Drive Higher Profit With Three Proven Pricing Tactics

Managers, especially in these uncertain economic times, are looking for a quick return on investment, no matter if this investment is in time or in dollars.

As has been noted by leading analyst firms, such as McKinsey and Co. and A.T. Kearney, pricing is the quickest and the most efficient way to improve your bottom line. It has more leverage than cost cutting, traditional business process improvement and any effort to increase your sales volume. It is also an area that relatively few companies focus on. Thus, excellence in pricing gives you a strong competitive advantage.

Now, in knowing this, how can you use pricing to drive higher revenues for your business? What tactics in the pricing realm can you implement today?

Of course, you are reading this document because pricing is on your mind right now. Maybe your company is bringing out a new product or product line, so choosing the right price is a topic of discussion at your company. Maybe your company is facing downward pricing pressure and you are looking for ways to fight back. Maybe you are just looking for ways to improve your bottom line. No matter the reason for your pricing interest, as our gift to you, here are three proven pricing tactics that are guaranteed to go straight to your bottom line. You can find them below, sorted by the immediacy with which you should start putting them into action:

One: Implement Today:

By documenting the profitability (not revenue!) for each of your products or service offerings -- or at least the top 20% to start -- we recommend you put programs and policies in place to guide your customers to the most profitable of these. Here are some short tips on what you can do

1. Compensation Optimization. Compensation drives behavior, and as you want to sell more of your most profitable product, it becomes important that your sales people are compensated on profits, not revenues, or at least some combination of the two. You can even offer special bonuses for these particular products or services to further drive your salesperson's efforts to get them into the hands of your customers.
2. Price Imaging. This is the method of using a product or service that is more expensive than the one you are actually trying to sell in order to create the illusion that the target product or service is more affordable. Consider that after spending some time browsing $2000 handbags at a high end fashion store, most women would find the $200 purse at the checkout a bargain!
3. Strategic Discounts. Discounts are best used if executed strategically. This means that discounts should be focused on driving customers to your most profitable products or service and should not be used indiscriminately. The levels of discounts also need to be carefully calibrated so that your highly profitable products stay highly profitable.

Two: Implement Next Month

Uniqueness IS Pricing Power. Products that are unique in its marketplace have pricing power. This means that prices can increase and sales volume will not suffer. In fact, if any offering is unique, and you are selling it at commodity prices, you are most likely on the upward slope of the market's demand curve and a price increase will result in higher sales volume, and revenue yields. A good method is to take your top 20% best selling products or services and look at their uniqueness. Categorize totally unique products as "A" and totally commodity products as "D", "B" and "C" are in between. Then focus all efforts to take out cost from "D" products and increase prices on "A" products. Also assess how "B" products can become a "A" products and how "C" products can become a "D" products.

Three: Implement over the 6 month.

1. Know Your Price Elasticity. The final step in pricing excellence is to know the price elasticity for your product or service and therefore know where you are on the demand curve. The demand curve almost always has an upward slope, a crest and a downward slope. Generally, if you are on the upward slope, an increase in price will increase revenue. Likewise, if you are on the downward slope, a decrease in price will decrease revenues. If you are at the crest you need to use other methods, as just changing your price will not help.
2. Build Price Wall Awareness. Many products or services have very clear price walls; these are inflection points in the demand curve that consumers have built into their psyches. At these price walls, a 1-2% price change may generate a 10 - 20% drop or increase - in revenue, depending on which side of the crest your price happens to be.
3. Understand Your Customers. Anecdotal information about the needs of your marketplace captured by sales people are not the same as hard data from your marketplace. The latter captures the value perceptions and willingness to pay with statistical significance. This will allow you to generate behavioral segmentation and to create bundles (or options) and prices that better target the marketplace. Through this greater understanding, it may also be possible to open up new market segments. Segments that you have not yet served.

These are just some of the strategies and tactics companies have when looking at pricing to improve their business results. We hope you found this document of value, and that when you plan your next pricing move this will come in handy.