In some companies, the hastily-called "price meeting" has become a regular occurrence-a last-minute meeting to set the final price for a new product or service, or a semi-regular review of the company's price list. The attendees are often unprepared, and research is limited to a few salespeople's anecdotes, perhaps a competitor's last year's price list, and a financial officer's careful calculation of the product's cost structure across a variety of assumptions.
A more productive approach to price optimization requires data, analysis and discipline. These are the same ingredients that drove the cost-cutting success of the 1980s and 1990s, when companies systematically studied, reviewed and re-engineered their processes to eliminate redundancy and to reduce costs and cycle times. Price optimization requires, and deserves, the same level of attention and support.
Price optimization data comes from focused research. The research comes from surveys constructed and conducted by professionals who know what to ask for and how to extract the information that is important to the pricing project. They have experience structuring the questions, questionnaires and data to uncover the most important points, inconsistencies, and above all, the values perceived by the interviewees.
Mistake #10: Companies spend most of their time serving their least profitable customers.
Most companies do not even know who their most profitable customers are. While 80% of a company's profits generally come from 20% of its customers, a careful review of the data often will show surprises, since a company's largest customers are often only marginally profitable. Failure to identify and focus on their most profitable customers leaves companies undefended against wIier competitors. Such failure also deprives the company of the loyalty that more attention and better service would provide. It can also mean that the company cannot actively seek out more profitable customers because they identified or profiled them. These companies base their decisions on anecdotes, stories, whispers and hearsay rather than hard data about customers and competitors.
Mistake #11 (Bonus entry)
Companies rely on salespeople and other customer-facing staff for intelligence about the value perceptions of their customers. Such people are an uncertain source, because their information gathering methodology is often haphazard, and the information obtained thereby can be purely anecdotal. Such information is neither precise nor quantifiable. A customer will rarely tell the "complete truth" to a salesperson, so any information the customer may volunteer will be biased in many ways. Salespeople can readily identify those anecdotes that advance their interests (e.g., lower prices means higher revenues, regardless of profitability), and those that operate against them. Savvy companies employ trained professionals to collect and analyze the data to identify and evaluate the value perceptions of their marketplace. Large companies have entire departments doing this fulltime; smaller companies may outsource it to a specialist like Atenga.
The optimization of pricing strategy is as important as the management of costs and the growth of sales volume. Since most companies have never done it, rigorous price optimization has emerged as an important source of competitive advantage and increased profitability. The iron law of pricing states that different customer's will ascribe different values to your products and services. Savvy companies do the research to identify the various market segments they serve, and they re-engineer their marketing, packaging, and service operations to excel at meeting their needs. They use that research to align their prices with the value perceptions of their customers. In this way they win customer loyalty, lower costs of sales, and above all, enhanced profits.
Value Optimized Pricing (VOP) is the business process that ties price levels and price strategies to the value perceptions of the customers. Far superior to pricing based on costs, competitors and "gut feel," VOP enables a company to discover and document the customer's perceptions of the company, its competitors, its products and services, its value propositions and its policies and practices. The span of VOP is the entire business experience your customers have with your company, for the entire package constitutes the basis
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