Per Sjofors, a.k.a. “The Price Whisperer,” founded Sjofors & Partners and is a thought leader on using price for higher growth and profits.
Most companies ignore pricing as a growth lever. Instead, they look solely at the sales volume and cost control to drive their business forward. But, in my experience, when a company starts to look at its operation through the lens of pricing, everything changes—in a good way.
First, we must realize that profits drive everything in a company. This is in the back of executives’ minds, but it is worth repeating. If the company doesn’t have profits, eventually, there is no company. Investors—including yourself, if you are an owner-operator—will eventually get tired of funding an unprofitable company. Having said that, some companies have been successful while being unprofitable for a very long time, like Amazon and Uber. But they are the odd ones out. They convinced investors that they had such a vast market opportunity that it would be worthwhile to continue operations at a loss. Most companies do not have that luxury.
Profits can be used to increase the company’s market development effort, product development and service and shareholder distribution. Profits can also be used to hire better, more experienced, and thus more expensive people. And this is where pricing comes in.
The profitability of every company is driven by three variables. It is the total cost of operation, the total sales level of whatever product or service the company sells and the price of whatever you sell. Of these three, for the average company, I’ve found that pricing is more than twice as effective in driving profitability than controlling cost and three times as effective in driving profitability compared to increasing sales volume. This is because the cost of goods sold increases when sales volume increases. Even if you’re selling software where the incremental cost of every additional download or SaaS signup doesn’t cost much, there’s always a cost related to customer support and the cost of sales. If, on the other hand, as most companies do, profitability is considered from a cost perspective, improving cost control works from a lower dollar amount than pricing, assuming your price is above your cost. All of this is, of course, known to every exec, but only if you ask them. In daily work, it is largely ignored.
With that said, what does it mean to see the company through the lens of pricing? Well, it means a lot of things. Firstly, if your company operates from this perspective, you can start working proactively with pricing, and many small decisions will likely be different as a result. I encourage company leaders to consider questions, such as:
• What is the price elasticity (sometimes called elasticity of demand) in our market?
• Do we know what will happen if we increase prices? Will revenue and profit grow? If so, by how much?
• Can we trade sales volume for profits? Will this be different for different products or services? Different for different market segments?
• Can we change our product mix so that revenues and profits increase? If so, how do we do it?
• Do we know what customer segments support more profitable prices than others? How do we know, and can we trust that knowledge? Are we targeting these in marketing and sales?
• Do we know what features/functions/benefits of our products or services will support more profitable prices? Are these used in our marketing and sales?
• Do we know what marketing channels and messages attract buyers with the highest willingness to pay, thus supporting more profitable prices? As opposed to channels and messages that attract price-sensitive prospects?
• Do we know what sales channels and methods support more profitable prices than other channels and methods? How do we know, and can we trust the knowledge?
• Do we know how to stratify pricing so sales friction is minimized and we can capture the maximum portion of the addressable market with the most profitable prices?
• Can we change our overall business model in ways we can add more value to our customers at the same time as we can charge more profitable prices?
• Can we create bundles of products and services in ways that add more value to customers, and will those bundles support more profitable prices?
• Alternatively, can we unbundle our products or services in such a way that it provides our customers with more choices and lower sales friction?
• Do we have programs for co-selling and up-selling? If we do, are these programs focused on increasing profits? Are all customer-facing staff members trained to do this? Is the website set up to offer co-selling and up-selling if that is how you sell?
• Is discounting rampant, and can we reduce discounting without losing sales volume?
• Is discounting done across the board or strategically to drive customers to more profitable products or services?
• Are we presenting our prices to customers to increase willingness to buy (e.g., sales volume) and willingness to pay (e.g., more profitable prices)?
Now, to answer a question: What results can companies expect when they start to consider their operation through the lens of pricing? In my experience working with clients, it typically leads to 25%-40% higher margins. Not for every company, naturally, but for many. Some will see even more significant improvements. When the cash from these added profits is used to increase a company’s development efforts, sales growth typically doubles. This means that if your current growth is 10% annually, it may grow to 20%. This accelerated growth can continue for years, leading to market leadership—and who would not want that?
Viewing your company through a lens of pricing can make a huge difference for your company, employees, investors and customers who the company can serve better. Is it hard work? Definitely. Is it worth it? You bet!
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