Profits down the drain, pricing rarely blamed
News headlines revel in business performance reports, especially poor results.
Often littered with excuses justifying why profitability isn’t where it should be. Small business owners marvel reading how big companies suffer the same issues they do, with getting the marketing mix right.
Rarely highlighted in any shiny company report is the reality big business didn’t get its pricing right.
Everything from lacking innovation, insufficient volume, tough competition and cost blowouts get mentioned, yet never acknowledging the price to customer value expectation. Why?
There are only four parts to the marketing mix, one would think pricing should get 25% of the blame!
Incorrect pricing can be fatal for SME businesses who lack the resources to continue to rediscover and re-launch themselves.
Comprehending value based pricing
“Price is determined by supply, demand, accessibility and perceived brand value”
Value is derived from a Consumers understanding of a product’s non-price attributes, these are;
- Brand (image),
- Products features and benefits (characteristics),
- The service they receive,
- Pre/ post purchase (experience), and
- The ongoing connection established/maintained (relationship) traded off against the price.
If the customer knows little about the non-price attributes, then price is the exclusive decision driver.
Companies run discounting strategies believing high-unit sales volumes will make the necessary contribution the business requires. This works for the likes of WALMART, but they have the lowest cost of production on the planet and have factored lower margins into their contribution calculations.
Such an approach rarely benefits a SME firm, who typically have a pricing strategy of cost plus.
“80% of all SMEs in Australia and NZ suggest they use the cost plus methodology”
The good news
Truly understanding non-price attributes helps to differentiate a product in the marketplace and achieve profitability.
- Start by really understanding the genuine cost basis of the product or service i.e. dig deeper than raw cost, look at the entire value chain,
- Really understand the uniqueness and value proposition, and
- Formulate sales and marketing strategies so staff (they have to believe it to sell it effectively) and customers understand the positioning.
Undertaken effectively, a value based pricing approach is a genuine strategic differentiator. Customers today are well informed - they only buy value!
Need more help? Talk to a nem partner.
Authors: Hal Linstrom & David Linstrom, Partner's of nem Australasia.
This article is based on research and opinion available in the public domain.