Pricing approaches
August 19th, 2010
Copyright © 2010 Integrated Profitability TM
Here are a few methodologies used to price products and services:
● Cost-plus
Definition: using your expenses as the basis of your price
How to do: add up all your costs and tack on a profit margin
Pro: all products and services will be profitable (assuming they sell)
Con: neither sales nor profits will be maximized. If the resulting price is too high, sales will not happen. If too low, your profit will be lower than it could have been.
● Competition-related
Definition: using information from your competition as the basis of your price (e.g., their prices, pricing, product & service offerings)
How to do: gather competitor information and mimic their prices
Pro: prices will be competitive
Con: your products and services will not be able to reap the benefit of any differentiating advantages or counter adverse impacts of any differentiating disadvantage
● What the market will bear
Definition: using the current “realized-prices” in the market as the basis of your price
How to do: keep raising prices until sales stop
Pro: prices will be maximized
Con: sales and profits will probably not be maximized; customer loyalty may be damaged
● Marketing-based
Definition: using your marketing objectives as the basis of your price
How to do: within the context of your marketing goals, ensure that every price supports them (e.g., growing market share might mean lower prices; protecting a premium brand might mean higher prices)
Pro: strong and consistent branding
Con: may ignore financial realities
● Strategy-based
Definition: using your company’s strategy as the basis of your price
How to do: within the context of your strategic goals, ensure that every price supports them (e.g., sun-setting an older product might mean milking prices for as long as possible; use prices to differentiate between two products or features so that consumers naturally tend to purchase the one most strategically aligned)
Pro: coherent and integrated pricing will help meeting strategic objectives
Con: short-term opportunities may be forsaken
● Combination of all above
Definition: using a combination of all the above methodologies to decide your price
How to do: integrate information and approaches from all methodologies
Pro: tends to result in the best short- and long-term profitability results
Con: resource intensive
Assuming you have the time and the skills, having a pricing methodology that directly supports all business aspects (e.g., costs, competition, marketing, branding) to the maximization of the company’s long-term profitability is best.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 76
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Cash Flow: Revenue (Actual, Part 4)-Differentiate Services
July 30th, 2009
Copyright © 2009 Integrated Profitability TM
This is the fourth article on increasing actual revenue to improve your company’s Cash Flow. The last article focused on differentiating products to create opportunities to increase prices or to naturally influence customers toward certain products. This one looks at the same type of opportunities for services.
● Differentiating Service offerings
Similar to differentiating your products, this approach adjusts the level of service that is provided, either as an adjunct to a product (such as extended warranties with differing coverage and differing lengths) or as differing levels of service (as when spas offer a series of more and more complete packages).
Differentiating your service levels usually also has an expense component. More service costs more to deliver–and we will cover that side of the equation in the articles on the expense side of improving Cash Flow. For the revenue side, the better the level of service, the higher the price. The higher the quality of the service, especially in comparison to competitors, the more a premium price may be charged.
Cash Flow: Revenue (Actual, Part 3)- Differentiate Products
July 27th, 2009
Copyright © 2009 Integrated Profitability TM
This is the third article on increasing revenue to improve Cash Flow. The first article in the series covered selling more, the second focusing on pricing opportunities. This article concentrates on tweaking your products and product line to generate opportunities to potentially expand sales, increase prices and/or improve profit margin.
● Differentiating Product offerings
Depending upon your business, you might be able to make small differentiations that naturally encourage customers to buy more. Ever notice at coffee shops and fast food places how the drinks are priced? The small one is priced at $x.xx and then each larger size above is a small fraction higher. How many times do you buy the biggest one because it’s “only 15 cents” more? You don’t need the bigger drink, but it is such a good deal.
Assuming the price of the smallest drink is higher than the cost of the largest drink, this type of pricing makes a lot of sense, for both profitability and especially cash flow. That is: the price of the smallest drink is more than the cost of the beverage in all the sizes. So, if somebody buys the smallest drink, you have the greatest profit margin. If somebody buys the largest drink, you have the greatest cash flow. Either size, you win.
Cash Flow: Revenue (Actual, Part 2)- Increase Prices
July 23rd, 2009
Copyright © 2009 Integrated Profitability TM
This is the second article devoted to improving Cash Flow by increasing actual revenue, as opposed to merely adjusting the timing of revenue. The last article of this series covered increasing sales.
Revenue consists of two pieces:
1) a unit of something (e.g., a product, a service, a period of time)
multiplied by
2) a price
The previous article concentrated on increasing the number of units; this article focuses on increasing prices to improve Cash Flow.
● Increase prices
Every business, market, product/service suite and customer base is different. The ability to increase prices is dependent upon many relative characteristics across all four areas, and how they, at the current moment, are interconnected. For example, who has relative market leverage: buyers or the seller? If you have leverage, there is a better chance you will be able to increase prices, without causing a more-than-offsetting decrease in sales. If not, you don’t.
More importantly, where is your product/service placed in the range of similar offering? How is it perceived by the market? If it is one of high quality, then prices may be able to be increased. If you know that your product and service is the best quality and value in the market, but your customers don’t know it, then you have some marketing homework to do. In order for someone to pay a higher price, he or she most perceive that the product/service is better and deserves the premium.
How does your product/service compare to the competition?
Cash Flow: Revenue (Grey Area)
June 29th, 2009
Copyright © 2009 Integrated Profitability TM
In “Cash Flow: Revenue (Timing),” we covered ideas on how to improve revenue by making changes in the timing of the receipt of cash. The last example in that article, about influencing the type of payment mode customers use when making purchases, was crossing the line from temporary timing changes into permanent cash flow improvements.
There is a grey area between “Timing” and “Actual” ideas when it comes to improving Cash Flow.
For example, if credit cards cost 5% on average to convert a sale into cash, you might consider offering a discount if the sale is paid for in cash. In this example, a 2% discount would provide a good benefit. Some businesses already do this. Traveling around the country, there are gas stations that differentiate prices based on whether one is paying with cash or with credit. As far as your business is concerned, it all depends on the paying-willingness and flexibility of your unique customer base. How to go about it?
Subscribe to our blogs using either our 
