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Price Strategy: Emerging as the Most Important Resource for Companies to Increase their Competitive Advantage

The vast majority of companies have spent years achieving gains through cost cutting, outsourcing, process re-engineering and the adoption of innovative technologies. However, the incremental benefits from these important activities are diminishing, and companies need to look at other areas to improve their business results.

Today, companies are looking to serve well-defined market segments with specialized products, messages, product variants and services, and to earn superior profit margins while doing so. Savvy companies are implementing price optimization schemes and focusing on building their organization to serve their most profitable customers. Many are even “firing” customers who are unprofitable.

All too many companies, however, use simplistic pricing processes and cannot even identify their most profitable customers or customer segments. This lack of information means that all too many management teams have their sales staff focusing the bulk of their time servicing the least profitable of their customers. Some companies even embrace policies and pricing strategies that drive away their best customers, and then they wonder why their profits are not growing.

In the course of our engagements, we have seen examples of good and bad pricing policies. The following is a list of ten of the most common mistakes companies make when pricing their products and services.

Mistake #1: Companies base their prices on their costs, not their customers’ perceptions of value.

Mistake #2: Companies base their prices on “the marketplace.”

Mistake #3: Companies attempt to achieve the same profit margin across different product lines.

Mistake #4: Companies fail to segment their customers.

Mistake #5: Companies hold prices at the same level for too long, ignoring changes in costs, competitive environment and in customers’ preferences.

Mistake #6: Companies often incentivize their salespeople on units sold or revenue generated, rather than on profits.

Mistake #7: Companies change prices without forecasting competitors’ reactions.

Mistake #8: Companies spend insufficient resources managing their pricing practices.

There are three basic variables in a company’s profit calculation: cost, sales volume and price. Most management teams are comfortable working on cost reduction initiatives, and they have some level of confidence in growing their sales volume. But good price setting practices is seen as a “black art.”
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Ihab Salloum