Pricing has become an increasingly hot topic now when we are suddenly dealing with inflation and tolls again. Everyone wants and needs to adjust their prices. But do you know how much a 1% price increase affects your bottom line? According to a McKinsey study named ”The power of pricing”, a 1% increase in price statistically increases profit by 8% – meaning there are many compelling reasons to actively work with pricing.
The base for setting the right price is to understand your customers’ situation and buying process. A general price increase of X% often yields a positive result in itself. However, there are significantly more effective strategies based on understanding the perceived value of your offering and customers’ reactions to it. Essentially, you should raise prices (more than the inflation) when customers see your product as more valuable than the competitor’s similar offering or that it is hard to replace.
Overall, most companies have great potential in working with pricing. As the well-known industrialist Hans Werthen from Electrolux put it:
“I’ve seen many more companies get into trouble because their prices were too low than because they were too high. If your prices are too high, you get a reaction right away and can correct it. The opposite you’ll never find out about.” The core of succeeding to raise prices is to make customers perceive the value of the product or solution higher than the claimed price.
So, the foundation of value-based pricing lies in how you position your brand and present your offering through, for example, communication that differentiates and builds a higher perceived value of your brand and offering. This is often created through creative, emotional and consistent communication.
Finally: Listen to your salespeople with some caution. Many sales teams suggest lowering the price as a recipe for success. Naturally, customers will try to negotiate a lower price – but as a salesperson, your job is to counter this with value-based argumentation. And in the vast majority of sales-driving analyses we have done, price does not appear among the top parameters that actually drive sales. Customers always say price is important, but in reality, it often matters relatively less.
In one case, a client was certain “Price”, “Quality” and “Delivery accuracy” were the most sales-driving factors in the steel business. After doing a Brand Potential study we discovered that the most sales-driving arguments was “Easy-to-do-business-with”, “Community feeling” and “Prestige” – the type of arguments we traditionally don’t connect with B2B sales processes. By adapting the positioning and communication, both the customers willingness to pay and willingness to buy increased substantially.
Sounds interesting? If you want to discuss your sales potential, reach out to ulf.vanselius@comprend.com