Pricing: An anti-depressant Featured

7:00pm EDT January 26, 2009

Depression. It’s not just about the economy. Depression slips into our collective psyche. The markets fall in a downturn because investors lose confidence. Fortunately, some of the things your company needs to do in this environment will also lift corporate self esteem and fight the psychologically dangerous side of a downturn.

“There are lots of opportunities for improvement in this kind of a market,” says Jim Lane, director of GBQ Redbank Advisors, GBQ Partners LLC. “You have some of the traditional barriers to change now removed, in part because it’s become more about survival instead of incrementally doing better, but also because people are more willing to change at times like this.”

Smart Business spoke with Lane about value ideas and pricing opportunities that can be used during a downturn, and the positive impacts they can have.

What value ideas should companies use?

Since some prices are falling, look at the supply chain and procurement functions. There are opportunities to get certain commodities at lower prices. Petroleum, for example, was being sold at double or more than where it is now just a few months ago.

Transportation companies fall under pressure and become more price competitive during a downturn, so consider trading a long-term commitment for a lower rate.

For many, variable costs will naturally be falling as order volume is reduced. In those situations, look to fixed and overhead costs to make sure they are kept in line with variable costs on a percentage basis.

Surprisingly, this may be an excellent time to launch new products and services, especially ones that are in tune with the times and generate cost savings for your customers. People are looking for new things and they’re looking to change. Look at how your customers want their suppliers to change, and then make those changes.

How has the economy affected pricing?

One of the biggest ways pricing is affected is when company professionals get worried about the future — giving discounts just to lock in a deal, or overcompensating for customer service failures by giving things away for free. This behavior can be very destructive to profit. Sometimes we forget, but a 10 percent discount means selling 67 percent more to make up the lost profitability. Pricing is such a huge profitability lever — just a 1 percent improvement in price is equivalent to an 11 percent cost reduction effort.

What can be done about pricing?

To move toward a culture of pricing excellence, you must first understand your value proposition to your customers. Actually sit down with your customer and ask: What is our product worth to you? Does it lower your costs? Does it enhance your performance?

Understand in real economic terms the impact of your product or service on the company or individual that buys it. Take copious notes and be sure to share this information with the entire company. It’s empowering for employees to know how they affect the lives of customers, and this feeling of making a contribution to someone else is the beginning of a cure for downturn thinking.

What strategy can a business put in place to move toward an improvement in pricing?

First, get a handle on discounts. There are a lot of different things that actually turn out to be the equivalent of a discount, and people don’t think about them because they’re stealthy or hidden. They give away freight or expenses as part of the deal, or they give away accessories that go with the product as opposed to charging separately for them. They give friend and family discounts. They give discounts that can be used additively, for instance, reducing prices in January and allowing customers to further reduce the price by using leftover holiday coupons. Watch how the various offers you have add up and make sure that you’re consistent about not doubling up on them.

Second, examine buying behaviors at the transaction level. By examining the extremes you can learn about company and buyer behaviors. Ask why customers are able to buy your product for so little and how you can get them up toward the average. Then ask why some customers are willing to pay so much. What value are they seeing or what approaches are you using that you could use across your organization and customer base to improve pricing? Again, looking at the upper extremes of order values is healthy for the corporate esteem.

Third, determine your pricing floor, which is cost plus the minimum acceptable margin for an order. Then compare that floor to current pricing behavior and price lists and ensure that no order is accepted below the floor. This typically requires a pricing control structure and a chief pricing officer to enforce compliance and approve discounts.

What are the benefits of implementing a pricing strategy?

The beauty of pricing is that although the homework is daunting, implementation is simple and it has a huge impact on profitability. If you get a 1 percent increase in price, it drops straight to the bottom line. It is unlike most improvement efforts, where you have to apply some additional cost. In pricing, if you get a price increase for the same product without changing the product, all of that falls to the bottom line. It’s an efficient way to generate additional profitability. In my experience, customers don’t even realize how much discounting is going on, so they don’t even miss it when it’s eliminated.

JIM LANE is director of GBQ Redbank Advisors, GBQ Partners LLC. Reach him at (614) 947-5257 or jlane@gbq.com.