Maintain Margin is Not a Good Pricing Strategy

Greetings!

If you are starting to plan your 2015 list prices, it is time to stop using the "Maintain Margin" pricing strategy. In the July issue of Pricing Insights we discuss a better way to set list prices. We have also included some links to other recent pricing-related articles on the web.

"Maintain Margin" is Not a Good Pricing Strategy

For many companies, summer is the beginning of planning for the next calendar year. As part of that planning cycle, finance, product management, marketing, and pricing functions begin to do their analysis for setting new list prices. Unfortunately, one of the common list price approaches we see is to set prices that will "Maintain Margin", which is really a cost-plus exercise. If you are in the Maintain Margin group, it is time to stop. There is a better way.

Before discussing a strategic approach to setting list prices, it is important to understand why Maintain Margin is wrong. With any cost-plus pricing approach, you can 1) get it right and increase your prices in an amount that reflects customer value, 2) raise prices too much and begin to erode sales, or 3) fail to increase prices enough to reflect the value to the customers and leave money on the table. While it is important to understand how your costs are changing, they should not be the sole determinant of prices.

A more strategic approach would enable you to match your price changes to customer value, protect your sales, and turn that customer value into shareholder value. Some of the factors you should consider in addition to cost changes include:

Cost to Serve: Managing Leakage & Influencing Behavior

By Tonya DeWeese, PROS

Beyond the obvious costs of serving a customer - like freight, rebates and other elements - do you know the hidden costs that may affect your profitability? This is the true cost of serving a customer.

Cost-to-serve is defined as the costs associated with creating a product or service, delivering it to the customer, receiving payment and retaining that customer.

Make sure you understand all of these costs at a granular level. By understanding all of the various cost-to-serve elements, companies can determine where to commit resources and ensure they're managing customers appropriately based on profit, revenue or overall level of importance.

Read the full article

How Big Data Brings Marketing & Finance Together

By Wes Nichols, Harvard Business Review

You can't script negotiation. Instead, you need a supple strategy you can adapt to the situation at hand. Opportunities pop up. So do obstacles. Power ebbs and flows. Talks that seem to crawl along can suddenly race forward or veer off in another direction.

After all, negotiation is a two-way street. Whoever you're dealing with may be as smart and determined (or as fallible) as you are, and you can't dictate their agendas, perceptions, or actions. So, you need to be both proactive and responsive, depending on how the interaction goes. For example, let's suppose that you want to nail down a service contract with a new customer. What's the first thing that you would say after the prospect welcomes you to her office (let alone the second or the third thing)? It all depends on how she starts the conversation.

Read the full article

When Is It Legal to Lie in Negotiations?

By G. Richard Shell, MIT Sloan Management Review

COMMERCIAL NEGOTIATIONS seem to require a talent for deception. In simple, distributive bargaining, when someone asks, "What is your bottom line?" few negotiators tell the truth. They dodge, they change the subject, or they lie. In more complex, multi-issue negotiations, even relatively cooperative bargainers often inject straw issues or exaggerate the importance of minor problems in order to gain concessions on what really matters. In nearly all bargaining encounters, a key skill is the ability to communicate that you are relatively firm on positions when you are, in fact, flexible -in short, to bluff about your intentions.

Inflation

Inflation increased slightly in June with PPI reporting a 0.4% increase, continuing an up and down trend during the year. PPI increased 1.9% for the previous 12 months. CPI has increased 2.1% over the previous 12 months, with Core CPI (excludes food and energy) up 1.9%.

Happy reading!

Scott R. Francis

President

Strategic Pricing Solutions, LLC

(412) 222-9522

(412) 222-9522 | www.stratpricing.com |

Text | Link