strategy ensures that you can offer your customers various choices without the need to provide new products or considerably add to your costs of production. If this is done right, versioning can boost sales volume, while also increasing the average cost per sale. In product versioning, a single product or service is taken and offered in different tiers, which depend on the added qualities that are included. These versions are then sold at different prices. Through this, customers can be allowed to choose the amount they can pay for the product.
- Sandwich pricing: This involves placing the price of your competitor’s product in between two of your products. In this case, one is more expensive with more features while the other is less expensive. Besides this, you can make use of this with three of your products with the aim of getting customers to go for the mid-priced product.
- Competitive pricing: This is the process that involves the strategic selection of price points that can ensure that the features of a product or service can be taken advantage of, depending on the market relative to the competition. This method of pricing is adopted more by competing companies that are selling similar products. To win the service game, businesses often set their prices equal to or less than what their competitors offer.
- Value pricing: By adopting this strategy, you must understand the value of your product to customers, while considering their willingness to pay. This pricing technique involves setting prices on your products as a result of the consumer’s perceived value of them.
Once you understand these five steps, you can start integrating them into your pricing strategy business plan.
Pricing Strategy Consultants
Oftentimes, companies establish their prices based on the competition. Other times, they raise the cost price by a specific margin. On the other hand, pricing strategy consultants employ the use of various techniques to maximize sales and volume.
Importance of Hiring Pricing Strategy Consultants?
Over the years, the pricing strategy of a company consisted of adding a margin to the cost price of any commodities or services. Yet, in recent times, the significant surge in the level of competition has changed this. Now, establishing a price has become a technical subject that requires both quantitative and qualitative analyses.
Pricing strategy consultants are available for your use. They help businesses improve profitability and increase sales while also providing a competitive edge. There are several benefits of pricing strategy consultants. Some of these are introduced as follows:
They help you determine the optimum price: Once a pricing specialist is hired, they try to determine the value of your products to ensure that the best compromise can be made between profitability, brand positioning, and increasing sales volume. To accomplish this, they try to evaluate several factors, including marketing objectives, revenue objectives, product characteristics, and target audience.
Besides these, they also evaluate other relevant external factors, including market trends, pricing strategies of competitors, and customer demand. From there, the consultant proposes the execution of a pricing system. You will get an added advantage of making use of a complete pricing system when you hire a pricing strategy consultant, unlike competitors that just apply a margin on their costs.
Besides establishing fair prices, there is also an opportunity to offer carefully considered discounts in accordance with the customer segments. This will provide an actual competitive edge since it becomes easier to remain a step ahead of competitors while you become a protagonist, instead of a mere spectator.
The presence of a pricing strategy consultant will also help you save time whenever you evaluate challenges and set aside solutions. In addition to this, you can also prevent your team from focusing on a technical subject when they have no relevant expertise. This will encourage an appropriate allocation of resources, leading to improved efficiency. The positioning of a product with respect to other competing products is determined by its price. This plays an important role in the decision-making process of the customer. When a good price is agreed upon, your products appear in a better position for your target customers. This helps in enhancing their perception of your brand.
Depending on your product and industry, there are about 14 – or more – different pricing strategies. This makes it essential to employ the service of an expert to help you make informed decisions on the right strategy to adopt. These considerations can then make it possible for you to transform a little boost in margins into a significant gain.
Being able to rely on the services of a pricing consultant makes it possible for your pricing strategy to consider essential criteria that consumers can take into account when making a purchase. This helps in attracting and retaining new customers. Having a dynamic pricing structure can also improve curiosity if dormant customers with no recent purchases.
How to Hire Pricing Strategy Consultants: Tips to Remember
What are those skills that pricing strategy consultants must possess? To answer this, it is important to note that while the business world focuses on cost, the customer world prioritizes value creation. For this reason, the importance of employing the service of a competent pricing strategy consultant cannot be understated. Some important skills that cannot be overlooked are introduced as follows:
Experience in your field
In terms of price strategy consulting, it is important that you watch out for candidates with experience with the pricing challenges you wish to tackle. Adequate knowledge in this field enables this consultant to understand the situation and provide appropriate solutions.
Do they understand the consumer?
Competent pricing consultants must put themselves in the shoes of the consumers as they attempt to understand how the consumers think. What are their needs? What do they consider to be valuable? What is their perception of the company’s products? The decision-making of consumers is often based on psychology and for this reason, their emotions must be prioritized. It is easier for a consultant to set the best price when they understand how customers think.
Ability to boost sales speed
The average period that it takes customers to make their decision to purchase is referred to as the speed of sale. The price of the product represents the major determinant of this speed. If the price is too high, customers tend to think longer than they should when they decide. A business will generate more revenue – and grow – when this speed is fast, which is exactly what a consultant should focus on.
Ability to deal with price threats
Price war represents a prominent threat and it is a tool that is adopted by companies to get rid of any competition. However, this threat can also emerge from within the organization. Indeed, giving an irrelevant discount or changing pricing policies too often can reduce your profit margin while also rendering customers unsatisfied and unhappy. These all represent a considerable risk that can be handled with caution. A reevaluation must be done as regularly as possible by an expert.
Ability to exploit pricing margins
Small pricing margins can be taken advantage of to generate a lot of revenue and eventually enhance the growth of the organization. This also represents a powerful tool that is used by experts, which must be exploited carefully.
Knowledge of the technology
Many pricing tools are available, which can enable companies to enhance their pricing processes while also enabling teams to appreciate the effect of pricing on a business. A pricing strategy consultant must be acquainted with the various technologies in the industry while keeping themselves abreast with the latest developments. Through this, they can provide advice on the different tools that are well-suited to tackle their challenges.
A consultant must also be able to develop an analytical mind while being innovative in varying areas, listed as follows:
- Corporate finance
- Sales management
- Business operations
- Product management
- Business management
Pricing Strategy Consulting
Pricing strategy consulting ensures that a company can gain a competitive advantage over the competition while boosting sales during stagnation. The aim of pricing strategy is to make sure that there are coordinated efforts between manufacturers, distributors, and pricing experts. A change in pricing strategy is a process – not an event. Pricing strategy consulting services help companies execute pricing strategies. This will establish the right combination between promotion and price, which help in attaining a favorable price that powers profitability and purchase behaviors. Some strategies that can be implemented through pricing strategy consulting services include:
- Competitive Analysis: An important consulting service involves an analysis of the marketing trends, as well as the policies implemented by competitors. Besides this, there will also be an analysis of the effect of prices on market shares and purchasing behavior. This impact will be anticipated by an expert by implementing all resources that can tackle the threat.
- Consistency in pricing: There must be a level of consistency between a company’s marketing strategy and pricing strategy. As mentioned earlier, price represents an essential factor that drives the decision of consumers. For this reason, it must be carefully and intelligently established according to the market trends, targeted consumers, and brand.
- Evaluation of trends in consumer needs: It is important to stress that consumer needs are ever-changing, especially in a competitive environment. As a result, consumer behavior also changes. To tackle this, a pricing strategy consulting service will pay much attention to the market in anticipation of these changes while taking advantage of any opportunity to raise sales volume and boost profitability.
- Dynamic pricing execution: It is essential for an organization to be flexible when there is a need for adaptation, particularly in a very competitive environment. Adopting a dynamic pricing strategy can be very useful as a result of the prevalence of pricing tools. This will ensure that the organization reacts very fast to any development in the market. The chosen measures can then be integrated by the expert and the company to improve sales, market campaigns, and profitability.
What Are The Most In-demand Pricing Strategy Consulting Services?
In a competitive market, the importance of appropriate pricing cannot be ignored. This will determine the extent to which customers are driven towards a particular product. With this in mind, it is important to discuss some of the most desirable pricing strategy consulting services:
This involves setting value for goods and services that are offered to one company – rather than to individual customers – by another company. Indeed, establishing a price for a product or service that you are providing another business can prove difficult. This is where competent pricing strategy consulting services come in. There are Business-to-Business pricing models that can be adopted. These serve as a framework for any pricing strategy. The most common models are introduced as follows:
- User-based Pricing: this involves charging businesses based on the number of users with access to the product or service that is sold. If there are more users, the price that is charged is higher, but lower if there are fewer users.
- Usage-Based Pricing: This form of pricing is based on the frequency of the product – or service – usage. Higher usage simply implies a higher cost. This pricing ensures that the purchasing business stays in control of the amount they spend since they know the associated costs.
- Tiered Pricing: This form of pricing involves selling products at different prices based on the features that are added at each level. The highest costs come with the highest amount of features.
- Flat-rate Pricing: This model involves offering a particular product or service with all the features included at one price.
This is a pricing strategy that involves adopting varying prices rather than fixed ones. This concept is aimed at selling the same product or service at different prices and periods to different groups of people. With pricing strategy consulting services, you can challenge your price settings while varying them dynamically to satisfy the customers’ profile.
An example of this can be seen in the airline industry when people can arrange their flight anytime they want. While some people can book tickets a few months in advance, others can only organize their flight just a few days or hours in advance. For this reason, ticket prices change dynamically.
Another example of dynamic pricing can be seen in the hospitality industry as hotels set their prices based on seasons and events. The use of dynamic pricing can enable the industry to generate more revenues. In some cases, they take advantage of scarcity and urgency to generate even more profits.
Fairness of Dynamic Pricing
At its core, dynamic pricing can theoretically make everyone feel satisfied since consumers hold the right to decide if they will purchase a product or not. To ensure fairness, it behooves the producers to ensure that the price that is set for their products is focused on meeting the consumers’ willingness to pay.
Usually, customers are never willing to purchase a product that is beyond their financial capabilities. Once there is a cheaper version of the product – or if the price reduces – they may decide to purchase it. Utility is met when a consumer is willing to pay for a commodity. A competent consulting service will ensure that the price established will meet the satisfaction of customers, setting a positive attitude towards the product.
Subscription Model Pricing
To enhance a company’s cash predictability, a price strategy consulting service will help create subscription model pricing. In this case, consumers must pay for a product or service on a regular basis, rather than once. Unlike other traditional forms of pricing, this is based on the length of the subscription, making it the cheapest option.
You might be wondering where or how to start your subscription pricing model. Again, having a good pricing strategy consultant can make this easier for you. Just as you start quantifying your real customers, it becomes easier to understand what they truly value in your product and how much they can pay for it.
In every pricing decision that you make, with the aid of a competent consulting service, data must be the most important component. Oftentimes, overpricing or underpricing a product might occur when a business fails to base its subscription pricing purely on data. However, with the help of an expert, sufficient data will be analyzed to track how to vary the prices of your product to match the quality of your products and services.
Furthermore, an infrequent update of pricing can result in several issues. Indeed, any price points that provide positive results during the initial period of a subscription business might eventually underprice the products over a period. As products or services improve in quality over time, it is only appropriate to adjust the prices based on the value that is provided. The inability to visit your pricing regularly might end up hurting your profits.
Price Point Strategy
Price points are the retail price that is set aside to win customers. While price is the exact amount that represents the value of a product, price point is a single point on a scale of possible prices that are set for a product. From these points, higher profits can be gained. The price point can help define a business and the kind of consumers that your products can attract.
How a Price Point Can Help Gain A Competitive Advantage
There are lots of factors – including pricing – that must be considered when a business is introduced. They play a key role in deciding how well a product performs. However, pricing is a critical contributor to a company’s potential in terms of long-term success. For this reason, it is not a decision that should be taken with little care. Oftentimes, the services of an expert are required in ensuring that the best price point is set.
There is no guaranteed logic for defining a set point. This is because the price point to be set is determined by the given circumstances of the business and the industry in general. Nonetheless, there are still various considerations that must not be ignored.
Things to Consider when Finding a Price Point
It has already been established that a price point is critical to the identity of your business, as well as the kind of consumers that opt for your products. Yet, no strategy for finding a price point can guarantee the best result since it hinges on various factors: these tips only improve the chances of finding one. Some things to consider in determining a price point are discussed below:
Evaluate Your Goals
Since your business and your products are specific to your industry, the first step – which is often a crucial step – that must be taken to establish a price point is to carefully consider your business goals. Take, for instance, at what price can your product be valued to justify all your expenses? Get rid of excess costs while you make several adjustments. With the idea of projected sales, you can then create a minimum price that can help you make a profit.
There is never a “right price” for your product. With this in mind, it should be pointed out that pricing is not as simple as generalization would suggest. To figure out the appropriate one for your business, you must understand everything that involves promoting, acquiring, and selling your products. From there, it becomes easier to target the desired customer segment, as well as the price point that can promote growth.
Pay Attention To Competition
In a highly competitive environment, it is a must for you to pay close attention to your competition if you wish to succeed. Before you consider establishing your price point, you should make adequate findings on other businesses that can take away attention from your audience. After all, the aim is to make your products and services reach potential customers. Besides your profit objectives, the knowledge of your competition can help you set an appropriate price for your products.
Competitive pricing might prove to be beneficial if you wish to have an edge over your competition. Through this, you can consider the value other businesses are setting on similar products while determining whether to increase or reduce your price point. Usually, many feel like reducing your prices more than your competitors is wise. However, that may not always be the best decision. Lowering your prices reduces the value of your products, as well as its standing in the industry.
A Plethora of Options
As mentioned earlier, the price of your products determines the impression your prospective customers get without trying them out. Simply put, price determines the perceived value of your commodities. The price quality is a starting point from which you can create your pricing strategy. Is the product a cheaper one that can be easily afforded? Or is it a premium one with so many features that make it better than others? Your price point determines how prospective customers see your products.
Besides this, there are several solutions that can guide your decision in setting a good price point. Having an expert exposes you to a great variety of pricing models that can help you create a competitive price point. It is not a bad idea to try out the dynamic pricing model. You might even embrace variable pricing. Indeed, you might even adopt a psychological approach that wins customers by offering products at a lower price to attract consumers to the available products. The options are virtually limitless and by making proper evaluation – probably with the help of a price consultant – of your business goals while considering your competitions, you can then narrow down what is best for your products.
The Price Consumers Pay
The price point is an important decision that all businesses must never ignore. You might chase away potential customers when the price of your product is too high. On the other hand, if you price your products too high, you might cast your products in an unflattering light, which might produce damaging results.
You do not want competitors to win businesses that you should compete for and receive. In recent times, the level of competition has increased markedly. For this reason, it is bad to get so complacent with prices. Revisit your perspective and make sure that optimum efficiency is maintained in your business.
Pricing Consulting Services
In a world where pricing has become so important that it can determine the success or failure of a company, pricing consulting has become an in-demand service that helps businesses attract customers, keep them, and boost sales volume.
Competent pricing consulting services are devoted to helping clients solve different kinds of pricing challenges as profitability grows significantly. You will come across different consultants with vast experience in Business-to-Business markets in a range of industries.
How should executives set value for a new product? Should the pricing be done the same as competing products? Should it be priced lower than competitors to gather market share? Should they increase the price to increase the amount of profit that is associated with individual sales? Indeed, pricing questions represent the most frustrating question for many executives. There is no strategic decision that can have more consequences on profitability than pricing.
Pricing affects the demand for certain products, as well as a company’s competitiveness. This is the reason why pricing consulting services are employed by businesses to tackle the various pricing questions, which often span organization boundaries due to their immense importance. Consulting services will help address the challenges of making strategic decisions by managing competing organizational viewpoints, as well as a careful approach towards price setting.
Any business that can rely on the knowledge of an expert can come up with an approach to pricing, which is based on the realities of the market environment. Price should be considered as a value that a business captures in a beneficial exchange with its customers. All the proceeds that are obtained from delivering values to customers at a greater price than the production cost.
Customers experience a gain in value when the benefits they enjoy the product outweigh the price that they are willing to pay for it. In free markets, consumers can decide if they should purchase a product or service. The price of a commodity can also be viewed as the value that a business captures in a mutually profitable exchange with customers. This is because it is unethical to force a customer to purchase in a free market. So, a consulting service can ensure that both sides (business owners and customers) can enjoy the benefits of pricing.
A pricing consulting service will achieve pricing by conducting quantitative analysis, gathering information, and revealing the range of prices that is more likely to produce positive results. In many cases, pricing data is not perfectly clear to several executives. In fact, there are uncertainties in price structure, price point, and the underlying data – all of which vary with customer demand and time. An expert will then ensure that an appropriate price is set with uncertainties while adopting quantitative approaches to enhance pricing decisions, prevent errors, and reveal opportunities.
Profit Sensitivity to Profits
A profit sensitivity analysis describes the effect that a small change in price can have on profits. Price changes produce direct and indirect impacts on profits. The former explains the relationship between prices and profits while the latter describes the effect changes in price have on customer demand and behavior. Usually, when prices are higher, demand is lower and purchases are fewer. On the other hand, lower prices result in more purchases.
Since profit depends on the number of goods sold, which depends on prices, the price changes indirectly affect profits through their impact on demand. During the analysis of profit sensitivity, it is important to discuss volume hurdles. This is the required increase in demand that can justify a price cut, as well as the allowable demand sacrifice that can justify a price increase.
Volume hurdles ensure that executives – often with the help of a consulting service – can quantify relevant selling goals while comparing them against any potential demand. In making pricing decisions, volume hurdles represent a routine procedure that can help in establishing sales targets for discount practices and other price promotions. At the end of the promotion, businesses can also evaluate the profitability of price concessions.
The profit sensitivity also provides a foundation that can help in carrying out economic price optimization, which represents a method for determining the best price that can maximize profits. From the evaluation of profit sensitivity, it is easy to see that a price increase will directly raise profits by boosting contribution margins but reduce profits indirectly through its impact on demand.
An expert can adopt this analysis to find a price that can balance both aforementioned opposing influences to maximize profits. Besides, economic price optimization discusses the price that increases profits. Setting any price that is above the optimum price will negatively affect profits by decreasing demand enough to destroy gains generated by improving margins. Likewise, establishing any price below the optimum will reduce profits by reducing margins more than the proceeds earned in increasing volumes.
Pricing Framework Consulting
Pricing framework represents the competencies that ensure that a company can realize the complete benefits that pricing offers.
Developing the Best Price
Once goods and services are tailored to meet the needs of buyers, they can be more profitable. To achieve this, it is important for consultants to understand buyer behavior better.
There is an interdependency between two of the aforementioned four Ps: Price and products. A consultant will seek to segment buyers while focusing existing product portfolios on these market opportunities. This helps in understanding the impact of different prices on volume in each buyer segment by geography and product, adopting some techniques, including demand remodeling.
As soon as the parameters are set, the consultant will help you develop knowledge of these techniques, which can be employed to create list prices and implement them in the market. Consultants will ensure that you can establish processes that can help you identify, gather, prepare, and store data safely, as well as automate them for practicality.
While working for clients on pricing framework, consultants often focus on four pricing areas. Some of these include:
An important option consulting services must include in pricing a product is to have a look at how much it costs the organization and how to add a markup to the cost to yield profit for the company. There are certain questions that must be answered to adopt cost-based pricing:
- What are the fixed costs for the company?
- How much of these fixed costs are allocated to the products in question against other products?
- What are the variable costs for the product that is being priced?
- How many units of that product should be sold annually?
This is an approach that companies adopt and is based on how much customers can pay for a product while completely ignoring any associated costs. This approach is common in the fashion industry. Take, for example, a nylon bag that takes less than $200 to produce can be sold for over $1,500. When it comes to value-based pricing, there are several questions that require an answer:
- What segment of the market is the product meant for?
- What features can make the product better than the alternatives?
Besides these, a manufacturer must also know the amount people can pay for additional features.
In some cases, companies adopt the mode of pricing to set value for their products. A consultant will use this as a pricing framework to set value for their products. They can decide to set their prices below, the same as, or above the value that the competitors set for their products or services. There are also many questions that must be answered to make use of this pricing technique, including the following:
- What products can serve as an alternative besides the products?
- How much are other competitors charging on similar products?
- Can the company afford to price its products at the same value as other competitors? And for how long?
Furthermore, a company needs to ensure that a product is priced in accordance with the strategic objectives of the company. Also, the following considerations must not be ignored:
- The overall objectives of the company’s pricing strategy. Is it to win market share? Or to ensure high profitability?
- The possibility of getting a product that the company can upsell or cross-sell, which must be taken into consideration when pricing the particular product
Pricing Strategy Consulting Firm
Having a good price structure is important for a business to accelerate growth. The price structure describes how total transaction prices are estimated. Take, for example, a residential utility bill will usually have a price structure that includes items that accumulate to form the total transaction charge. While some of these items remain constant every month, others vary with the services that are delivered. Price structures have – in recent times – become the norm in several industries and they serve as a framework against which other alternatives can be compared.
It is worth noting that any change in the price structures requires that all decision criteria are redefined for customers to choose between products and evaluate the market segments. Changing the price structure is much more difficult than adjusting individual prices. It is easier to change promotional prices and list prices, but tampering with price structure means changing the industry. Having a good pricing strategy can make the former easier to achieve.
The Impact of Pricing Strategy
Pricing strategy is one of the most understated aspects of a business. However, it plays a key role in an organization to facilitate its growth. According to research, proper management of pricing strategy can boost profitability by up to 60 percent. Sadly, many businesses ignore the importance of pricing and miss out on its potential benefits.
There are always great returns whenever resources are focused on improving pricing strategy. In many cases, pricing strategy consulting firms have helped businesses experience great returns, including a one percent rise in price that yielded a 12.5 percent increase in profit. This is not impossible for businesses to achieve if they can leverage a good pricing strategy – with the help of a consultant – to deliver more positive results while increasing market shares.
It is worth stressing that a pricing strategy that works once cannot be guaranteed to be effective always. Pricing strategies need to be revisited and optimized regularly. Competent pricing strategy consultants have various proven methods that can help businesses implement successful pricing strategies.
Common Pricing Strategy Concerns
Several factors play significant roles in the final choice of a consumer: price, perceived product value, brand power, and purchase occasion. However, price is often the most important factor in the decision-making process of a consumer. With this in mind, pricing strategy consultants always try to help businesses grow, but they – as well as business owners – are often confronted with several challenges. Some of these are explained below:
Pricing over a product’s life cycle
All products have their life cycle, as well as their profitability and sales, which vary over time. As the product passes through the different stages of its lifecycle – which often consist of four phases, including introduction, growth, maturity, and decline – consultants are often confronted with different kinds of challenges.
The Rate of Market Growth
Oftentimes, pricing policies influence how fast the market grows. It is natural for some products to gain more popularity than others. Such products become harder for a penetration price policy, which involves low or negative margins.
The issue of distinctiveness
Another concern that most pricing consultants face is the likelihood of erosion of the uniqueness of the pioneer products. This is often based on the number of competitive products that are available in the market, as well as the degree to which the characteristics of other pioneer products can be reproduced by these competitive products.
Initial producers, with the help of an expert, enjoy lead time that may be derived from proper analysis of their strengths and weaknesses, as well as considering all potential competitors and their financial strength. For a longer lead time, a skimming price would be sufficient. However, if the lead time happens to be short, there might be a need for a penetration price to create a wider market before the emergence of other competitors.
Choosing the right pricing strategy
For most companies, achieving price optimization is a major challenge. The presence of multiple internal stakeholders might affect so many internal processes and systems, including cost, product management systems, customer relationship programs, and profit management. If this is done right, price optimization might be the best activity that an organization carries out. However, this might have a damaging impact when it is done wrong. For this reason, even with the help of an expert, price optimization must be done carefully and there are several strategies that price consultants adopt to decide what the best course of action is.
How much are customers willing to pay?
The major principle of a pricing project – and one of the relevant objectives of pricing strategy consultants – is to test the price acceptability of a product or service with respect to its competition. This represents an area that must be considered with total care since the rules applied can vary markedly depending on whether the product is a commodity or customized. Besides, the effects of speculations about a product shortage on the price cannot be ignored.
Furthermore, the after-sales service can also contribute to the impression a product makes on consumers. Indeed, customers may attribute value to the kind of after-sales services they enjoy from the product, including reliable and quick delivery, the longevity of the brand, and the quality of the product. It must also be noted that having a good brand can increase the confidence of its customers and setting premium prices for products – even in the face of competition – will have little or no effect on sales volume.
The relationship that exists between the prices charged and the volume of products sold can be easily understood. However, it becomes more difficult when certain questions are asked: “how can a certain increase in price affect a company’s sales?” A price increase – regardless of its magnitude – might result in a decrease in sales and customers might choose to resort to substitute products or just simply stop buying the products. These are major concerns for pricing strategy consultants.
On the other hand, a company might miss out on the potential profits that come with charging more for a product. This is all down to the perception of the value of the product and how much customers are willing to pay. To make crucial decisions, consultants must have deep insights into price elasticity.
Dealing with bad data quality?
Another significant challenge in price optimization that companies – as well as consultants – face is bad data quality. This is because all pricing decisions must be based on data. Business data require extensive cleansing and preparation before they can be used in any business intelligence system. It is equally essential to understand how to combine product groups with various price elasticities. In the past, it proved difficult for consultants and business owners to differentiate between bad and good data. However, in recent times, many AI tools can help in extracting actionable intelligence from tons of complex data.
In recent times, the high level of competition has ensured that businesses have to pay close attention to several aspects of their dealings, including pricing. This represents one of the essential considerations that customers look out for and it can determine the level of demand, as well as profitability that a product can command. Raise the value of a product too high, demand might diminish, together with sales volume. Reduce the price of the product, you might tamper with profitability. For this reason and more, the need for a competent price consultant cannot be ignored to find the right balance between demand level, profitability, and sales volume.
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