The first step to ensuring your strategic pricing initiatives are successful is to understand what you’re doing. Here are a few questions to ask of yourself, as a business owner, and of your top management.
- What is “strategic pricing”?
- What is our Pricing Analyst’s job? (scope, objectives and success metrics)
- What assumptions underlie these answers and is there data to back them up?
- What additional analytics would improve pricing effectiveness?
If you find wildly varying answers, or confusion, from your management team it’s time to upgrade your approach to strategic pricing.
Test Yourself: Do You Believe Any of These Pricing Assumptions?
Buy low, sell high fattens margin percentage, and no other management activities can improve profits bigger and faster.
True! But, only as a static financial analysis exercise. Every distributor has pursued this concept for years with no sustainable profit improvements. Why?
- Suppliers and customers play this same zero-sum, win-lose game to a stand-off
- Hidden mistrust costs then undermine win-win replenishment system possibilities
- There’s no innovation or creation of better service value for target niches of customers to justify higher prices
- Reps often prefer meeting last-look prices, rather than insisting on extra points for their own value added and for the company’s measured, guaranteed service excellence
- No company has ever prospered by raising prices for the same commodity service value
Naturally-occurring high gross profit percentage (GP%) SKUs and customers are profitable. Get more!
False! Higher GP% is not the same as the GP dollars (GP$s) needed to cover cost-to-serve dollars (CTS$s). Small customers with higher GP% usually have small-dollar sales, orders, and picks. Their profit equations are mostly losers (GP$s (less) CTS$s (equals) Profit/Loss dollars).
You can fix losing small-dollar pick items by increasing the mark-ups to what the traffic will bear!
Do it! Your bottom line will improve. But, the small-pick items will still have losing profit equations. Just less so. You can build up GP$ per pick and per order to profitable levels by imitating Amazon. Bundle the popular small items (into 2-12 packs) and make the bundles add-on items.
Every incremental customer, sale, and margin dollar is good.
This data-free chain of flawed rationalizations goes something like this:
- All employees are a fixed cost in the moment
- Any extra order and line-item pick activity just keeps idle folks busier
- This allows for incremental margin dollars to go to profits
- And any extra sales will add to supplier rebates for more profits
What You Need: Line-Item, Profit-Equation Analytics
With a cost-to-serve model that generates a profit equation for every line-item event, you will discover the big cross-subsidies that exist amongst both customers and SKUs.
Take your strategic pricing to the highest level. For a free, tutorial/demo contact me. At email@example.com.