How Efficient Are Your Prices? - dummies

How Efficient Are Your Prices?

By Marina Martin

If you’re charging too much — or not enough! — your pricing is not efficient. Get to the bottom of your pricing efficiency by asking yourself the following questions:

  • What determines your pricing? The vast majority of companies have no real answer to this question. Do you?

    Even if it’s too late to change your core pricing, understanding why it is what it is (even if that understanding is because it sounded like a good price) can change the tone of future price-changing conversations.

    For example, if cutting a list price by 10 percent means you’d sell at a lower cost than your cost to produce that service or item, that’s a problem. If that same price cut still leaves you with a 90 percent profit margin, it may be easier to swallow.

  • At how many different prices are you selling the same product or service to different customers? In businesses where the owner has a direct hand in sales, or where managers have a great deal of pricing leeway, it’s all too easy to find yourself billing hundreds of customers at hundreds of different rates for the exact same thing.

    An ambitious salesperson feels he can get a 10 percent markup on Customer A, while a manager eager to close a deal offers a 40 percent discount to Customer B.

    Although it’s ultimately your choice to offer this sort of pricing flexibility, this is wildly inefficient if you have someone manually tracking the price differences, and/or if this variation impedes your ability to increase prices in the future if your raw costs go up.

    Find out how different prices are recorded and billed in your accounting department. You should also run through a hypothetical scenario where you need to increase prices by 10 percent. Is this a matter of a few keystrokes by an accountant, or does it give your accountant a stroke?

    Consider whether your accounting or billing software lets you “grandfather in” existing customers, which means you can choose to continue offering them their current rate while charging new customers a different one.

  • Who approves discounts? A corollary to the above question, you need to codify how much leeway individuals have to change pricing. Usually, these policies consider the total original price (for example, sales people cannot offer discounts on contracts over $5,000 without manager approval) and the percentage or dollar value of the discount (for example, sales people can offer discounts of up to 10 percent on their own, but require approval for greater discounts).

    If you have an approval policy, make sure the person with authority to approve the discounts is easily accessible. If it takes two days to approve a contract, you may lose the entire sale, which is the equivalent of offering a 100 percent discount!

  • Where do you store price lists? You need a single source for current pricing and all current, past, and planned sales and discounts. Internal employees can’t be expected to maintain a list of potential discounts off the top of their heads, and this leaves the door open for both honest mistakes and abuse — particularly if the purchasing customer attempts to use a fraudulent coupon or promotion code.

  • How do your prices compare to your competition? Rates that are wildly lower or higher than everyone else in your sector likely mean you are leaving money on the table. If they’re far lower, you may be able to raise your rate with less resistance. On the other hand, if they’re far higher for comparable services, you are probably missing out on customers who can’t afford you.

  • Do you offer volume or prepayment discounts? If your company is just starting out, a discount for prepayment (for example, 10 percent off if you pay for a full year up front, instead of monthly billing) is a smart way to increase your initial cash flow.

  • Volume and prepayment discounts also work because your costs are generally lower in both arrangements: It costs less to generate a large order and it avoids the costs of frequent billing to receive an annual payment.

In consulting, volume discounts can also make good financial sense because you don’t have to spend time or money tracking down additional clients to fill those additional hours.