Inside Supply Management Magazine

The Art of Pricing

December 18, 2014

After spending months sourcing parts or ingredients for a new product and setting up a unique supply chain to handle the company’s newest market introduction, how much time does your company devote to setting the price? In other words, is pricing an art or an afterthought?

Establishing a price strategy can help companies increase their competitive advantage and bottom line, says Per Sjofors, CEO for Stratinis Inc. in North America. “Too many companies use simplistic pricing processes and can’t identify their most profitable customers or customer segments,” he adds.

Sjofors lists some of the most common mistakes supply chain organizations and their companies make when pricing products and services.

Basing prices on costs, not customers’ perceptions of value. If the price is higher than customers’ perceived value, the cost of sales goes up, discounting increases, sales cycles are prolonged and profits suffer. If it’s lower than the perceived value, sales are brisk, but companies are not maximizing their profit.

Basing prices on the marketplace. Such pricing is a “resting place for companies that have given up,” Sjofors says. Management teams should find ways to differentiate their products or services to create additional value for specific market segments.

Failing to segment customers. The value proposition for any product or service is different in different market segments, and price strategy should reflect that difference. A price strategy should include options to tailor the product, packaging, delivery options, marketing message and pricing structure to specific customer segments to capture the additional value created for those segments.

Holding prices at the same level too long. While most companies fear the uproar of a price change, savvy firms accustom their customers and their sales forces to frequent price changes. Companies should recognize the value proposition of product changes along with marketplace changes, and adjust pricing to reflect those changes.

Changing prices without forecasting competitors’ reactions. Take into account not only likely competitive pricing changes but also make an objective assessment of competitive product or service quality. Price strategy should not operate in a vacuum.

Failing to establish internal procedures to optimize prices. Too often, prices are set at a last-minute meeting, Sjofors says. Attendees are often unprepared and research is limited to a few anecdotes from the sale staff, competitors’ price lists from last year and a financial officer’s calculation of the product’s cost structure.

“Pricing offers many companies the most direct route to higher profits,” Sjofors says. “However, particularly in North America, the pricing function often fails to get sufficient attention.” He adds that companies should look to trained professionals to collect and analyze data to identify, and evaluate the value perceptions of their marketplace.

“A combination of greater management commitment to the art of pricing along with powerful analytical tools can make a significant difference,” he says.