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The price is wrong Featured

10:03am EDT July 22, 2002

Pricing, for consultant Dave Bauders, is really pretty simple. Properly construed, it's a question of divining the relative value of products for various types of customers. And setting one's prices is among the most important variables a company must manage, he adds, "because every dollar of revenue and every dollar of profit has resulted from a pricing decision." He tells prospective clients, many of whom decline to engage his services because of his own lofty prices, that fixing their company's pricing structure can be worth anywhere from 3 to 7 percent of sales.

We asked Bauders-who is president of Strategic Pricing Associates and who prepped at IBM and the consulting firm Booz Allen & Hamilton-to discuss some of the best and worst of what he sees in his subdiscipline.

What's the most common pricing mistake you see companies making?

The most common problem is companies that have sales forces making pricing decisions without discipline. Virtually every company that has a large number of products, a large number of customers, and sales reps making pricing decisions has this problem.

That mostly ends up being mere discounting, doesn't it?

A pervasive problem among people who call themselves salespeople is that they discount rather than sell. Most salespeople are actually just discounters or order takers. They don't actually persuade people of the true value of the product. Or, if they do do it, they're not willing to push those ideas to their logical conclusion, which is to charge more. So they say that they believe they offer more value, but in the end, they don't ask for it.

What kinds of problems result from using cost as the major factor in setting prices?

When you start with cost as the driver, you'll get into two types of problems: The profit you'll add on arrives at a price that's too low, in which case you'll get lots of volume, but people don't have much respect for your ability to sell value. Or secondly, you'll arrive at a price that's too high, and thus relegate yourself to having substandard market share. Most companies are conscious of customer value, but they're not exactly sure of how to integrate that idea into developing their prices.

What's the proper approach to pricing?

The proper approach is to consider the customer characteristics, how the customer values and uses the product, and what types of competitive restraints there are on that. And then to arrive at a price. And when pricing is properly done, cost is a last check as to whether it's profitable or not. You should never start with cost as a driver in setting prices. Unfortunately, most companies have it exactly backwards.

How do industry leaders generally behave in pricing?

Companies that are leaders in an industry will be treated as such whether or not they exercise that leadership. So if you have a company that's No. 1, everybody's looking to them for leadership. And if they don't exercise that, whatever pricing decisions they arrive at will be taken as pricing signals by their competitors. Let's say that a whole industry is facing rising materials costs, and the No. 1 company does nothing to lead prices higher. The competitors view that as being an aggressive play for market share. So [the leader] may lower their prices in response or they may not move at all. But [competitors] will form an opinion about what the leader has done.

How do most companies internally organize their pricing decisions?

You have these three basic functions-finance, sales and marketing-in conflict. Properly, pricing includes all three of those aspects. What usually happens in companies is instead of sharing the responsibility, one of those functions, whichever is the strongest, hijacks it and takes it over. The winner generally is finance or sales; marketing very rarely wins. When sales wins it, you have a problem of a lack of pricing discipline, which is a management problem. When finance wins it, you have a cost-plus problem.

What's the hardest part of turning around a company's pricing strategy?

Changing customers' expectations. You have a company that has taught its customers that it does not have discipline. How do you get back to where you were? It's like when you feed a dog at the dinner table: Every time he nudges you, you give him food. What happens if you stop? Well, for awhile, he keeps nudging you, and he goes berserk. The same thing goes for customers. You've taught them things about you, whether you like it or not. You've got to have a strategy for changing the way they perceive you.

Do you generally recommend shock therapy or a more gradual approach to instituting pricing changes?

Sometimes it's shock therapy, depending on how strong their market position is.

I imagine in your field you have to put special thought into pricing your own services.

I price my work very aggressively, so there will always be a certain number of people who say no. I don't feel depressed or down when people say no-that's just a consequence of my pricing strategy.

How to reach: Strategic Pricing Associates (216) 791-1060