The ingredients of profit are price, expenses, and the unit sales volume. To attain the desired outcome, they must all be in the right proportions. No single pricing formula or strategy will invariably yield the greatest profit. You have to understand the different types of costs and how they behave to maximize profit.
Current knowledge of market conditions is also important because the “best” price for a product is not always the price that will sell the most units or the highest price.
1. Know What’s Selling and What Isn’t
If you’re doing well at the moment, you might neglect areas that are underperforming because increasing profits tend to conceal loss-making products. When business is slowing down, it becomes important to identify underperformers so you know why certain product lines or customers might be costing your company money. A good POS system can help you generate those reports. Read here about those systems.
2. Consider the Market
In markets where there is little competition, it’s possible to employ an optimized profit strategy based on the maximum price the market can afford to pay. Companies want to make the highest possible profit as soon as possible to recoup start-up costs, especially when it comes to new products. Conversely, you don’t want such dramatic profits as to entice a ruthless competitor’s attention.
3. Employ a Pricing Analytic Tool
Use a predictive, analytic tool to predict what is likely to happen in the future and to set your performance and pricing strategy to better react to those predictions. The tool should assess past performance in specific market conditions and indicate what you’ll be able to sell in a particular product line. These analytics will allow you to track goals, performance, and above all prices.
If you dispose of objective evidence from pricing analysis, your staff will find it much easier to decide if they should make a discount.
To see where your price falls, look at a wide variety of direct and indirect competitors. Make sure you’re staying competitive if your value proposition is operational efficiency.
4. Customer Satisfaction is Important
A pricing software system with a product analysis tool will improve efficiency, boost customer satisfaction, help identify substitute product lines, and speed up order processing. Such analysis allows salespersons to look at the whole picture instead of separate transactions. This can help identify clients who buy multiple products across different product segments.
Your team can create a ‘package deal’ for customers, allowing for up-selling and cross-selling opportunities.
5. Provide Current and Flexible Pricing
Having effective pricing software makes it possible for businesses to make the pricing process automatic. You can reset prices as often as several times per day based on information from the marketplace with an automated pricing system. This is also known as multiple or discriminatory pricing. For any product, some clients are willing to pay more than others.
With current, differential pricing, a product has different prices based on delivery time, the type of customer, payment terms, quantity ordered, location, etc. This enables sales people in the field to quote prices to customers from information and real-time updates sent to their smartphones. The more accurate data your sales team has available, the better they will be able to negotiating long-term contracts.
6. Come up with a Value Statement
Your company’s value statement should clearly state why customers should purchase your product(s) instead of that of your competitors. To boost the confidence of your sales staff, be specific in listing the reasons so they can be convincing when they communicate to customers the reasons why the latter should buy your product.
7. Pricing Should Correspond to Value
Your price should reflect your product’s value because it sends a strong message to your market. You need a very competitive price if your value proposition is operational efficiency. On the other hand, a low price sends the wrong message if your value proposition is product leadership.
Instead of the costs to make a product, this pricing strategy considers the product’s value. You will need to decide how much money or value your goods will generate for your customers based on stability, increased efficiency, or happiness, among other factors, and try to put yourself in their shoes.
Customers will look at a product and some of its alternatives and ask themselves if the discounted product is as good as a counterpart or if the extras are worth it. Ultimately, they will choose the product that provides what they perceive as the best price to quality ratio.
A value-based strategy will let your company:
- Establish value-added supplier relationships
- Deploy this strategy across a broader range of customers and markets
- Capture maximum value of new product offerings
- Extend the life-cycle of existing products
- Identify high value customer segments
8. Determine Price Fluctuation
Normally, higher prices come with lower volume. Still, it may be possible to generate more profit or revenue at a higher price with fewer units. It depends on how sensitive your clients are to price fluctuations. If they’re not that sensitive, you could set a higher price with normal volume and vice versa. This is the best way to estimate how a price change can impact on your profits.
9. Not Everyone is the Same
Pricing is the one aspect of business where companies acts as if all their customers are the same – by setting one price for each product. You need to understand that customers’ pricing needs differ and learn to set prices in line with that. This is key to developing a comprehensive pricing strategy.
One of the most effective ways to enhance profits and improve customer service is to offer three versions of a product: the good, the better, and the best. These options allow them to decide how much to pay for a product and what the right one for them is.
In a highly competitive market, businesses need to capture the full value of their product lines through multiple distribution channels and throughout their entire life cycle in order to stay at the top of their game. Being an underutilized strategy, pricing creates fertile ground for new profits.