How do you determine your pricing? It’s probably a rigorous process, but is it science or art?
Do you start with your profitability and go from there? Or do you start with the market price and let your profitability fall wherever it may?
Neither approach alone will help you win in the marketplace. Because neither approach puts your customer‘s profitability into the picture.
Use a pricing strategy that considers your customer’s profitability
Delivering a market price to your customer will certainly be geared toward improving your top line. Here the logic is that your customer will be looking closely at a few high volume, highly competitively priced products to evaluate your overall pricing proposal.
If you price those product “footballs” correctly, everyone seems to wins. You get the business and they get the pricing they need to be competitive in the marketplace.
But that strategy embodies the whole point of pricing – that your customer is competitive in the market. If they are making the money they need to be successful, you will stand out.
But are you making the money you need to stay in business?
Take a P&L approach to pricing
It’s no surprise that there’s no one sure way to approach pricing. It really is part science and part art.
But do you approach the science part with a fact-based strategy? To do that, you need to be able to answer a few simple questions:
- What is the product’s market price?
- What is the customer’s margin % expectations
- What can we make?
As one senior leader recently commented to us about pricing: “If you manage pricing from only your profitability – you’re going to be dead.”
Which is why pricing is art as much as science.
Inside of a company, pricing is really a continuum
The sales team is, understandably, all about making the sale. They want a price that will help them achieve that goal.
On the other hand, the product marketing team is looking to get credit for the innovation they are bringing to the marketplace. They want to get paid a premium.
Straddling both sides of the fence is channel marketing (also called trade or customer marketing depending on the company). Channel marketing sees both sides of the fence, is grounded in reality, and keeps perspective throughout the process.
Having a group like channel marketing manage your pricing is the secret sauce. They have perspective, collect all the facts, and keep the customer’s profitability balanced with your own profitability.
For other Channel Instincts posts on pricing, see What Does “Your Price Is Too High” Really Mean?, Is Pricing Making You Go Bananas? and Are You Pricing for Volume or Profit?