For this blog post, we are looking at how to build a pricing strategy in 4 easy steps. We will look at what’s happening today and understand some of the reasons behind failed pricing activities, as well as explain why it’s essential for your business to have a pricing strategy.
What are the benefits of having a pricing strategy?
1. A strategy will give you a set of objectives that are aimed to achieve.
2. It will enable you to understand why you are trying to achieve these objectives.
3. The objectives will have some KPIs (Key Performance Indicators) allowing you to measure and assess what you are doing.
4. It will provide clarity to your pricing and at what frequency you need to reprice.
What happens when you don’t have a strategy?
Often businesses miss out on these benefits because they jump reactively from a pricing need to pricing. The results are as follows.
There’s no benchmark of what good looks like or even some KPIs to assess performance, motivation, volumes, and margins dwindles.
Often there are no rules in place, so the pricing becomes ad hoc and ends up not making sense.
Without any objectives or follow-ups, pricing becomes person–dependent and illogical, resulting in overpriced products which create distrust among your customers and damage your pricing perception, and with under-priced products, they damage your bottom line and might cause a price erosion in the whole market.
What does your pricing strategy need to include?
So, hopefully, by now you have understood why you need a strategy and what happens if you don’t have a strategy. But what needs to be in your strategy?
1. Define what you want to achieve
As in many cases, you need to decide where you want to go and what you want to achieve with your new pricing strategy.
Do you want to increase profit?
Sell more products?
Improve your customers price perception of you?
Decide where you want to go and make sure you have the rest of the company onboard, then you are ready for the next step.
If you want to read more about why you start with your objectives then you can read this post as well.
2. Agree on some objective measures
Objectives need to be exactly objectives. These should be established using the S.M.A.R.T acronym.
To make sure your goals are clear and reachable, each one should be:
- Specific (simple, sensible, significant).
- Measurable (meaningful, motivating).
- Achievable (agreed, attainable).
- Relevant (reasonable, realistic and resourced, results-based).
- Time-bound (time-based, time-limited, time/cost limited, timely, time-sensitive).
If you are not familiar with this, please visit this link for more information.
When you know what to achieve and how to measure it, you are ready to jump to step 3.
3. Use KPIs to assess performance
The KPIs are the numbers that come from your objectives. Often these are difficult metrics to decide upon and there isn’t really a right or wrong answer as to what the numbers should be. I would suggest that whatever your pricing KPIs are now, they will need to reflect some growth in them. A key part of the strategy must be to assess the performance of your pricing.
What happens next?
You now have a strategy in place that defines what you are trying to achieve, some objective measures, and some hallmarks that allow you to benchmark the pricing quality.
4. Adapt and Change to keep improving
With the review process in place, you can objectively see what’s working and what’s not working and using the framework of your strategy, you can sense check your pricing and adjust accordingly. The process of pricing is the one that means you must consistently evolve and change to keep ensuring that you keep making progress. Also, make sure you have pricing software allowing you to change and evolve over time.
Thank you for reading.