When we ask this most essential question to clients we ususally get three tracks of thinking.
1. Track 1 - the question is answered in a currency amount e.g. $400MM
2. Track 2 – they don’t know
3. Track 3 – they give us a market share estimate e.g. we have 80% share
The response we are looking for as a starting point is volume, units, purchases etc – some quantifiable number that actually represents the size or magnitude of the the business they are in? What does market size have to do with pricing you may be wondering. A basic building block of your pricing strategy is ensuring you have a baseline understanding of the market size (in units) and in turn you track the volume/units of what you sell. Volume trends provides a critical input to examine your firm’s performance that can be horribly skewed if you are only looking at dollars($).
Remember with a sound pricing strategy we are looking at ways to improve profitability(EBITDA) not necessarily top-line growth. Many companies don’t know they are losing or have lost significant business because they are not tracking and trending volume per product and customer. They see sales rising – albeit not a robustly as they wanted – and think it’s still “good enough” to get through the monthly sales meeting.
Moving forward as you begin to think through and build your pricing strategy three important action items should be added to your pricing “to do” list
1. Set a Baseline: Size the Market not only in Dollars but volume
2. Monitor and Trend Volume: Track volume performance per product and segment and evaluate at least per quarter
3. Analyze Dollars and Unit Impact: relative to your most critical customers to ensure if you are losing volume you know root cause for both positive(+) and negative(-) deviations
Losing volume may not be a bad thing if associated with the low emphasis customers but the key is to ensure your firm is consciously and systematically aware of the volume loss (or gain) relative to the impact it has on profitability.
Many companies only report – monthly or quarterly – on performance in sales dollars and assume all is well if it is going up. It may be time to lift up the sales dollars hood and see what is truly happening in your business