How Smart Pricing Is Killing You

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In difficult times, everyone's an expert.  We've got to price low, deliver high, or we go out of business, right?

No.  Wrong.  Badly wrong.  Dangerously, insanely wrong. 

Lots of companies are already doing it, and most of them are haemorrhaging market and enterprise value.

Naive price strategy kills businesses.

When everything's in flux, incremental thinking gives false insight.  Winners aren't the ones who win every sale. Winners create profit by
 
* Getting the right proposition
  * to the right customer
    * at the right price

And guess what? Almost everything has changed, especially your customers.

But where's the risk in just dropping prices to win business?

For a start, unless you're a very unusual business, parts of your cost base have jumped up because of a whole host of factors. Those include the cost of capital, diseconomies of lost scale, credit issues and so on. Some elements of cost may also be coming down. The change for you is not identical to your competitors. You have the opportunity to bear down on supplier costs, but with care: win/lose thinking can win the round but throw the game. For good.

But there are great opportunities in the drive downmarket for some. You need to know where is viable for you short-term before you adopt one price strategy.

We need to detour for a moment.

Often the market leaders coming out of a downturn were nowhere near the leader board going in to the crunch. Some of those have literally come from nowhere of course - and you do to keep an eye on the entry opportunities in your market. But very often what's happening is a dramatic growth in market share by smaller players, sometimes divisions of companies that became exciting when the 'core business' hit the rails.

Low price, OK service tends to be the default growth strategy. So yes, if you really can go low price, high service at a profit then that's a good option. But you need to be very sure you're not just announcing your exit. Because you're going to be out-priced, and internal reconfiguration and commercial pressures may hit your service, then it's a vicious circle.

Right now is the time to be pursuing pure (but pragmatic) price maximisation. If your economics are worse, you'll have to face that sooner or later.

So choose to face it sooner. The sooner the better.

Am I saying every business must increase its prices? No.  But almost every business should be increasing some prices:

- To seek positive-sum competition and map out price wars
- To get early intelligence on how the market is moving
- To develop profit sources that help strategic realignment

Intelligent and focused price rises can add impact to appropriate price reductions elsewhere in your portfolio, and can help to give you maximum flexibility at a time of turmoil.

It takes courage and a thick skin to pursue this kind of strategy.  Because lots of people in your organisation have a vested interest in boosting apparent sales volume by suicide pricing regardless of the real net-net result to the business as a whole.

Most managers won't give this a second thought. It's laughable, impossible, don't bother me.

But some I meet already know at gut level what their head wouldn't let through.  It's possible, it may even be necessary - and the winners are going to win BIG. Will that be you?

Jeremy Parsons
Principal Consultant (UK)

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