Setting pricing, adding value and following the money

[Image courtesy of AJ Cann at Flickr Creative Commons]

I’ve been thinking a lot about pricing recently. Not because I’ve been on a spending spree (I’m allergic to shopping) but because I’ve been immersing myself in the subject for a project I’m working on.

This client helps people optimise their pricing across all products, sectors and geographies, so they don’t leave any profit on the table.

You’d be amazed at all the ways that happens.

Salespeople renew the same contract they’ve been using for five years, with pricing that’s little changed. Shipping and freight charges eat into profit margin. Products are undersold in certain countries, when a much higher price could be realised without hitting market share. Organisations focus on low-value, low-margin products at the expense of high-value, high-margin ones.

That last one is crucial, probably because it’s something we all do at one point or another.

Follow the money

I was comparing experiences last weekend with a friend of mine who’s in recruitment.

He told me that a few months ago, he decided to take a closer look at his client list, and decide which ones to focus on. He had an idea of who his best clients were, but wasn’t sure if activity translated into results. 

It didn’t, unsurprisingly.

Those clients he interacted with most tended to have low-value requirements, and a large number of unsuccessful candidates. So although his CV-to-interview ratio was high, the more important interview-to-offer ratio was low.

Combine that with lower salaries (on which his fee is based) and it was a lot of effort for relatively little return. Especially when some clients constantly tried to negotiate him down on price. 

The 80/20 rule may be a cliché, but that doesn’t mean it’s not true.

And when he looked at where he was really making most revenue, it was with a handful of clients who valued quality over price. So he had fewer, but higher-value interactions, and a much better hit rate. And never a mention of negotiation on price.

From commodity-based to value-based 

So identifying the right sort of client is critical to pricing, and to minimising the hidden cost of protracted, difficult sales – which when you factor in your time, is akin to dropping your price.

But also critical is focusing on adding value. And yes, it’s another cliché, much used and abused. But in real terms, what does it mean? 

Let me give you a very practical example, based on my recent research. You’re a plastics manufacturer looking at how much you can charge for your product. What exactly is the optimal price? 

The answer is that it depends entirely on the sector and use. So if your client produces disposable razors or pens, you can’t charge that much. But if they’re a mobile phone manufacturer, then you can charge a premium. The end product sells for more, so you can charge more for the raw materials. 

And it’s not just products – it’s services too.

Take copywriting. If I help people plan their marketing campaign, design a communication strategy or position themselves against the competition (all of which I do, by the way) I’m adding value – for them, and for me.

But if I just churn out words as fast as possible, without much thought for the bigger picture, then I’ve turned those words – and my service – into a commodity.

And in a fiercely competitive market, the very last thing you want is a product or service that’s commoditised.

Know your market

The key to all of this is knowing your market. In my client’s case, they harness the power of big data, deep analytics and sophisticated algorithms to optimise pricing.

They don’t just do a one-time segmentation and run with that. Instead, they do dynamic segmentation, which is regularly refreshed so it’s always up to date for all markets, segments and countries.

If all of this sounds big, that’s because it is. And maybe you don’t need the power and sophistication of such a solution. Neither do I, to be honest. Because in most cases, just like my recruiter friend, the right pricing depends on having the right clients.

In my case, that means finding the sweet spot. If clients are too small, they don’t have the budget. If they’re too large and they’ve already got an agreement in place with an agency who’s on their preferred suppliers list.

So in the middle, there’s lots of scope for work. 

And even at the upper end, with bigger potential earnings, there are ways in – as long as you know the right people. It’s just a case of working out who’s signed them up as a client, and how can you get an introduction.

And for me, that means agencies who have the size, clout and reach to get to the big companies. I land business I never could on my own, and the agency gets a resource that’s outsourced and flexible.

And it works for everybody involved.

So when it comes to not leaving profit on the table, the rules are pretty straightforward. Find the right clients. Focus on high-value products and services. Add value to justify a premium. And carry out regular reviews to make sure what you’re doing still makes sense.

Simple, easy and effective. And not an algorithm in sight.