We spoke with James Brown, UK Managing Partner at strategy and pricing consultancy Simon-Kucher & Partners, about pricing strategies and how they can be incredibly valuable in improving earnings for businesses.
Simon-Kucher & Partners is an international firm with 40 offices and over 1,400 employees. The firm works with businesses in all industries to help them develop marketing, pricing and sales strategies to support growth. James is Managing Partner of the firm’s London office and works with clients across the UK.
James, can you give a bit of an overview of pricing strategies and why they’re often overlooked?
“I think it simply comes down to the fact that businesses feel as though they’re going to be stepping into the dark if they adjust prices, and this scares them off.
“So often in business, people are keen to deal with known quantities. Since it’s perhaps more straightforward to optimise costs, it becomes the default option. It’s not that this strategy doesn’t add to profits in the short term, it absolutely can but, in excess it can create risks and hinder future growth. Focusing purely on costs and volume also misses a huge part of the puzzle.”
Given there does tend to be trepidation, what are the benefits of focussing on price as opposed to sales volumes or costs?
“Breaking it down profit equals volume of sales, multiplied by price, less cost. I’d say try to pull all the levers – volumes, cost and price – just recognise that price is going to be your most powerful lever.
“Take a simplified example. A £100 million turnover business selling 1 million widgets a year, with a price of £100 each. Gross margin of 40% and fixed costs of £30 million.
“If that business improves sales volume by 5%, they gain 20% profit. If they improve unit cost by 5% then they gain 30% profit. But if they manage to get a 5% price increase through without volume loss, they push profit from £10m a year, to £15m a year – a 50% improvement!
“Many management teams set pricing early on in the life their business, and often have a one-size-fits-all approach to pricing for all customers. If firms never review this then they limit their growth potential significantly.
While there are clearly huge gains to be made, the key thing is minimising volume loss in any new pricing strategy, which is probably what a lot of businesses are scared of. How do you navigate this?
“A new pricing strategy doesn’t necessarily mean putting prices up. It can also involve dropping prices in some areas to hit sweet spots. But yes, fear of losing volume puts people off price increases, and often that fear isn’t based on fact.
“Pricing and volume don’t necessarily have to grow at the expense of each other. Segmentation and differentiation are key here – finding ways to increase prices to customers who will accept it, and hold or decrease for customers who are more price sensitive.
“The price “model” can often be even more important than the level. Many businesses look to transition to recurring revenue models (e.g. subscription) which can be attractive to customers if set well, provide a “higher quality” revenue stream to the business, with more customer stickiness and predictability. Great for business valuation!
“There will always be customers who are willing to pay more and customers that want to pay less. Since most businesses don’t consider their pricing strategies often, they may actually already be losing volume without realising it. When you think about it in those terms, taking a step back and looking at your pricing strategy becomes even more compelling.”
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