What do you do when you're starting to see your profit margins erode? If you're like most business leaders, your first course of action is to cut costs through traditional methods such as lean manufacturing, outsourcing, off-shoring and so on. The ideal solution, however, may involve taking a closer look at your pricing strategies.
Instead of focusing too much on your internal practices and the waste therein, you may need to turn your attention to the revenue side, at least in part. How much are you earning for each product you sell? Could you make more? How will you optimise this aspect of your business?
That last question might be the most important of all. This has been a topic of conversation for a while.
How will you perfect your pricing and maximise profitability? The best answer involves following a three-step process.
1. Apply the pocket price waterfall approach
The first step toward optimally pricing your product is understanding the concept of the "pocket price waterfall." In short, this means knowing the difference between an item's original retail price and the amount you actually pocket after all transactional discounts have been exhausted.
Realistically, in a sales environment, there are bound to be all sorts of discounts and deals that factor into the sales price of an item. It's rare that someone buys your product for the full retail price. It would be a mistake, therefore, to budget your business based on the full price.
Subsequently, a key business strategy in achieving pricing discipline is knowing exactly how much you're looking for in a "pocket price" - meaning, the amount of actual cash for which you sell your product.
2. Use "pricing bands" to specific sales opportunities
Further complicating the process is the fact that not everyone buys your offerings at the same price. Different clients have different levels they can afford, and it's up to you to tweak your asking price to keep each buyer happy.
Therefore, it makes sense to think of your prices not in terms of definite, hard-and-fast numbers, but instead to use a system of "pricing bands." This means you use BI applications to find upper-bound and lower-bound limits about how much you're willing to accept for each item, but there's some wiggle room in between. This way, you can adjust your pricing strategies as necessary and find opportunities to make deals that you couldn't otherwise.
3. Create a corporate culture of profitability
In the long run, your goal should be to transform your corporate culture so that people are united behind one common idea - a philosophy of profitability. Your staff should focus on being engaged, efficient and productive, but the thought process shouldn't end there. At the end of the day, the real goal is to have everyone aiming for maximum profits.
You can reach this point if you have strong business performance management strategies in place. With sound leadership and a top-down understanding that everyone must fulfil their roles, your whole staff can work together to optimise pricing and drive profits at your business to new record highs.
An Enabling Foundation
Fortunately, some business intelligence tools like Qlik can aggregate all the data necessary for the three stages of pricing analysis onto a single platform and provide the ability for Managers to quickly and easily understand the steps necessary to optimize pricing. Like the work we did with global packaging firm Orora this might involve identifying pricing trends, discounts applied relative to supply and even pocket margin waterfall analysis to understand profitability at a sales rep, SKU, region or even customer level. To understand more about how we helped Orora focus on profitability using Qlik download the case study.