Pricing is … a Magnifying Glass

Magnifying glassManagers who understand pricing well have a unique view into the health of their company. Here are several examples.

How well do our marketers use Value Based Pricing when setting the initial prices? When we do this well, we truly understand our market. We know what our competition offers and at what price. We know how our customers make their purchase decisions. If we expect our product development teams to build the best products, they must have and utilize this information.

How do our realized prices compare with our competition? If we are lower priced, it’s an indicator that our product development team didn’t build enough value into the product. Earning prices higher than our competition show we intentionally build differentiated products that our customers value.

Can we explain our price dispersion? We want to charge different customers different prices based on their willingness to pay, so price dispersion is good. However, it shouldn’t be random. When we can explain which customers get the best prices (or the highest prices) we show we understand our customers decision processes which will help in future product development decisions.

Are we watching ASP (Average Selling Price) on a product by product basis? Declining ASPs are an indicator that something in the market is changing. New competitors may be entering. Competitors may be lowering their prices. Customers may be changing their preferences. Monitoring ASPs creates an early warning into market dynamics.

Do we monitor our pocket price? This is the price we realize after taking into account all of the costs to serve a customer (e.g. shipping, early payment discounts, damage reserves). Careful scrutiny on pocket price keeps our profitability high.  Decreasing pocket price, especially if ASP is not decreasing, is a strong indicator that we are giving too much away in the sales process.

How well do our salespeople achieve the target prices? The salespeople who sell at higher ASPs for the same product are the ones who are selling value. They are communicating our features and benefits to our customers. The ones who sell at lower ASPs may be relying too much on price. They need to be trained.

As you can see, understanding and monitoring pricing provides a powerful lens into many aspects of your company. What are you watching?

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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