Accounts Management
Perspectives on Pricing
It’s important to understand how pricing functions relate not only to customer behaviour, but also to your profits. For instance, a difference of just 1–2% in pricing can have a significant impact.
As an example, if your business runs at a 20% margin and you decreased your prices by 2%, to maintain current profits, you’d need to increase your sales by 11%. Increase your prices by 2%, and you could afford for your sales volume to drop by 9% before it would start to impact profits.
On the same 20% margin, a price reduction of 18% would demand a massive 900% increase in sales just to maintain profits. Whereas for an 18% increase, your sales would have to drop by as much as 47% before your profits were affected.
Finding balance
What price level gives you an advantage over the competition but still maximises profitability? Factors include the real value of your position over your competition’s position and customer perceptions of your product’s benefits.
If your product has no benefits over your competitors’, a price increase could result in a serious loss of market share. However, if you can convince your customers that your product is better or that you provide better service and support, then a price increase may be acceptable.
To the extent you can emphasise the importance of issues other than pricing as part of your market strategy, simple price pressure by itself will not determine what you should charge.
The ‘Pocket Price’
You need to determine what base price, discounts and adjustments to offer your customers. To do this, you need to understand the full range of price components, the way your customers compare prices and price variations, and how to communicate pricing information to them.
The most important thing you need to know is the difference between list price and ‘pocket price’ i.e., how much each sale ultimately puts in your pocket.
Each product has a list price, but many discounts are available, including volume discounts, competitive price discounts and so on. The list price minus these discounts is the invoice price.
If your customers look primarily at the invoice price, and you plan to offer discounts after the invoice is issued, consider moving some of these later discounts to the invoice itself. It doesn’t change the final cost, but may improve the customer’s perception of pricing.
