Despite the proven positive impact that pricing has repeatedly demonstrated to have on profits and revenues, many companies are still hesitant to employ pricing strategies and improvement for fear of customer loss. In this article, the author presents three things pricers should focus on in order to build the confidence needed to minimize the risk of customer loss while improving pricing strategy and profitability. Saad Shahzad is a Business Consulting Manager at Holden Advisors. He can be reached at sshahzad@holdenadvisors.com.

The Pricing Advisor, December 2017

As a pricing professional, I always love to quote the study that a 1% improvement in price leads to 11% in operating profit, whereas a 1% increase in volume sold improves only by 3.3%¹. If the business case for managing and improving price is so apparent, why don’t more companies do it?

There are multiple factors why a price improvement doesn’t reach its potential – but the top reason is often fear of customer loss. The concern is genuine; if you purposefully increase the price, the customer might get upset, stop using your service, or worse, switch to a competitor. The result can be painful: reduction in revenue, market share, profitability and a host of problems from Wall Street.

But there is a bright side: price improvement holds tremendous potential for profit improvement if the fear of failure with customers can be overcome.

There are three things you need to focus on building the confidence you need to minimize the risk of customer loss and ultimately improve price and profitability.

Know the value of your product and services

Experience has shown that most companies are unable to understand their true differential value. Companies fixate on common value (value that is common between you and your competition) and start to think that their product is a commodity. Businesses need to understand the true differential value of their product: for some it is superior technology for others it is superior service. Once companies understand their differential value next step is to identify customers who benefit from them. These are the customers where risk of customer loss will be the lowest.

Calculate your tipping point

Do the breakeven analysis and customer level profitability analysis. The breakeven analysis will tell you how much volume you can trade-off for gains in pricing. The customer profitability analysis will tell you which customers you should start with. According to a Harvard study, 20% of a company’s customers are responsible for 225% of profits². So for the 80% of customers who are unprofitable, start by improving their price and keep an eye on the tipping point.

Have an execution plan

Knowing the right customers to improve price is the easy part; it can be done with value research and data analytics. The real issue is the execution. Is there a sales person in your organization that would love to talk to customers about price? Especially when you want to improve it? I have never met one and I believe it is not the easiest of conversations to have either. So, to build confidence, give sales teams the right tools for the effort.  Fear is often created from the unknown: will the customer get angry?  Will they leave?  Planning is the antidote to fear.  Better public and value communication to customers, negotiating skills, and value give-gets are keys to building a solid plan, reducing fear, and realizing pricing’s potential.

¹ “Managing Price, Gaining Profit,” HBR, 1992, by M. Marn and R. Rosiello

² “Profit Priorities from Activity-Based Costing” HBR, 1991, by R. Cooper and R. Kaplan