Is your company’s pricing strategy aligned with the reasons your customers actually buy from you? Over the course of many years supporting manufacturers and distributors as they optimize their pricing strategy, we’ve found that this isn’t the case for many companies.
The same companies who claim that their customers are loyal to them because of above-and-beyond service and value-added expertise are commonly pricing their products to undercut the competition. Unfortunately, as many find out in a costly way, you can’t have it both ways. It’s important to know who you are in the market and to have a pricing strategy that reflects it.
Why Do Your Customers Buy from You?
One of the first questions we commonly ask companies is “why do your customers buy from you?” The answer to this question tells us so much. Is this company in a hyper-competitive space or are they the “only game in town” in their geographic footprint? Do they have a commitment to having everything in stock when competitors commonly drop-ship a few days later? Do they have a great relationship with vendors who funnel opportunities their way because of their strong reputation? Do they know the local markets better than anyone else and maintain close customer relationships? These are all important questions to answer when we first engage with a potential client.
One of the first things most companies say is that customers buy from them because of their service. We hear that their sales and service reps are viewed as trusted advisors and experts, and that the company has a decades-long reputation as the leader in their space. And, it must be said, that this type of pride in what companies deliver for their customers is a clear demonstration of why companies focus on the value of service.
What we virtually never hear from our prospects is that their customers buy from them because they have the lowest price. Yet, we still find that the sales team’s pricing behavior seems like a race to the bottom.
A Disconnect Between Price and Value
Unfortunately, while excellent service is virtually always the first thing that companies think of when they consider why their customers buy from them, seldom does their pricing structure align with that brand promise. The same companies who see themselves this way (and often rightfully so) are in the trenches haggling over decimal points with their customers in an attempt to stay competitive with everyone else.
There’s obviously a disparity here. To be clear, I believe that many companies deliver excellent service and their customers are loyal based on great customer experience. The disconnect here isn’t on the side of the brand promise or customer commitment. More often, companies simply aren’t getting paid for their excellence because their pricing model doesn’t allow them to.
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Your Place in the Market is Right; Your Pricing Structure Might Not Be
If you’ve built your business by being a trusted resource and have a team of technical experts that deliver best-in-class service, don’t change that. Just make sure that you’re making money doing so. Chances are, delivering that extra level of support to your customers doesn’t happen for free. Having quicker turnaround times, being a one-stop solution, and providing extra customer touches all come at a cost. This level of support also adds value for your customers, which is why they buy from you.
When you decide that you want to get paid properly for being the best at what you do in your space, it’s time to look for areas where you can improve your margins. Of course, building the right pricing structure for your business isn’t as easy as increasing prices across the board. You need to remain competitive in the most competitive areas of your business. That’s why it’s important to pick the spots where your customers are less sensitive to price changes and do your best to stay relatively competitive in areas of your business where customers are comparing prices with your competitors.
Boost Margins While Staying Competitive
With the right pricing system, companies can stay competitive on their “Core A” items that are being cross-shopped while making up the difference by adding margin on the long-tail items. This happens in every industry. Printers and their ink cartridges. Razors and the replacement blades. Stand mixers and all of the add-on attachments. Your company is in business to make money, but you obviously need to be competitive in the areas where your buyers are shopping you against your competition.
In fact, some of your competitors – that you feel you need to aggressively price against – probably already do this as well.
So, what are the equivalent products to the ink cartridges, blades and attachments in our business? There are probably a lot that are hiding in plain sight. When we analyze a typical distributor’s transactional data, we commonly find that as many as 80 percent of their SKUs are not very sensitive to price changes at all. These items aren’t sold first or most often, aren’t purchased frequently, aren’t negotiated and aren’t subject to competitive pressure.
The key is to identify these long-tail products carefully based on customer buying behavior, and not solely based on how much or how often you sell them.
Get Paid for the Value You Deliver
If you’ve established yourself as a best-in-class provider in your space, your customers will pay you for the added value of working with your team. They want the reliable delivery, friendly customer service, timely response to inquiries, and wealth of expertise that your company uniquely delivers. And, chances are, they don’t expect to get all of that for a dollar less than your competitor.
Build a pricing system that finds extra points in key spots within your business. You don’t need drastic increases to the competitive items your customers are cross-shopping, but you can find margin expansion along the edges that ensures you are getting paid for the differentiating service you offer. Your sales team is probably already selling the value your company delivers, they just need to transition to the mindset of getting paid for that level of service.
Are you looking to improve your pricing system to gain profitability while staying competitive? SPARXiQ has helped countless companies make significant bottom-line gains without losing valuable revenue. We’d love to help you accomplish the same.
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