Directions to Develop More Effective Pricing

The Improve Pricing section of StrategyStreet helps you use pricing to improve your profitability by increasing your revenues from customers. You might improve profitability by raising prices to increase revenues and the gross margins in your business or by reducing prices in order to sell or retain more sales volume and improve operating margins with better economies of scale.

• Video #72: Overview of Pricing Part 1: How to Look
• Video #73: Overview of Pricing Part 2: What to Expect
• Video #74: Overview of Pricing Part 3: What to Do
• Video #78: Competing Against Low-End Competition Part 1
• Video #79: Competing Against Low-End Competition Part 2

You should consider how changes to your pricing approach might apply to each of your key customer segments. If you haven't done so, we recommend that you identify the customer segments in your business by using the Diagnose/Segments section of StrategyStreet to identify the Core customers in your market. You might then use our Improve/Segments section to identify the emerging needs of these key customers. Your price brainstorming sessions will be most effective if you have a clear understanding of the needs of your customer segments. As you evaluate each potential change in pricing, make a rough calculation of the impact of the potential change on the net life cycle costs the customer incurs with your product compared to competitive products.

• Audio Tip #79: How Much Must My Product Reduce the Customer's Costs?

There are several actions you may take to use price to improve your revenues:

1. Identify Price Reduction Needs. Price reductions may offer revenue opportunities. In some cases, you must price defensively, countering the low prices of competition to keep from losing market share. In other situations, you may be able to reduce price offensively to gain share with low prices. In this latter case, you would expect that competition would be unable or unwilling to match your new, lower price. Shortcut to Examples>>
   
   • Audio Tip #131: Defensive Versus Offensive Pricing
   • Audio Tip #142: Defensive Pricing Guidelines
2. Identify Opportunities to Raise Price. You raise prices to improve margins where the revenue and margin gains from sales to continuing customers are greater than the margin losses from defecting customers. Shortcut to Examples>>
   
   • Audio Tip #143: Offensive Pricing Guidelines
3. Determine the Increment of the Price Change. Price changes come in many sizes. In general, price decreases are larger than price increases. (See Link to Examples below.)
4. Adjust the Application of Price According to Your Market Outlook. You may modify the level at which the company applies its price according to the industry price outlook and the cost of administering the pricing program. In general, if your outlook sees a declining price environment, you would increase the specificity of your price in order to retain as much revenue as possible. On the other hand, if you envision a rising price environment, you would apply your price to a broader segment of the market in order to reduce the cost of pricing administration. Shortcut to Examples>>
   
   • Audio Tip #148: Levels at Which a Company May Set the Price
5. Change the Components of the Price. Value is a combination of performance for price. Accordingly, you may change your value with price in one of two ways. First, you may change the performance and price simultaneously, and second, you may elect to change only the components of the price. Shortcut to Examples>>
   
   • Audio Tip #151: Changing Performance and Price Together

We have used these steps to organize ideas and examples supporting your Improve Pricing brainstorming work. Under each step, we list the factors that you can alter, or actions you can take, to change the effective price for your customers. Each of these factors or steps also includes numerous examples.

These are practical real-world examples. The examples we offer to support each item on the outline come from the experiences of many other companies in other industries. The purpose of these examples is to broaden your brainstorming ideas. Each example lists the SIC of the industry, the year, and a short description of a situation where the pricing concept is used or implied in the company's actions. We also offer "Warnings and Advice" advisories for each significant action section in order to allow you to consider some of the risks of the action.

For example, in Step 4: Change the Components of the Price, under the category "Change Components of Performance and Price Together/Primary Functions", we would have the following:

Each pricing action is distinct from others. However, the brainstorming examples are not meant to be mutually exclusive nor collectively exhaustive. You may find that you generate new ideas in one brainstorming step that really belong in another. Nevertheless, the idea is the end point, so anything that helps you generate new ideas is of benefit to you.

We suggest you use this section of the web site as follows:

• Open the portion of the outline of interest to you.
• Begin brainstorming ideas to innovate your current pricing approach for your customers, using only the outline.
• Use the examples supporting the outline item in order to expand your range of ideas.

• Worksheet #12: How to Produce Results with Brainstorming Meetings

<Brainstorming Examples

Basic Strategy Guide Users Go To: Step 23

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