Increase Revenue: Improve Pricing Practices

Many companies have become good at managing costs and gaining efficiencies as a way to improve the bottom line. But the discipline so often brought to the cost side of the business equation is far less common on the revenue side. As a result, many companies continue to leak cash from the top line.

One example where we have seen significant opportunities for revenue improvement is by upgrading present pricing practices.

A well accepted principle in pricing improvement is that a company’s pricing should place considerable weight on value added to the customer.  This is different than basing prices only on competitive price levels or adding a margin to the company’s cost of production.  But the key question to be answered is how should value be identified, marketed and sold?

Companies bringing high value to their customers, with highly differentiated offerings, have the advantage of selling a highly tailored value package at the executive-level.  For example, a supplier of sophisticated investment analysis software that can deliver benefits worth hundreds of millions to a major bank can demonstrate a good business case for their product.  The sales team would be a few highly seasoned, technically trained business development executives.  In this case, “step-up selling” and other such highly structured product line and pricing approaches would be inappropriate.

Other companies, though, bring customer value that is significant but not high. They have their points of differentiation but nothing overwhelming; and need the efforts of a distributed sales force and channel partners.  This calls for more structure in the product/service line and in pricing, so that the company’s sales approach is practical and executable.  This is true whether we’re talking B2B products and services or consumer durables.

For these organizations, building a value structure into a product/service line with different options and configuration variables is a very useful step on the path to collecting additional revenue for value.  It is progress for companies doing cost-plus pricing (applying a single gross margin rate atop the costs for various components and configuration choices) to at least define different degrees of customer value by each configuration and option selection. 

We recommend conducting a review where you look at every configuration option and ask yourself to articulate the benefit to the customer of that selection or specification.  If you can’t define anything meaningful for a given selection, then put that element into the definition of the base product/service (or make it a no upcharge selection).  For any selections where you can articulate a meaningful value proposition, estimate its economic benefit – both short and long-term. 

This list should be very helpful in devising premium-priced, premium-margin specifications and options.  That can become the basis for more structure in the product/service line. It can also supply the foundation for training the sales organization in how to sell value.

Please contact me if you would like to further discuss this or other ideas on improving your pricing process.

jbonocore@bonocore.com