Rafi Mohammed

Dow 15,000? Sure, But Companies First Need to Fine Tune Their Pricing Strategy

Posted on July 24th, 2007 (0 Comments)

Relaxing in chaise chairs on a recent beach vacation, I turned to a friend of mine with an epiphany: “pricing is really the most overlooked and undervalued strategy in business.” To which she replied, “don’t you ever think about anything besides pricing?” Sadly…rarely…

Still dubious about the upside of better pricing? Saturday’s Wall Street Journal had an interesting front page article titled “Price Pressures Curb Tech Profits as Sales Surge.” The article contained the following insight: “the fundamental factor in many tech markets – and behind much recent stock market activity – is pricing.” What more can I do to convince you that pricing is a key strategy to focus on? The Wall Street Journal has spoken…pricing is a key influencer of the stock market these days!

While pricing environments can get tough, they rarely are as cutthroat as you might imagine. Here’s my advice to companies who are stuck in the classic pricing rationalization of “my competitors are killing me:”

Don’t get caught in a discounting war, focus on what differentiates your product: This is exactly what Blockbuster has done to gain market share from Netflix. While owning retail stores was once considered a liability, Blockbuster recently allowed its monthly mail order subscription customers to rent and return at local stores. Just yesterday, Netflix announced a $1 discount on its monthly plans – an implicit acknowledgement of the enhanced value Blockbuster offers customers. Analysts estimate that this simple $1 discount will end up costing Netflix $20 million in profits a year. As result, Netflix’s stock hit a 52 week low and was downgraded by analysts.

Focus on profitable markets: Sure everyone wants the big accounts, but often there’s more margin in selling to the small guys where there’s less competition. Remember, Wal Mart got its start in small, yet highly profitable, markets that other chains didn’t care about. Southwest Airlines did the same.

Focus on capturing your product’s value: Please don’t make me repeat my umbrella story. Most companies simply mark up their costs. The quickest way to increased profits is to change the way you think about pricing…it’s all about value.

Higher overall margins are necessarily not better: The strategy of pricing involves serving as many customers as possible through early bird, regular, and chef’s table strategies, with each strategy offering different margins. Early bird pricing may not “keep the lights on,” but it does contribute to overhead. So while your average margins may slide a bit, early bird, regular, and chef’s table pricing will profitably grow your business.

Pricing is truly the quickest way to improved profits, a higher stock price, and your next promotion. As an ambitious businessperson…perhaps you ought to be thinking about pricing on your next beach vacation…

Add Comment
Send to Friend
Email Signup
RSS Feed