There are hundreds of good ideas in this book that work. There are thousands more that you could get from reading other books or from just a simple Google search. Getting knowledge on this business-critical topic of pricing is the easy bit.
Implementing change is the only thing that will improve your bottom line profit.
Whatever your role in your business – CEO, director, owner, manager or simply an employee wanting to develop and progress – you need to develop an action plan for change, and you will at some stage need to engage the energy and enthusiasm of others above, below or alongside you.
There are some key steps in achieving any change in business. This chapter seeks to help you implement changes and improvements to the area of pricing, but many of the principles apply to any change management process.
In this chapter you will see how to:
Be honest about this: pricing is an emotive issue, and you will almost certainly encounter some resistance to any changes you make. However, it is important to understand that this resistance is just as likely to come from within your business as it is to come from your customers.
Therefore, getting key people in your organization on board with the objective of increasing profits through better pricing skills is crucial. A great starting place is to quantify the potential profit improvements from relatively small changes in key areas.
If you wish to use it, an iPad App has been developed so that you can play with your existing business’s financial performance by looking at a number of what if scenarios. The ideas behind this were covered very early on in Chapter 1, but the App just simplifies the calculations to make the impact easier to see.
Whether you use the simplistic models discussed in this chapter’s Action Points, or download the App, what you will undoubtedly see is that the greatest and easiest impact on profits will come from getting better at pricing. So if you personally need the motivation to change, or are seeking to enthuse others, do the calculations and see what the impact could be for your business. It is very common to achieve at least a 1 per cent or 2 per cent improvement in profit margins, which often has the impact of doubling bottom line profits, and many businesses achieve profit margin increases of 5 per cent to 10 per cent. See what your profitability could be if you get these changes right.
It is a basic human characteristic that people need to be motivated to change, or punished for resisting it. Simple carrot and stick. When you know the numbers, why not put some of the potential improvement on the table as a reward for the pricing team doing the analysis and implementation, for the sales team in adapting their approach, or the whole team for playing ball with the changes you adopt. It can be a fixed percentage of the uplift in profits, or a fixed sum to be shared out only if profit margins improve by x per cent. Let them see how the changes will benefit them and change will be much easier.
If it is your business and you will be doing all of the hard work, why not commit to booking that great holiday you can never quite justify if you improve margins by x per cent in the next six months?
The basic logic is obvious. Everyone, including you, is more likely to embrace the ideas and work hard to achieve the improvements if there is something in it for them, and you need to paint a clear picture of what the future could be like if you get it right.
Build your team and allocate resources
Throughout the book I have referred to the pricing team. If your business is large enough, this should include senior people from the sales and marketing sides of the business, as these are the people who will have to adapt the outward messages for your customers and your marketplace, and deliver the changes in pricing that you decide. It should also include people from your finance team so that you have someone detached from the frontline who can simply work out the maths of the various actions and ideas you may seek to implement.
As many chapters have already discussed, a big part of the problem for many organizations is that the people in charge of setting prices or reducing them by discounts are those at the sharp end who develop a fear of bad customer reactions, or who lack the numeracy to understand the financial impact of what you need to change. So get numbers people into the team.
Regardless of your size, the ideas in the book will also require training of those affected by the changes, and management of change itself. People naturally fear any change, as they are uncertain of what this will mean for them, and they are fearful of getting things wrong. If you have an HR department, get them involved to ensure people are comfortable with what is happening, are guided through the implementation of the ideas, and have a route to raise concerns if they want to. The HR team can also then work on sourcing training, or creating the in-house training that will be needed for the frontline team and perhaps others.
Regardless of whether your team is 8 to 10 people or just you and one other, you need to make sure that they have the time and resources to undertake the work properly. That will mean allocating time on a regular basis for them to meet, debate issues, analyse information and agree actions. It will also mean that they will need to do work during their normal week that could interfere with their normal day jobs.
In many change management projects the failures result from the fact that responsibilities and pressures are added to the workload of busy people, and either never gets done, or is done in a rush with far less attention than it deserves.
If you have done the first part of this chapter and calculated the potential profit improvement your business could achieve, you should have the confidence to ensure that work on this topic is high up the pricing team’s priority list and gets done. If this is a problem, then you may need to consider giving these people additional resources (part-time assistants, etc) to free up their time.
As with all teams, it needs leadership. If you are the CEO or business owner, then that may be you, or you may delegate it to someone else to run. What is often a serious problem in these situations is to have someone who is immersed in the detail also seeking to lead the project. If you are able, have someone that understands the objectives and is respected by the team, but who can keep away from the day-to-day actions, to lead the project.
The final aspect of building the right pricing team is to consider the inclusion of outsiders. Inevitably those within your business have a different perspective on it than those outside of it. Your team may be more emotive about issues than someone who doesn’t have the responsibility of implementing any changes, and they may also bring other skills and experiences of similar businesses or even direct competitors.
You could consider the following:
If you want to make any changes, then you need to be crystal clear what these are, how they will be achieved and when they will be done. Just saying we will improve our profit margins is not enough, otherwise you will look back at any improvement and regard it as a great success. Say how much you want them to improve, and by when that should be achieved. It won’t matter if you miss, but you are significantly more likely to get a better result if you set clear, unambiguous targets.
Whatever actions you choose to take, set a deadline for action, and divide this into milestones so that you can measure progress along the way and monitor whether you are on track or not.
You may well have seen it before, but the acronym SMART is still very important in setting any goals. There are a number of variations of it, but consider:
S – Specific. Clear to everyone involved in the project.
M – Measurable. 2 per cent increase in margins rather than just an improvement.
A – Agreed upon. You will not achieve goals if some team members are resisting you.
R – Realistic. Within your resources and time constraints.
T – Time based. State when you aim to hit the various goals set.
Writing with a passion about pricing has been easy, and a lot of effort has gone into writing Action Points for the end of each chapter. However, those were designed to get you thinking about particular issues raised within that chapter. What follows now has a slightly different emphasis. There are 42 Action Points that are presented a little more forcefully – just get on and do these things, starting right now.
The order is not important, with the single exception of Number 1 (put your prices up by 5 per cent right now). Read them all, tick 14, then just do this stuff!
1 Just put your prices up right now
a Select a pilot branch. This should be the one that has your best sales team.
b Have a training provider and sales manager write down the approach you will use.
c Use the trainer and sales manager to jointly train the team.
d Set up the salespeople to roll out the 5 per cent increase, starting with their C-grade customers and building up to the A-grade ones.
e Stop after each customer category to discuss and review the outcomes.
f Once the roll-out has finished, have your finance people assess the before and after profitability of that branch.
g Adapt the training to use over all remaining branches.
h Prepare a programme to implement the 5 per cent price increase over all branches.
i Use the sales manager and salespeople from the pilot branch to deliver training to the other branches.
2 Know your numbers
Let other people gather their detailed reports, but if you are the person at the top of your business, you need this whole-of-business profit summary, updated monthly. Keeping this information at your fingertips sends the strongest signal ever that you are fully focused on profits.
3 Invest some time on the issue
This team’s first review will take some effort, but after that you want a review submitted every quarter.
4 Don’t let your salespeople set the price
You can expect resistance from salespeople, so in larger businesses you should consider engaging a change management expert to assist in this process. In a smaller business make it crystal clear that you expect your people to raise issues properly and accept the changes that you decide.
5 Not every customer is worth having
6 Train your salespeople to understand the financial dynamics of business
7 Limit discounts
8 Score discounts
9 Manage discounts
10 Don’t rely on anecdotal evidence of what others are charging
11 Don’t use round sum prices
12 Loss leaders don’t work
13 Don’t give anything away for free
– Delivery is £8.97, but as a special deal for you/the first 100 customers/this month there will be no charge, saving you £8.97.
– Initial consultations are £242 per hour, but our policy is not to charge for the first 1-hour appointment.
14 Re-word prices for increased perception of value
– The price of the fitted bedroom is £2,000; becomes
– Your investment in a fabulous new fitted bedroom is only £2,000.
15 Re-word prices for relativity
– Half price at £102.48
– Manager’s deal of the week £102.48
– End-of-season price £102.48
– Limited offer at £102.48.
16 Prepare your salespeople to defend prices with confidence
17 Explore ways to add value to your offer
18 Look for partnership deals
– A wedding photographer could offer deals that promote a wedding florist, and vice versa.
– An architectural practice could work together with a landscaping contractor.
19 Build future contact into the deal for the initial sale
– A car dealership could invite customers back in the month of December to collect a free calendar and pen.
– A bookstore might give customers an invitation to a ‘closed shop’ evening with a guest author and where sale prices will be offered on stock items two days before being advertised to the general public.
– An equipment installer could offer to revisit the customer after six weeks, to do a clean of the system.
20 Ask your salespeople and technical support staff what your products and services are worth
– Take care to investigate anything that is hearsay, before blindly choosing actions to take.
21 Have a very top-of-the-range option that is significantly more expensive than any other option
– Increase speed of delivery by working 24 hours, weekends, etc.
– Significant additional after-sales care; ie weekly checks for the first month after installation and monthly for another five months.
– Add a service if you know that some customers become time-pressed; eg organize professional photos of a completed job that a client might use in brochures or on their website.
22 Ask customers for their permission to increase prices
– My accountant has been looking at our figures and the increases in our costs, etc, and we have been absorbing increases a few too many times, as you have probably seen or guessed. We are looking at a 10 per cent increase across the board, and I just wanted to make sure that I told you this face-to-face.
– Most will ask if they can meet you halfway at 5 per cent.
– A lesser number will agree, because they do appreciate the value you add even with this increase.
– A few will grumble aggressively, and with reluctance, and to them you could offer to defer the start date for, say, a three-month period, or perhaps agree to withhold the increase if they improve their payment periods.
– To any C-grade customers or below that choose to walk, let them go.
23 Develop a value strategy for any price disagreements
– Be certain that your salespeople know exactly what the value is with each product and service being offered and that they understand where this value sits relative to that being offered by competitors.
– If they don’t get the sale, you lose.
– If they discount the price, you lose.
– If they stick with the price, confident in its value, and offer some bonus items to secure the sale, then you have the greatest opportunity to impress and retain the customer, and in most instances the customer will be delighted to have received some bonuses. Examples include free delivery, assistance with installation, a longer warranty period, an offer of discounts on future spare parts (should they become needed).
24 Revise your price list, to show value features first
– Convenience of your location for pre-purchase meetings, after-sales support, delivery of spares.
– Quality of your products and services.
– Technical capability of your people.
– Reputation of your company; for example, a strong background of developing new products and owning patents; lists of awards gained.
– Whole-of-life costs; that is, purchase price plus longevity of the product.
– Special features, highlighting those that your competitors cannot possibly offer.
– Anything else that shows your products and services represent better value than those offered by the competition.
25 Set up payment options that ease the impact of a high price
– The easiest method is to allow payments over, say, 36 months. But this does add a collection risk.
– The next is credit card, which delays the customer’s actual payment by four to six weeks. It could be four weeks before the customer sees the impact of the high price.
– A debit card means that the transaction appears on a statement at a later date, possibly six months away. The entering of a PIN means that the high purchase price itself isn’t front-of-mind to the customer at the time of purchase.
26 Start out with a simple approach
– When thinking about your products, services and bundling-up deals, stick to a Gold, Silver and Bronze hierarchy of offers. Platinum can be added later.
– When thinking about your customers, group them into A-grade, B-grade and C-grade hierarchy based on the total profit they generate for your business. Pricing strategies must focus on the A-grade clients, never on the C-grades.
– Test out new strategies in one branch, as a pilot. This is manageable, and then replication across other branches becomes easy.
– When doing mathematical analysis, focus on a small sample that has wide impact. This might mean choosing the top 10 customers (rather than 200) or selecting the biggest selling 20 products/services (rather than 500). Such data is usually quick to obtain, and any inaccuracy in the figures has low impact on decisions. Successful strategies can then be cascaded down to the smaller clients and the lesser products/services.
27 Add services to your products
– Selling a lawnmower with the offer of a basic maintenance tutorial six months later plus an advanced tutorial at the 12-month mark. Value £75, but for you £10.
– Offering a two-for-one card for the purchase of replacement blades, spark plugs and air filters.
28 Productize your services
– A builder could offer two ongoing service packages for the slowest months: December / Christmas Check-up – correct sticking doors and windows, clean glass windows inside and out, wash light fittings, replace high-up light bulbs, lubricate all door hinges, polish brassware. Or a January Repairs – replace tap washers, touch-up furniture and timberwork scratches, fix cracked tiles, re-grout, replace broken window panes.
– A law firm could offer a newly-weds package of services, bundling up wills, home rental agreement checking, future mortgage transaction work, life insurance for the couple, and other products. In this example, the law firm would present a small booklet of vouchers in a bright colour, because the services may be used several years in the future.
29 Uncertainty and vagueness lead to ‘no sale’
– I don’t know what the delivery fee will be, so I will have to check and let you know. – That combination will be somewhere between £3,000 to £5,000. It depends.
– I know it is very fragile, but on some occasions I think we have included additional insurance cover or it might have been the customer who organized that.
– That colour is available, but whether our supplier has stocks in the country is another matter.
30 Quotes are won on diligence not price
Note: this Action is not about pricing; however, it impacts directly on your volume of work and hence your profitability. If possible, have a finance person measure the impact on your bottom line.
31 There is only one way to grow your business rapidly and for least effort
– A project to win more customers.
– A project to prevent the loss of customers.
– A project to increase the frequency of interactions between your business and each customer.
– A project to reduce costs or increase productivity.
– A project to purchase technology items for the sales force.
32 Don’t let one bad experience colour your judgement
– Situation: what happened.
– Effect: how the salesperson felt, and how long that feeling impacted on their confidence.
– The If-Only Alternative: a better way that this could have been handled so that the salesperson’s confidence was repaired rapidly.
33 Re-direct the ‘Let’s please the customer’ culture
34 Offering certainty is creating higher value, for higher price
35 Repeat customers are much more valuable than one-time sales
– Human memory: a top New York barperson can recall 3,000 people’s names and their drinks.
– Computer systems: the smartphone system ‘Vend’ alerts sales staff in retail outlets when the customer walks through the front door. The POS screens show their face avatar and a list of key words.
– Loyalty clubs: frequent buyer programmes can operate internationally and require the member to pay an annual fee, or in the simplest form it could be a piece of cardboard that identifies a returning café patron.
36 Get an external perspective
a Welcome and Statement of Purpose (to develop better pricing strategies) – you (10 min).
b Introductions (business overview, major products or services, summary of typical customers) – each participant (5 min each).
c Presentations of approach to the setting of prices and summary of pricing strategy – each participant (30 min each).
d Produce a joint pricing strategy capturing the best points from each business.
e Group dinner.
Notes: 1) consider utilizing an independent facilitator; 2) if you see benefit, the group may agree to doing a similar workshop regularly, on a different topic.
37 Adopt and adapt from your competitors
38 Eliminate cost plus pricing from your strategies
39 Focus your salespeople on value, not cost
40 Any sale is a compromise of issues
41 Value dissipates with time
42 Always offer a ‘one-up’ option
– Gold, Silver, Bronze
– Large, Medium, Small
– Bulk, Regular, Light
– Luxury, Regular, Budget
Where do you start? As a guide, what pace is reasonable?
1 Today: Get ready to implement the 5 per cent price increase across the board. Call your senior people together tomorrow morning.
2 Tomorrow: Make the announcement without inviting debate, then discuss and agree on the effective date. Customers will need to be notified, so the first of the next month should be your target.
3 The day after: Choose any 14 Actions from the 42 suggestions above. Create a Project Plan to implement these over the following six months.
4 The following half-year: Choose another 14, and implement.
5 The next half-year: Implement the remaining 14.
6 When you have attacked all 42, start again and push the boundaries further.
THIS STUFF WORKS!