In this era of cost-cutting and price discounting, it has become harder for many firms to price their products in a profitable manner. Yet, this can be done!
As McKinsey’s Jay Jubas, Dieter Kiewell, and Georg Winkler report:
“Companies often overlook pricing as a driver of earnings growth, instead defaulting to cost cutting and other measures. Here are five steps to growth through pricing.”
- “Provide meaningful transparency into pricing data — Pricing managers often lack a clear understanding of how profitability varies among regions and product lines, and they know even less about how it can vary among individual customers or transactions. Yet these all have an important influence on pricing and sales decisions.”
- “Understand what customers really value — For all the sophistication provided by advanced analytics to master a complex array of prices, the price of a product or service ultimately depends on how much a customer thinks it’s worth—that is, ‘value pricing.’ The best companies augment pricing analytics with detailed customer insights to identify all the key buying factors that determine how much a product is worth to a given customer, understand how those factors compare with competitors’ offers, and quantify the value created for the customer.”
- “Move from sales reps to ‘value negotiators’ — Determining the best price means nothing if sales reps can’t convince customers to accept it. For this reason, it’s critical that sales reps have important pricing capabilities, such as sound judgment to manage time, negotiate thoughtfully, and adjust pricing guidelines in order to maximize value and minimize the risk of customers defecting.”
- “Provide on-the-job training to build confidence — While most companies understand it’s important to build the pricing skills of their people, few move beyond basic training in classes or online. Successful companies, however, use adult-learning techniques, such as experiential learning, to embed the new skills in the front line.”
- “Change the culture — In our experience, even the best pricing programs will fail in the long term without a deliberate commitment to overcome the entrenched habits and shifting priorities that doom most change programs.”