4 Lessons Learned from 30 Years in the Pricing Industry
In the current landscape, with supply chain issues, fluctuation in demand, and troubling inflation, it can be hard to know how to handle your pricing strategy. Many enterprises that we work with are struggling to optimize their pricing to maintain margin and growth, and they come to us seeking new approaches.
In working with these clients over the past three decades, we’ve learned some key lessons that seem especially relevant today.
Pricing isn’t the top factor
Although customers prefer lower prices, price is typically a secondary consideration in most purchase decisions. Other concerns like, quality, service, selection, availability, ease of doing business, reputation, trust, and support typically rise to the top when customers make their decisions on with whom they will do business. This is backed up by several studies on customer purchase behavior. Customers expect prices to be both fair and in the ballpark of what other competitive vendors are charging.
Changing vendors is difficult.
In the world of recurring B2B purchases, buying inertia is powerful, and customers form relationships with the products, vendors, and processes they’ve used to make repeat purchases. Switching costs are significant, and it is unlikely that a customer will defect due to a minor price discrepancy unless there is a major service failure. Studies show that over 70% of customer defections are due to service failures, and only 17% of customer defections are due to price issues. In short, if you provide good service, customers are not likely to leave you, even if your prices are somewhat higher than your competitors.
Lowering prices doesn’t increase profit.
Because of the tremendous leverage pricing has on profitability, it is very rare that lowering prices by itself can generate enough extra demand to achieve incremental profits from such a move. A company with 10% profitability must get better than a 10% increase in volume to offset just a 1% decrease in price. Imagine how much volume must be recovered to offset a 5% decrease in price. In short, lowering prices is typically not a recipe for improved profitability.
Delivering pricing quickly matters.
Customers value instantaneous pricing information. In a Hanover study of over 700 procurement professionals, it was revealed that over half of those from companies over $500M would be willing to pay up to 5% higher prices for instantaneous pricing information. Providing instantaneous pricing information has also been shown to significantly improve win rates.
So how does all of this tie together? In short, customers will value their relationship with you if you continue to provide good service, provide fair and rational pricing, and make it instantaneously visible. Furthermore, the temptation to reduce prices is not typically justified, as it is difficult to make up enough profit back in additional volumes. Rather than pricing, investments in improved service levels, pricing consistency, and transparent visibility are likely to have higher ROI in terms of customer value and profitability.
So how should companies shape their pricing strategies to be as successful as possible under the evolving impacts to the economic and human health of individuals and companies? To start, companies should use pricing software, called pricing optimization and management (PO&M) in the industry.
What is PO&M software?
PO&M is (ideally) an AI-based SaaS solution that accelerates pricing processes while increasing margins and protecting price attainment. These solutions enable an organization to efficiently manage and optimize the price of its goods and services. These offerings also offer a growing range of sales intelligence advice, such as best-next-action recommendations and customer churn warnings. The pricing capability incorporates the latest market information, delivering informed, dynamic, personalized pricing decisions to buyers across traditional and digital channels in milliseconds. Centralized management makes it easy to gain consistency and visibility by taking control of product offers per channel, eliminating the likelihood of channel conflicts. PO&M software should also feature smart analytics and reporting tools.
PROS Smart Price Optimization and Management harmonizes dynamic prices across all go-to-market channels, while aligning with market dynamics and maximizing profitability for the company. With the help of PROS advanced AI, businesses can optimize their pricing, in accordance with customer preferences, competitive pressure and changing market demand.
If you want to have a conversation about how PROS can help you with your pricing strategy, contact us here!