Pricing policy is an elusive being! The creation of even the most simple price policy raises questions that fundamentally challenge the reason for being, the strategic cohesion of a business, and the alignment of a leadership team.
Is our product higher quality? Does it have improved functionality? Do we seek to sell it at a competitive price and thereby gain share and volume? Or do we sell at a premium and gain margin recognition for the product superiority?
Are we driving for market share?
Are we looking to get volume growth, but if so, do we mean sales £ growth or unit growth?
Is our production cost much lower than the competition? And do we want to translate this into increased volume and market share, or into increased profits through margin expansion?
The one question that seems the most difficult for management teams to coalesce around is: What £ profit do we want, what £ profit will be enough?
This question flushes out the macho in every leadership group, but the inbuilt need to demonstrate ambition and drive means that we can never truly answer it. There is always someone in the group who seeks to push for just that bit more. Even if not initially, each iteration of the plan is subject to this persistent influence of more profit:
- The Finance Director who seeks to expose the conservatism of the Sales Director
- The Managing Director who wants to be seen to push harder and faster
- The HR Director who is convinced that production costs are too high
- The Owner who thinks everyone is out to fleece them and push for an easy life
Yet the only way to create a pricing policy (which is the product of brand, market penetration, competitive positioning, cost and ambition) is to know what £ profit we want at the end. It is the ultimate matching test.
It is illogical to push for more sales when the price point is set to achieve a given market penetration, volume and marketing cost assumption. Yet brute forcing sales targets or trying to do more-for-less alters the plan, most often in a manner that is entirely counterproductive. The usual pressure outlet is that of reduced price and increased promotion in pursuit of increased volume.
The machismo that drives this ‘it’s never enough’ culture seeks to prove that sheer willpower and loudness of voice can overcome the science of pricing. The trouble is that even the loudest voice struggles to influence every customer, whereas price influences them all – continuously.
There is no other goal that creates alignment is the same way. Market penetration can be achieved with price, product, marketing spend and promotion. But the mix of these influences can derive radically different margin outcomes. £ profit, has many ways of getting there but just one outcome.
Make the £ profit goal of the company overt, consistent and test every pricing policy against it.
Have the debate.