Restart stalled growth by adapting your pricing strategy
When growth drops, it can be almost instinctive for a business to look at its prices and decide how it can reduce them without impacting profits too materially.
This is the wrong place to start, even though it might be where you finish. Falling growth puts substantial pressure on a business that can result in short-term reactions that cause long-term harm.
Look at your pricing strategy
Reassessing pricing strategies and practices is necessary when growth stalls. In practice, it is a process that needs to be approached dispassionately and with the right amount of relevant data to help inform decisions. Your aim is to look at your pricing strategy for new growth opportunities.
Following these steps will help guide you through this challenging process. A key piece of advice is, however challenging your situation, do not rush this. It is too important. Getting it wrong could cost you your business.
Step one: get the data you need
You will need enough historic pricing data for your own business and key competitors. Find out if customers are churning or buying elsewhere because of your pricing. Note, that this is usually not the case. Other issues typically underpin deceleration of growth.
Do not fall into the trap of gathering too much data. Data-blindness is a real problem you can – and should – avoid. Smaller, more accurate, data sets are materially more powerful in helping make the right decisions about pricing strategies. Note the difference between strategies and prices. Once you have decided on your strategy, larger data sets are invaluable to model and test how resultant prices perform in practice.
Step two: do not be distracted by current sales and marketing
It is quite possible that, as growth stalls, your sales and marketing teams want – and may well need – deals and offers to bring business in. This is acceptable in the very short term as long as your business handles it properly. Be clear that deals are time-bounded and stick to that principle while you decide what the best pricing strategy is.
Step three: determine your current strategy and its impact
Remember that a strategy is a set of business choices that positions you on a playing field of your choice in a way that you win. This is equally true of a pricing strategy.
There are seven principal strategies for pricing, some more risky than others. Each one is summarised here so that you can identify which applies to your business now. If you cannot find your strategy within this list, seek advice as a matter of urgency because it suggests your business may not have a pricing strategy at all.
Prices are set according to the overall value they deliver to customers. In Larato’s opinion, this is the strongest strategic approach because it benefits suppliers and buyers appropriately.
Prices are set according to what the competition is charging. This is a risky strategy because you are basically releasing control over your pricing to the general market, exposing your business to price wars, and potentially overlooking the value your business adds to its customers.
Prices are maintained as the lowest in the market. A business can only adopt this pricing strategy if it has – and can maintain – the lowest cost base. If this is not the case, failure will follow.
Prices are set by adding a margin to the production and delivery costs. This is risky because it can make a business uncompetitive if it cannot keep a tight handle on its cost base. It also ignores the value added to customers’ organisations.
Prices are set high to begin with and then lowered over time. There are several problems with this strategy. Again, it overlooks value added to customers. It can also result in a loss of control over the commoditisation of your products or services. If your competitors are also price skimming, they may decide to lower pricing faster than your business plan can tolerate.
Prices change with availability or demand. Travel fares are an example of this. Dynamic pricing strategies are complex to establish and difficult to sustain.
Step four: what are your strategic options for pricing?
When considering future pricing strategies, do not start by thinking about where you are now. This step comes later. For now, consider the best strategies for your company over an 18-month period which, from experience, is a fruitful timeframe to work within. It enables you to adapt promptly and provide your chosen strategy the time to work.
These questions will help you to think through what your pricing strategy could be.
· If my business were to increase its focus on specific markets or customers, how would that impact my pricing strategy?
· Does my business know the commercial value it delivers to customers?
· Do my customers know the commercial value my business delivers to them?
· How well does my business understand competitors’ pricing strategies (note this is knowledge of their strategies not their prices)? What would adopting such a strategy mean for the business in the longer term?
· Why cost-plus pricing? What alternatives do I have? (Value-based pricing is always an option).
· Why would my business choose a price-skimming strategy? What data and market intelligence are required to make this work in an 18-month time period?
Step five: model the transition from now to the future
It is vital that you model how your current pricing strategy will transition into your new one across every area of your business. Don’t make any guesses. Measure the impact and how your organisation will adapt successfully.
A big question
What if your view is that your current pricing strategy is the right one for the next 18 months despite the lack of growth?
If this is the conclusion you draw, then you need to think about how you can
1. Find new markets for your existing propositions
2. Restructure your business so that you can ‘run flat’ in order to buy yourself time to explore other options
3. Evaluate partnership, merger or exit options
If you cannot improve your pricing strategy, avoid the trap of ‘seeing how things go for now’ because while you follow this tactic, you will be depriving your business of the fuel it needs to grow.
Finally, if you do reach the conclusion that your pricing strategy cannot be changed and your pricing strategy is not value-based, it will almost certainly be worth looking at value-based pricing again