Pricing Is Not Transactional

Per Sjofors, a.k.a. “The Price Whisperer,” founded Sjofors & Partners and is a thought leader on using price for higher growth and profits.

Over the years, I’ve learned a great deal about how companies can use their pricing strategy as a growth leaver. In my work with CEOs, one of the most frequent questions I get is the following: “What are the most common pricing mistakes?” And they expect me to answer something very transactional and particular. For example: “That burger you had for lunch should’ve been $4.19 instead of $3.92. Or maybe $3.92 instead of $4.19.” Or things like Netflix should change the pricing from X to Y.

Instead, I have a more complex answer. The reason is that, when done correctly, pricing affects everything in a company’s operation. It is not just transactional.

The Most Common Pricing Mistakes

In my experience, there are two common pricing mistakes companies make. The first is that the company sees pricing as purely transactional—as a number. These companies do not understand that a comprehensive pricing strategy can drive a company forward like no other activity of the company’s operation.

The second most common mistake I see is when a company’s pricing does not receive enough resources within the company. Many times, it becomes a set-and-forget item. Companies often do pricing in the most effortless possible. They may use guesses or “gut feel,” rule-of-thumb cost-plus uplift, looking up a competitor, or “market price”—which, unless prices are published, is a euphemism for guessing. So, to set a price this way takes the company all but five minutes for a product or service. And then it sits there, unchanged, for years and years. Consequently, these companies are almost guaranteed to leave money on the table.

The response I get to these answers is often silence, as the questioner often expects the simple answer I mentioned above and believes that the process behind pricing a product or service doesn’t matter much. But anyone who has followed me and read my articles on the subject knows my stance that pricing, when done right, can elevate a company to the next level. And taking a company to the next level is not done on a whim; it requires preparation, detailed execution and a company ready and willing to change. To toss out simplistic pricing models is to leave money on the table—money the company rightfully could earn if they only knew how to set prices to match the value they deliver. Companies wishing to grow rapidly also need to consider that different customer categories value a product or service differently, that the circumstances around the purchase affect the value for the customer, and that how a company markets itself also affects how the customer values the purchase they are about to make.

All this can be obtained from value research that generates a detailed understanding of the decision landscape and the purchase decision dynamics in a market—the cornerstone for good pricing practice.

Overreliance On Customer Feedback

But, you may ask, don’t companies already know this? In my experience, they typically don’t. I believe this is because of how these companies rely on communication with their customers to drive pricing. Customers are asked about their satisfaction and what they may like or dislike about a product or service. However, in my experience, customers rarely try to understand the value in dollars the company delivers, and if they do, it is seldom done in a way that generates a trustworthy answer. I believe that while communicating with customers is good, it’s not good enough when it comes to pricing.

Consider that any company goes to market with a specific positioning and particular marketing messages. Those are accepted by a portion of the market, of which a portion becomes the company’s customers. Companies then ask their customers why they bought the company’s product or service, and the answers will essentially mirror the company’s messages. They will hear back the same messages they used to attract customers. And they miss those non-customers from which growth could come.

The other potential problem when a company asks its customers about pricing is that customers may withhold information they think will enable the company to take undue advantage of them the next time the customer buys something from the company. This leads to untrustworthy data driving your pricing. When seeking consumer feedback, I recommend asking these kinds of questions anonymously so the answers are more unbiased.

Researching Your Market

From this, we can conclude that it is important to refer to your market, not just your customer feedback. Further, it’s important to understand, in detail, what monetized value you deliver to the market. This value measure should be correlated with customer profiles, product or service benefits, marketing channels and messages, sales channels and methodologies. With this information, your company can develop a holistic pricing and growth strategy.

Let me end this article with two examples.

Say a company sells a consumer product. It tries to increase prices, but that backfires badly. However, after doing value research, they are able to correlate their marketing messages with price. After changing the main message, they are able to successfully increase their prices with no loss of sales volume—growing revenue virtually overnight.

A second company sells an online service B2B. Companies buy this service for certain individual employees. The company has good relations with its customers and determines from their feedback that the market wants to buy the service individually when the need for an employee arises. However, value research of the entire marketplace indicates that only about 20% of the market wants to buy this specific service in this way. In comparison, 80% want a yearly subscription with unlimited access to the service, not having to buy it individually. So, by focusing its outreach to customers, not the entire market, the company misses 80% of its business potential, which is especially important as investors value companies with reoccurring subscription revenues.

I hope that with this article, I conveyed that pricing is not just transactional and that spending a bit more resources on pricing can profoundly impact a company. Including yours!

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