Your pricing strategy can make or break your company

I’ve been very busy recently working with several clients, one of which needed strategic assessments of entering the Smart Grid market. And a big part of the assessment had to do with the pricing model for this new vertical.

As you can imagine, pricing model has a direct impact on the top-line, the bottom-line, and sales volume, and can effectively make or break a company – or make it float around in mediocrity, as is sometimes the case.

Before I get into details, I should say that I have no background in consumer goods where pricing is a whole different beast to tackle. I have no idea how the following applies to consumer goods, though I suspect the general principles apply to business uniformly.

Market-based vs. cost-based pricing. Amazingly, some companies still base their pricing model on their cost. Here’s my comeback to this concept: whether a product costs you $100 or $1,000, if the market pays $800 for it, that’s where you should price it. Otherwise you’re either leaving money on the table or pricing yourself out.  If you can’t make the desired margins, you need to create value, change your target market, or change your offering.

Creating value. The market pays for value, and you can’t expect it to extract the value from your offering without your help. Every target demographic needs to be considered in creating the value. Whether it’s the ‘cool’ factor, functionality, reliability, time-savings, cost-savings, or otherwise, clearly communicate the value to each set of your demographics. Products don’t sell themselves, people sell them – and they do it by creating value. Tactful positioning comes in handy for creating value. Apple is a company that consistently does a great job at creating real value (great products) plus perceived value (cool factor).

Competition. It shouldn’t be a surprise that if there’s little competition in your market, you can charge higher for your products and services. Needless to say, you need to continually monitor your market for competition. And if your market finally does get targeted by competition, value creation will help you edge ahead of them.

Price wars. Alternatively, in markets with a lot of competition, it’s easy to fall into the “price war” trap. This is typical in commoditized markets, or those in which innovation has worn off (like the PC market). The best way to avoid price wars is to add value, reposition, or accelerate innovation. Without continued innovation, value eventually wears off. Sometimes it’s not worth staying in a market with continual price wars, and it’s best to get out. IBM got out of the PC business mostly for this reason.

Growth markets vs. established markets. The general rule is that growth markets afford higher prices. Market excitement, lack of competition, and the general “first to anything” mentality with growth markets allows for higher prices. Don’t be afraid to use this to your advantage. Eventually, with additional players and sizzle fatigue, prices will go lower.

If in doubt, start high. If you’ve been in the business long enough, you probably have a pretty good idea of the price the market will bear, but in new verticals, this can get tricky, and sometimes it becomes difficult to figure out a good pricing model. When in doubt, start high. The market will quickly let you know if you’re overpriced and you can always lower your prices, but increasing your prices will be much more difficult.

The market talks back – only if your price is too high. As I mentioned, the market will quickly let you know if you’re overpriced. Here’s the trick, it will hardly ever tell you if you’re under-priced. You could be happy selling high volumes of your products not realizing that you’re leaving 20% on the table. How about implementing a better pricing model that will increase your top-line by 20%, or add 50% to your net margin?

Life-cycle pricing. This topic deserves its own article, but it’s important to keep an eye on the market as the product or service grows, picks up momentum, and nears its “end of life”. The product or service needs to be actively re-priced throughout its life-cycle from launch, mid-life, to end-life. For example, production costs or support/maintenance costs could be much higher for older products or services, causing the margins to deteriorate with lowered pricing. Continual business analysis can bring this to light in order to shelf older products and services, and charge more for newer ones.

Lastly, don't be afraid to charge higher for your products and services. Create value and don’t leave money on the table. Remember, you can always lower your prices, but increasing them is much more difficult.

I’d love to hear your stories of pricing genius or mishaps.

Ten growth factors for small and medium business (SMB) during the recession

Times continue to be difficult for businesses about a year into this recession. So many small and medium businesses I’ve recently spoken with are either going under or selling out, I’m beginning to take it personally (yeah, it’s all about me!). During good times, anyone can drift along, and during tough times, the weaklings fall off the grid, but during particularly hard times like right now, only the best survive. Being average no longer cuts it.

Reality check: by definition, half of all companies are below average. Where does your company fall on the spectrum?

Best business practices that make stellar companies need to be front and center in hard times as there’s no time to snooze. You and your employees have to work harder and much smarter in order to succeed. Here’s a list of factors that will propel growth during the good times, but must be seriously considered during tough times.

Embrace change. I know it’s cliché, but you don’t have a choice. The road ahead of you has turned and you’ve either come to a screeching halt or headed for the cliff. The only way to survive is to turn with the road. Change can be scary and unsettling for some, but get used to it. A windy road awaits all of us.

Define your target market with laser accuracy. Many of you have drifted along and survived on low hanging fruit, but this is no time to be fuzzy about your target market. Take a giant step back and define your market strategy. Where is your best bang for the buck? Are you headed for where the market is going? Without this, you’re shooting blind hoping to hit the target.

Develop complementary corporate partnerships. I’m a big advocate of corporate partnerships and when times get tough, joining forces with others becomes essential. Some of the best partnerships are with companies that provide solutions complementary to yours into the same target market. A combined sales force selling combined solutions can generate strong revenues.

License your intellectual properties (IP) to non-compete entities. This doesn’t apply to everyone, but to those who develop IP… In a perfect example of working smarter rather than working harder, licensing can increase your revenues solidly over time with high margins. Some companies develop IP and patents without doing much with them. Put your hard earned IP to work and watch your revenues grow.

Boost R&D. Times are not going to remain down indefinitely. When the next “up” wave comes around, you want to be ready with new solutions for the market. This is when weaker companies scale back on R&D and smarter companies invest in their future.

Evaluate all aspects of your marketing operations. The marketing function has transformed exponentially in a very short time. You can’t expect to print some brochures, design a cool website (even with SEO), announce some new releases, and expect the market to come after you. Explore new ways in which you can continue to engage the market (sometimes at a lower cost than traditional marketing methods). Social media is not a fad. It’s here to stay, and it will turn your marketing department upside down.

Evaluate and optimize your sales operations. Make sure you have the best Sales VP your money can buy as (s)he is the one in charge of generating your revenues. Being aggressive is no longer the main success factor in sales. Your sales VP should be strategic and creative, and embody excellent leadership skills to keep your sales staff highly motivated during tough times. Evaluate all aspects of your sales operations including direct sales, telemarketing, channels, ecommerce, etc., and focus your resources on the highest ROI methods. Spend time evaluating new sales and lead generation tools and pick one that best fits your business. If you decide to hire commission-only sales people, make sure they are deeply knowledgeable about your products and your vertical, otherwise they’ll fail and leave within weeks.

Engage your employees and listen. Your employee base is a goldmine of ideas and information about your business. They know your customers, your market, and your operations. Actively encourage them to come up with ideas to improve revenue generating operations, product innovation, cost cutting measures, etc., and listen to them. You’d be surprised at the level of ideas you’ll generate simply by asking. This also gives your employees a great sense of inclusion.

Evaluate your board. The purpose of your board of directors is to help the company’s health and growth. If every single one of your board members isn’t actively involved in the growth of your company, what are they doing there? Pick individuals for your board who can specifically help the growth of your company through their expertise in your vertical, connections to potential clients or partners, or extensive experience running businesses similar to yours. And ask them to get active about your company.

Stay physically healthy. (This is your mother talking!) You need to keep healthy to handle the pressures of working harder while managing change. Stress compromises your immune system and induces depression and anxiety. Regular exercise has the exact opposite effect, and has myriad of other benefits. It’s a slam dunk.

I’d love to hear about other creative improvements you have implemented for growth in hard times, and I invite you to share your ideas here.

Next time, I’ll talk about fund allocation tips for small and medium businesses during the recession. Feel free to subscribe to this blog to get the follow up blog by email (I don’t blog that often so you won’t be spammed).