Are you sure you’re overpricing?
Are you a shop selling fashion, for example? Then you’ll be used to the industry norm where sales occur to move end-of-season inventory to make way for new stock. It’s often cheaper for a shop to discount stock than it is to warehouse it, if they even have the space.
For everyone else, overpricing is possible, but is rare. Most marketers are so terrified about pricing and scaring away customers that they swing the pendulum to the opposite corner, underpricing their offers instead.
Before prices are reduced, marketers need to really understand how their customers buy. Do they buy on price? This is important since many customers don’t.
If a company is supplying raw materials to a manufacturer, the manufacturing processes may grind to a standstill if the raw material doesn’t turn up when it’s expected. This is especially true where production is scheduled using a just-in-time methodology.
In this instance, the cost of the raw material that a marketer supplies fades into insignificance when compared to the cost of idle machinery and employees sitting around, wasting production time. It may be possible to charge a premium for guaranteed delivery.
And it’s not just raw materials – the same principle applies to any product or service that a business customer needs to keep it functioning.
Responding to Overpricing Concerns.
Overpricing is more likely to occur where there is little or no brand differentiation between competitive offers. However, if the marketer is confident that their offer represents additional value above that of competitors, and they are confident that the customer values the additional value, the marketer should maintain a higher price.
As markets mature, more competitors enter and customers become more educated about competitive offers. Depending on the product category, this may force price to sharpen. As part of a regular pricing review, the marketer should obtain a sense of pricing trends in the market, move if necessary, to reflect the maturity of the product.
Rather, though, than simply reducing the pricing across a base, the marketer can introduce a tiered pricing structure that offers different pricing for products differentiated by attributes. This strategy is commonly applied in electrical appliances, such as digital cameras or DVD players. The more features and functionality made available to the customer, the greater the price charged.
Mathematically speaking, one indication of overpricing is an increasing gross profit margin without additional sales to support the increased profitability.
The marketer should heed the warning signal: Obscene profits for little effort always attract competitors looking to share in the rewards so don’t increase your cost base unless you are standing on solid ground.
In the excitement of increased profits, it can be tempting to increase the scale of operations, hire more salespeople or rent bigger, flashier premises. The entrance of competitors applies pressure to the pricing and suddenly the marketer finds themselves in an unsustainable position.
Steps to address Overpricing.
One of the favourite arguments from salespeople (especially those paid on commission) is that pricing is the reason competitors are winning all the business. This may be true, but only if the only difference between competitive companies is the price, and the competitor is taking market share.
In reality, no two competitors are the same so the marketer needs to be really sure that pricing is actually the problem. The problem may be completely unrelated to pricing, it could, for example, be an untrained sales force that do not have sufficient product knowledge or skills to sell at a higher price.
STEP 1: EQUIP SALES WITH BETTER SELLING TOOLS.
At a minimum, and regardless of price points, it is good marketing practice to equip sales teams with tools and training to assist in the selling process.
Face-to-face training through conferences or seminars is often expensive and can be hard to coordinate with other commitments, but can deliver benefits such as providing a focused group environment without workplace distraction, and facilitate networking and team building which may be of particular advantage to companies that have geographically-widespread sales teams. Using a face-to-face model, training can be tailored more effectively to individual needs.
Technology, conversely, offers cheaper deployment of training and the participant can control the pace of learning at a time suited to them. To use the eLearning method, Internet (or company Intranet) access needs to be deployed to employees, the marketer can then construct training tools using online product libraries, online training tests and quizzes, web conferences or video tutorials, as examples. For more information about staff training and the different techniques you can use, visit the Training Staff by eLearning tutorial.
A simple, extremely effective training tool is the production of cheat sheets (often delivered online to facilitate improved version control). A cheat sheet can be used to prompt salespeople with messages about how to respond to pricing feedback or queries from customers. Cheat sheets, for many companies, should be a mandatory for the marketer to produce. They offer a quick condensed overview of the topic and this provides an easy, quick reference for staff.
STEP 2: CONDUCT A BRAND AUDIT.
Branding allows for premium pricing. Before price reductions are considered, the marketer should undertake a brand audit to review whether the brand is sufficiently differentiated in the mind of the customer so that the premium price point can be maintained. It may be that investing more effort into brand strategy rather than price reduction may deliver a more optimal end result for the company.
If the brand strategy is in order and the product is differentiated in the mind of the customer, the marketer has done its job. Now it’s the sales person’s job to explain why the customer is getting value for money. This is what they’re paid to do.
STEP 3: IF YOU’RE GOING TO DROP PRICES, MANAGE IT CAREFULLY.
Price adjustments forced by competitors are especially problematic for large incumbent market leaders. It makes the market leader look like they have ripped off the buying public. It is better to avoid this situation and find another way around it. Some ideas include:
- PASSING ON SAVINGS. If costs have been reduced, you have a good story to tell customers, and that is that you are passing on savings. The costs should be invisible to the customer. In other words, don’t sack all your employees then try to explain later how they are getting a good deal (even if your customer service sucks because there is no staff left).
- EXPERIENCE CURVE PRICING. Experience curve pricing is another good story along the cost-saving line. Experience curve pricing assumes that, over time, it costs a business less to make a product or service. Costs that have been are sunk costs. Savings can be passed on to customers.
- CHANGE PRICING MODELS. Changing pricing models enables you to disguise cost reductions. In the instance where you are looking to drop prices, you can consider moving to a different pricing structure that makes it hard for customers to compare prices. For example, bundling of products together for a discount, or some insurers allow customers to choose a reduced policy premium in favour of increased excess in the event of an accident. It makes it hard to compare the old price with the new.
- ACQUISITON PRICING. Getting a new customer on-board? Acquisition bonuses, sign-on bonuses and discounts are commonplace in attracting new customers, especially those on contract.
- REBATING CUSTOMERS. Rebates, which are common in computer-related products, are a form of discounting that tends to hurt a company less. Rebates motivate sales, but often half the buyers that are entitled to rebates forget to collect them. They lose receipts, or the forms they need, or they forget to submit their claims in time. Rebate pricing tends to be less expensive than it would seem on the surface.
- LOYALTY POINTS AND AWARDS. These are very common in the airline industry. On the upside, they encourage a customer base that is incentivised to fly with your airline rather than your competitot. The big downside (and it is BIG) is that points like these sit as a liability on the (accounting) books. Each time a customer accrues “points”, the business accrues a “debt”.
Check out more of my posts on pricing strategy.