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How does your firm calculate its product
or service price?
Often salespeople feel that pricing is a key impediment
keeping them from hitting their quota.
This is misnomer for many who believe that lower pricing
means always-greater sales. In fact, this hypothesis is not supported by
business studies.
Pricing, as a selection criteria, falls below technical competence,
service and support, vendor's understanding of a company's need, and past
experience with vendor based on research by Getronics,
IDG Research, and CIO Magazine.
Let's take a look at how some firms determine their pricing
structure.
11 ways firms calculate their product
or service pricing:
- Use a competitor's price as a benchmark to set their price
- Use price points (drop the price) to increase market share penetration
- Use price as a marketing tool to break into a new account to a "create
a relationship" that will generate additional revenue after the first sale
- Use cost of labor as a benchmark and
then mark up gross margin based on some mathematical projected profit model
that includes corporate G&A costs
- Write off all of the development or cost of labor costs, calculate all
revenue as gross margin, and set price with no costs of goods
- Price the product on an inventory spin model to generate more gross
revenue by "turning" your
inventory faster (i.e., selling more product faster)
- Use a bundling model by tying multiple product options with service
options to hide actual segmented pricing
- Create value pricing where price is based on the business value and
how it affects the buyer's ability to increase income or decrease expenses
when the product or service is deployed
- Create price based on Return On Investment (ROI) calculation for the
buyer
- Use a profit-driven price model where each deal is individually reviewed
to determine its overall profitable contribution
- Last, but certainly not least . . . just guess (I don't recommend this
but it seems to be pretty popular.)
Let's look at three of these methods:
- Pricing based on competitor's price benchmark;
- Dropping price to get market share; and
- Dropping price to "start" a relationship and generate more revenue on
the back-end of the first sale with a prospect.
When we look at these three methods, we observe they are short-term
action steps that never truly help a firm become more profitable.
Why?
Pricing based on your competitor's sales price never works because
it ignores your firm's operational costs and assumes that your business
costs are the same as your competitor's costs.
Market share pricing only helps firms who already have a monopoly
and restricts company profitability.
Discount pricing to launch a key account relationship is
a common practice but recent studies conflict with this pricing
approach. Of particular note with regard to this method, past studies by
Walker Information show that 1 out of every 2 buyers do not plan
to buy from the same vendor again and are unhappy
with their business relationship.
So, all of the prospect negotiation techniques of cutting your price
to start a relationship are just that . . . negotiation tactics.
What
is the right pricing method for profitability?
For most firms, it is going to be a combination of the first 10 methods.
The key to the correct pricing model is focusing on how you bring value
to your prospects' purchase while balancing your firm's cost of business.
The incorrect pricing model is, of course, number 11.
"You win customers
by quality rather than price."
Jean Ridley
Writers Resource Box
| Paul DiModica is the author of the best-selling
books: Value Forward Selling, Value Forward Marketing, and Sales Management Power Strategies.
He is founder of Value Forward Group and addresses
thousands of executives each year on the subjects
of sales, marketing and strategy, including
executives and staff of Wells Fargo, Lanier Corporate, Adobe, IBM, Tyco/American Dynamics, Navitaire and many others. His content-rich
workshops and strategy sessions on leadership, sales, management
and marketing bring about immediate changes
and long-term results. For more information, visit http://www.valueforward.com |
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