Have a pricing strategy. It is surprising how many companies don’t and handle pricing in a very ad-hoc way. Basically, there are three pricing strategies you can use:
a) cost plus – the least profitable way in my opinion and sometimes, the least competitive,
b) competitive – important to know where you’re pitched and;
c) value – where you price up your whole proposition and optimise your profit.
- Promote added value. If you operate in a repeat sale B2B environment where you must promote to keep customers interested, use value added rather than discount. Use BOGOF (buy one, get one free) deals if you can get or afford them as these are really strong and don’t affect your normal shelf or list price. Supermarkets do it all the time to good effect. Buy 2 get 1 free works as well, as does extra fill products – “20% extra free” means just that i.e. selling 600ml for the price of 500ml and is a much stronger offer than 20% off, not least because you know it’ll be passed on at retail, driving the value through to the consumer, rather than increasing the margin of the retailer.
- Keep control of your price list. Never, ever panic! You can’t win every sale – the laws of economics won’t let you. A knee-jerk reaction to lower price because of a competitors activity won’t get you any extra sales over the medium term, but it will certainly get you lower profits. Don’t forget, on a 50% margin, if you sell 10 units at £1, you’ll make £5; if you drop 10%, you’ve got to sell 13 units to stand still! Personally, I’d lose the one sale and sell the other 9 at £1. When this happens, sit back, have a cup of coffee and plan your market research – talk to all your customers – you never know, you may be 10% cheaper than the competition on another product and be able to make a bit more.
- Bonus your sales people on cash gross margin. Don’t be tempted to reward on percentage gross margin – your sales could take a dive. If you do cash gross margin then your sales people are not just discounting with your money, it’s their own as well. So, back to the 10 units at £1. You want growth, so you target 11 units at £1 at 50% gross margin which equals £5.50 cash margin. If you sales people want to discount 10% they’ll have to sell 14 units to hit their target before they get a cent! In reality, the need for heavy discounting will tend to reduce.
- Watch your business. We’ve been talking about gross margins here, but real profit is what’s left after expenses are paid. There are not many ways to influence your net profits: a) sell at a higher price, b) buy, or manufacture at a lower price, c) lower your other costs. Now, unless you are Tesco (who’s stated aim is to sell as low as it can, rather than for as much as it can get) you should try to do all of these, all of the time.
Don’t take your eye off the ball!
By John Hester