When reviewing the data of many industrials companies, we have found at Thinking Dimensions that there is frequently a “One Size Fits All Pricing” syndrome which is hampering performance and limiting sales.
One size fits all pricing often starts with a “Price List” and then offers discounts based on early bookings, volume rebates, or territorial discounts based on country, geography, or similar segmentations (i.e. Early Stage markets vs. Mature).
What is wrong with One size fits all pricing or as companies often call it “good enough” pricing”? The problem with one size fits all pricing is that your company is not taking into account the value the product and/or related services are providing to the user. By not taking into account the value the following three challenges arise:
1) Lost Sales due to pricing outside the value equation the customer is evaluating
2) Confusion in the market due to incorrect price points and positioning
3) Lost revenue due to incorrectly charging the margin required to maintain a sustainable business over time
Often it is argued (successfully unfortunately) by a Sales VP or manager that they have to use a price list because this is “the way it works in our industry”. While it is true that many industries tend to use price lists- it doesn’t mean your company needs to- by the same argument you should make the same products as your competitor because that is what the customer expects.
Once the problem is recognized the next challenge is to change and implement a new value based pricing system. How to do it?
1. Start by segmenting your customers, product, and markets, by clear criteria visible and agreed to by all within the organization. Carefully look at what type of segmentation makes sense for your business.
2. Define clearly your competitive advantage- what customers pay you for and ensure this is validated.
3. Develop the capabilities necessary to exploit your competitive advantage.
4. Begin to price based on both value and emphasis of the markets where you want to grow.
5. Monitor and adjust pricing on a regular basis.
I suggest you begin by creating a pricing team or pricing council- not only involving sales- that works cross functions in your organization or business unit and begins to study how pricing can work as a lever to higher margins and better levels of customer satisfaction and subsequently retention.
In the past five years- the adjustment of pricing has lead to significant margin increases for our clients- as well as the higher levels of satisfaction they deserve to have with their important customers.