How to Price Effectively to Boost Your Company's Growth and Profits

marketing@surefirelocal.com
Price Effectively to Boost
Your Company’s Growth
and Profits

Utpal Dholakia
Rice University
PRICE EFFECTIVELY TO BOOST YOUR COMPANY’S
GROWTH AND PROFITS
Surefire Local Webinar • February 2018

IN TODAY’S
WEBINAR,
YOU WILL
LEARN —
• How your prices drive profits and convey
decisive information about quality to
customers
• Which costs are relevant for pricing
decisions and which ones you should ignore
• The pros and cons of using cost-plus pricing
• How to understand and measure what your
customers value
• Why price points are important to your
customers and how to use them to set
prices
• How to use value-based pricing
• How to actually get the prices you ask for

All the information discussed in
today’s webinar is explained in
greater detail in my book
How to Price Effectively: A Guide
for Managers & Entrepreneurs

PRICING DECISIONS ARE IMPORTANT
Pricing decisions are
among the most
important and
impactful business
decisions that you can
make
1
They are one of the few
business decisions that
have a direct and
immediate effect on
your company’s
revenues
2
Quoting or changing a
price is one of the
easiest things you can
do, yet it is also among
the most risky
decisions
3

Reason 1: Prices Drive
Your Company’s Profits
Reason 2: Prices Convey
Information About
Product & Service Quality
WHY PRICING
DECISIONS
ARE
IMPORTANT

WHY PRICING
DECISIONS
ARE
IMPORTANT
•Reason 1: Prices Drive Your
Company’s Profits

WHAT DRIVES YOUR COMPANY’S PROFIT?
Profit =

Profit = Sales Volume

Profit = Sales Volume
In mature markets like the ones most of us operate in, growth
rates are small, and it is very difficult to grow sales volume
quickly.

Profit = Sales Volume - Costs

Profit = Sales Volume - Costs
There are some opportunities to manage & reduce costs,
especially for new businesses. But for most established
businesses, it is difficult to move the needle on costs. Cutting
costs leads to lower quality, and this can backfire.

Profit = Sales Volume x Price - Costs

That leaves price.
This is the area of greatest opportunity!

Of the three drivers of profit, sales volume, costs, and price,
for most businesses, the greatest opportunity lies in pricing
your products and services most effectively.

LET’S CONSIDER THE
PROFIT POTENTIAL
OF PRICE IN MORE
DETAIL

COSTCO’S
HOT DOG –
SODA COMBO
Warehouse chain Costco has maintained the
$1.50 price for a hot dog and a soda combo
for over 30 years, through six presidential
administrations.
It sells over 100 million hot dog–soda
combos each year.
The combo is recession proof and inflation
proof.
If Costco were to raise the price of its
famous by just two pennies to $1.52 in all its
stores, and then make the same pricing
move on its other products, the operating
profit of the entire company would shoot up
by a whopping 48%!

COMPARISON OF A FIRM’S PROFIT LEVERS
Source: Managing Marketing in the 21st
Century, Noel Capon

Century, Noel Capon

Century, Noel Capon
Of all the drivers, a 1% improvement in price produces the
highest improvement in profit

EVEN A SMALL INCREASE IN
PRICES WHILE MAINTAINING A
COMPANY’S SALES AND COST
LEVELS GENERATES A
SIGNIFICANT BOOST TO ITS
PROFIT.

WHY PRICING
DECISIONS
ARE
IMPORTANT
Reason 2: Prices Convey
Information About Product &
Service Quality

Let’s say the only thing I tell you about
one particular car is that it cost $85,000.
How will you imagine this car to be?

On the other hand, if I say the car costs
$5,000
What will this car look like to you?

WILL YOU IMAGINE THIS IS A
$5,000 CAR?

HOW ABOUT A BATHROOM
REMODEL WHERE THE
CONTRACTOR BID $7,500?

BATHROOM
REMODEL
How about a bathroom
remodel where the
contractor bid $7,500?
Versus one where the
contractor bid $25,000?

BATHROOM
REMODEL
What kind of contractor will you
imagine in these two scenarios?
Their experience? Their quality of
work? The satisfaction of their
customers?

Prices convey information about the
product’s or service’s quality.

High prices signal that the customer is
going to receive something of high
quality, where the provider has put effort,
and used their skill and competence.

High prices signal that the customer is
going to receive something of high
quality, where the provider has put effort,
and used their skill and competence.
Low prices, by themselves, signal
mediocrity and low quality.

• If a person is told they
are tasting two different
wines—and that one
costs $5 and the other
$45 when they are, in
fact, the same
wine—the part of the
brain that experiences
pleasure will become
more active when the
drinker thinks they are
enjoying the more
expensive vintage.
HIGHER PRICE MAKES WINE TASTE BETTER
Source: Marketing actions can modulate neural representations of experienced pleasantness, PNAS, January

A high price is a badge of your service’s superior
quality. The high price is a signifier conveying
positive qualities that your customers value such as
reliability, innovativeness, comfort, convenience, and
status that strengthens your brand, supplies pride
and confidence to your employees and builds trust
with your customers. When you make high-quality
products and services, high prices are a strength, and
low prices are a hindrance for marketing them, and
for increasing sales and profit.

MANY
MANAGERS/
BUSINESS
OWNERS:
1. Don’t pay sufficient attention to
pricing
2. Find pricing to be intimidating, so
they put pricing decisions on the
backburner, focus on other things
3. Are afraid to raise prices even when
they deliver high quality to
customers
4. Give deeper discounts than
customers need or ask for
5. Use simple methods like cost-based
pricing or pricing slight below a
competitor and leave money on the
table
6. Fail at price execution, not getting
the asking price

Pricing decisions are necessary for your
company’s success. Pay attention to them, and
spend significant time and effort in thinking
about your pricing strategy. Collect relevant
data about all four pricing decision inputs and
analyze it carefully. Make your pricing
decisions in a structured, methodical, and
consistent way. Separate decisions from
outcomes.

HOW TO MAKE
GOOD PRICING
DECISIONS

The four pillars of pricing provide the four
main inputs into making structured pricing
decisions.
Next, I would like to share the structured
method of pricing that I have developed
by working with dozens of companies over
the past decade.
It is called the Value Pricing Framework.

Let’s begin with the role
of Costs in the Value
Pricing Framework

COSTS
• A company’s costs provide the most
important input in a pricing strategy
• Costs set the floor on prices, and
determine the lowest price level you
can charge.
• A majority of prices are set by
companies based only, or mainly, using
costs.
• Costs are separated into incremental
costs that are relevant to the pricing
decision and need to be considered
carefully, and non-incremental or
irrelevant costs, that should be ignored.

Effective prices are rarely set or
changed based solely on costs.
However, without considering costs,
prices would be like anchorless ships
adrift on the ocean, just as likely to
reach a port, as they are to float
away and disappear over the
horizon.

HOW TO
USE COSTS
FOR
EFFECTIVE
PRICING
First, you need to
understand your costs and
separate which costs matter
for your pricing decision and
which ones do not.
The main takeaway here is
that some costs matter and
others do not. We can call
them relevant costs and
irrelevant costs.

Determining
Relevant Cost
Understand
components of
costs.
1
Understand how
costs will change
with the changes in
sales that result
from pricing
decisions
2

INTRODUCING BREAKFAST IN A
RESTAURANT
• Full-service restaurant
• Currently open only for lunch and dinner
• Considering opening for breakfast on
weekends
• Which costs should the operator consider in
making this decision and in determining the
most profitable prices to charge for
breakfast items?

WHICH COSTS ARE RELEVANT TO THE
BREAKFAST DECISION?
•Kitchen staff, servers,
host/ hostess – extra
shifts
•Utilities – Electricity,
Water
•Food costs
• Rent (pro-rated)
• Taxes (pro-rated)
• General Manager’s salary
• Cost of fixtures, plants,
decorations (pro-rated)

BREAKFAST DECISION?
shifts
Water
•Food costs
These costs are incurred regardless
of whether breakfast is offered.
They are irrelevant to the decision of
whether to serve breakfast.

BREAKFAST DECISION?
shifts
Water
•Food costs
These costs are incurred regardless
of whether breakfast is offered.
They are irrelevant to the decision of
whether to serve breakfast.
Relevant Costs are
Incremental Costs

• The cost basis of offering breakfast for
an already open restaurant will be
much lower than a new restaurant that
is only open for breakfast and lunch
• Breakfast prices will be lower at such a
restaurant if it uses cost-based prices
INTRODUCING
BREAKFAST IN A
RESTAURANT

The Dunlavy: Upscale
full-service restaurant in
Houston opened for breakfast in
late 2016 (previously open for
lunch and dinner)
Snooze Eatery: Newly open only for
breakfast and lunch

The Dunlavy: Lunch menu
The restaurant can afford to charge significantly lower prices
for breakfast because it has to cover fewer costs (only the
relevant costs).
The Dunlavy: Breakfast menu

Costs relevant to the pricing
decision are Incremental
Costs
Now let’s consider Avoidable
Costs

RUNNING SHOES
AT FOOTLOCKER
• Footlocker purchases running shoes in
late-winter for $31/pair and sells them
during spring/ summer for $50.
• Demand for these shoes dwindles in
the Fall.
• Store has two choices:
• Choice 1: Sell out remaining
inventory with end-of-summer
sale at $29.99 per pair. Take a loss.
• Choice 2: Hold shoes in inventory
until next spring (8 months), Sell
them for $39.99/ pair. Lower price
because the shoe will be an old
model next year.
• Which decision makes more sense?

• Avoidable costs play a big role:
• Costs of holding shoes in inventory
($.75/month/pair = $.75*8 = $6)
• Costs of borrowed funds and insurance
(1%/month = .01*8*29.99 = $2.40)
• Cost of labor to put away, remove &
display shoes ($1/ pair)
• Space used in stockroom where new
merchandise can be kept (Opportunity
cost)
• Avoidable cost = $6 + $2.40 + $1 =
$9.40/ pair
• Decision to clear out inventory
at a loss makes a lot of sense.
RUNNING SHOES
AT FOOTLOCKER

Costs relevant to the
pricing decision are
Avoidable Costs

•One final issue:
Cannibalization costs
• Assume that next year, you would
sell the new line at $50 (purchase
price = $31 again)
• If you decide to hold the current
line, there will be some
cannibalization. Need to factor this
cost in.
• Assume: Half the purchasers of
discount shoes would have bought
new shoes
• Cannibalization cost = $18
($50-$31-$1)*.5 = $9.00/ pair
• This is another opportunity cost
RUNNING SHOES
AT FOOTLOCKER

RELEVANT
COSTS
• Costs that determine the profit
impact of the pricing decision.
• Not all costs change with a price
change: Those costs that do not
change are irrelevant to the
pricing decision.
• Two types of relevant costs
• Costs that are incremental (not
average)
• Costs that are avoidable (not sunk)

INCREMENTAL
COSTS
• Pricing decisions affect whether a
company will sell less of a product at a
higher price or more of the product at a
lower price.
• Some costs remain the same in
either event
=> Irrelevant to us
• Some costs change from one
scenario to the next => Incremental
and must be considered
• Closely parallel fixed and variable
distinction, but not fully.

INCREMENTAL
COSTS
• Variable costs: Since pricing
decisions influence the amount
of business that a company
does, variable costs are always
incremental for pricing
• Fixed costs: Some fixed costs
like product design, advertising,
and overhead are incremental
when deciding whether a price
will generate enough revenue to
justify being in business of
selling a particular product or
serving a particular customer.

WHICH FIXED COSTS ARE INCREMENTAL?
•Incremental fixed costs are those that directly
result from implementing a price change.
• Fixed cost for a restaurant to print menus with new prices
• Public utility’s costs to receive regulatory approval for a price
increase
• Fixed cost for an airline to advertise a new discount service or to
upgrade interiors to offer a premium-priced service

SEMIFIXED COSTS
•Many costs are fixed over a range of sales
but vary if sales go outside that range
• A manufacturer may be able to produce 50 additional
units each month with available equipment
• Equipment costs are fixed and non-incremental when
figuring cost of producing up to 50 additional units
• However for additional units over 50, they would
become incremental and relevant to deciding whether
the firm can price low enough to attract that additional
business

Now that we have understood the
concepts of incremental and
avoidable costs, we can now go on
to the idea of “Price Floors”
Costs set two types of price floors
for pricing decisions

Total costs establish the
long-term price floor on the
product’s price.
In the long-run, your prices have to cover all your
costs, both fixed and variable. If you don’t meet
this minimum threshold, you cannot survive as a
successful business.

Incremental costs establish the
short-term price floor on the
product’s price.
Short-term price floors, if used creatively and
thoughtfully, create significant customer value,
helping your business grow while maintaining or
increasing its profit levels, and helping your
company’s financial performance.

As the breakfast and Footlocker
examples showed, a manager who
focuses on average cost would be
misled into rejecting profitable
growth opportunities in the
mistaken belief that the price would
be inadequate.

The adequacy of any price for
introducing new products or
targeting new segments can be
only ascertained by looking at
the incremental cost of sales
and ignoring those costs that
would be incurred anyway.

Regular Customers Served
at Regular Prices

Regular Customers Served
at Regular Prices
Creative Business Growth Activities to Take
Advantage of Lower Incremental Costs of Sales

Let’s Look at Some
Creative Business
Growth Activities That
Take Advantage of
Lower Incremental Cost
of Sales

Source: Mallory Schlossberg. One retailer is letting customers decide how much to pay — but there's an invisible price if you
choose the lowest option, Business Insider, 2015.

ALMOST EVERY COMPANY CAN PROFIT FROM PRICING
BELOW AVERAGE COST
• CPG manufacturers supply generic versions of their branded
products at prices far below average cost. Profitable because
little incremental costs of capital, shipping, and selling
beyond those incurred for branded version.
Source: Who really makes Trader Joe’s food? (Taste Test), Huffington Post, 02/12/2013
Pricing: Trader Joe’s $1.49, Annie’s $3.29 Pricing: Trader Joe’s $2.49, Cheerios $6.49

ALMOST EVERY COMPANY CAN
PROFIT FROM PRICING BELOW
AVERAGE COST
• B2B Space: Leading
manufacturer of industrial
cranes does milling work for
other companies. Price does
not cover a proportionate cost
of equipment. But still
profitable since equipment is
needed for the firm’s primary
work

ALMOST EVERY COMPANY CAN
PROFIT FROM PRICING BELOW
AVERAGE COST
• Airlines fly weekend flights that do
not cover a proportionate share of
capital costs for plane and ground
facilities. Lower weekend fares add
incrementally more to profits
because they require no additional
capital

What about Cost-based pricing
(also known as Cost-plus
pricing)?
Let’s consider the strengths and
weaknesses of this pricing
method.

THE LOGIC
OF
COST-BASE
D PRICING
IS SIMPLE
• It is widely criticized, but is still, by far, the
most commonly used pricing method
• 75% of American restaurants use it,
60% of manufacturers
• Retailers use “double markup” adding
margin of 100% on their wholesale
cost.
• Restaurants have established
benchmarks, 2X for food, 5X for liquor,
etc. So do many home improvement
contractors.
• The logic of cost-based pricing is simple:
Price every product to deliver a fair return
over costs, fully and fairly allocated

COST-BASE
D PRICING
– EXAMPLE
• ABC Navigation Systems has a contract to
supply the US Air Force with advanced
aircraft navigational equipment. Under
contract terms, price of each navigational
unit to be paid by the USAF is calculated as
follows:
• Variable cost (labor, components,
electricity, etc.) = $10,000
• Allocated fixed costs (salaries,
insurance, R&D, building heat, debt
service, maintenance, etc.) = $8,000
• Contract guarantees 15 percent profit
• Unit price = ($10,000 + $8,000) * (1 +
0.15) = $20,700

BENEFITS OF COST-BASED PRICING
It is simple. Line
employees can
implement it with
moderate training.
1
It is easy to explain and
justify. It can be
described and defended
easily to employees and
customers.
2
It stabilizes market
prices. When all
competitors have similar
cost structures, and use
it, prices remain stable.
3
It encourages customers
to focus on quality.
Prices tend to correlate
to quality.
4

WEAKNESSES OF COST-BASED
PRICING
It encourages inefficiency.
There is a disincentive to be
efficient and to lower costs.
Reducing costs will decrease
revenues and total profits.
1
It ignores customer value
and reference prices. This
can be dangerous, because it
can either results in prices no
one is willing to pay, or it can
leave a lot of money on the
table.
2
It creates a false sense of
complacency. Managers
think they cannot lose
money if they use cost-based
pricing, which is wrong.
3

HOW CAN
YOU LOSE
MONEY
WITH
COST-BASE
D PRICING?
• In most companies, it is impossible to
determine a product’s unit cost before
determining its price
• Unit costs are dependent on volume!
• If you sell more than you expected,
your unit costs will be lower, and you
will leave money on the table.
• If you sell less than you expected, your
unit costs will be higher, and you will
charge too much, and customers may
not buy. You will lose money!
• Price affects sales volume, sales volume
affects costs

COST-BASED PRICING IN STRONG
MARKETS
Cost-based price serves as a cap on price if it can
be easily achieved
•Toyota Prius launch
• In June 2004, the backlog for 2004 Toyota Prius reached 22,000 in the US.
• As of April 2004, the expected delivery time for Prius in the Netherlands was
one year.
• As of March 2004, the waiting list at a Sonoma County, California dealership
was over 100 people long
• Price at the time: MSRP = $19,995, Invoice = $18,411; Dealer priced $6 to $8K
higher (“fair market adjustment”)
Source: Forget Rebates: The Hybrid-Car Markup, by Sholnn Freeman, WSJ, June 10,
2004

COST-BASE
D PRICING
• Leads to over-pricing in weak markets
and underpricing in strong ones
• Cost-based price still does not provide
a guarantee of covering fixed costs
• The underlying logic is flawed
• But most importantly, a company can
do better with other pricing strategies

CUSTOMER
VALUE
Customer Value represents the total amount of
money that the customer is willing to pay for the
benefits received from the product.
Customer benefits are of two types: Functional,
the main reason why the product was purchased,
and Hedonic or the emotional benefits the
customer receives. Together, they drive
customer valuation of the product or service.
Customer value usually sets the ceiling or the
highest possible price that can be charged for the
product.

FUNCTIONAL AND HEDONIC BENEFITS
More likely to be
related to costs and
to be considered in
pricing
May cost very little yet
customers may be willing to
pay a lot for these benefits.
Managers often tend to
ignore them

THE CUSTOMER VALUE GRID
Survey-based method
Step 1): Unbundle the product into its features
Step 2): Understand the hedonic and functional benefits
derived by customers from each product feature
Step 3): Ask customers to quantify the benefits in economic
terms, that is, how much they are willing to pay for each
benefit
Step 4): Add the economic value of each benefit to calculate
the product’s total economic value to the customer.

Another important property of
Customer Value is that it is not
stable
It changes in predictable ways
that should guide pricing
decisions

Understanding when
Customer Value increases
and the triggers of value
increase provides useful
information for effective
pricing decisions

DEMAND FOR CHOCOLATE
Demand/ Customer
Value
Tim
e
Valentine’
s
Day
Easte
r

Demand/ Customer
Value
Tim
e
Valentine’
s
Day
Easte
r
When would it make sense to charge high prices?
And to offer discounts?

Demand/ Customer
Value
Tim
e
Valentine’
s
Day
Easte
r
Coupons

Demand/ Customer
Value
Tim
e
Valentine’
s
Day
Easte
r
High/ Full
Prices

The key insight here is to manage your
price levels so that they coincide with
predictable shifts in customer value.
Identify your customers’ value triggers.
Minimize incentives during periods of
high value.

REFERENCE
PRICES
• Customers rarely make purchase
decisions or evaluate prices in
isolation
• When judging a price and
considering the product’s
purchase, they compare it to
other reference prices
• Commonly used reference
prices include competitors’
prices, your company’s historical
prices, and other prices that the
customer may encounter before
purchase

REFERENCE
PRICES
• Reference prices play two roles
in pricing
• First, reference prices provide the
range of prices customers find to be
reasonable as a third independent data
point for pricing decisions.
• Once the range of reasonable prices is
well understood, the company can
strategically decide where it wants to
price its products in relation to this
range.
• Second, you can influence which
reference prices customers use and
how they interpret them.

REFERENCE PRICES IN PURCHASE
DECISIONS
• Customers Evaluate Your Prices Compared to…
• External (before and at the point of purchase)
• Advertised prices / sale prices
• Prices of adjacent items on the shelf
• Shelf tags to “help” consumers make comparisons
• Internal (based on shopper’s prior knowledge)
• Prices encountered during recent shopping trips
• Memory of price may not be accurate
• If brand is frequently discounted, consumers tend to lower their internal reference
• Customers use and combine external and internal price information to determine
whether your product is a good deal

WHAT IS A
PRICE
POINT?
• A particular reference price that is so
well-known and well-accepted so as to be
considered the “normal” or “usual” price for
the product or service
• $1,000 for a “good computer”
• $5 for lunch
• “A dollar a day” for news, coffee,
shaving, etc.
• $400 per month car payment
• Price points are segment-specific; there can
be several significant price points within a
category
• A price point actually has positive value for
the shopper

THE POSITIVE VALUE OF A PRICE POINT FOR
SHOPPERS
0.49 0.51 0.53 0.60 0.64 0.66 0.67 0.69 0.75
1850
1500
800
900
580
600
620
600
380
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Price
UnitSales
Price Point
Note: Illustration only, not based on real data
“Price points are inevitable wrinkles in demand curves.” – Robert Schindler

IF YOU KNOW WHICH PRICE POINTS YOUR
CUSTOMERS FAVOR, YOU CAN DESIGN
PRODUCT AND SERVICE BUNDLES THAT ARE
SPECIFICALLY TARGETED AT THAT PRICE
POINT, AND ALLOW YOU TO EARN A HIGH
PROFIT MARGIN. IT WILL BE EASY TO MARKET
SUCH PRICE-POINT-BASED BUNDLES.

NOW THAT WE HAVE COVERED THE
ROLE OF CUSTOMER VALUE AND
REFERENCE PRICES IN PRICING
DECISIONS, WE ARE READY TO LOOK AT
THE MOST IMPORTANT AND USEFUL
PRICING METHOD THAT USES THESE
TWO INPUTS:
VALUE-BASED PRICING

VALUE-BAS
ED PRICING
This is the most “natural” way to set a
price because it reflects negotiated
sharing of the value between buyer
and seller that has gone on for
millennia
Value-based pricing is nothing more
than basing the product offering’s
price based on its value to the target
customer.
So how does this pricing method
work?

DEFINING
VALUE-BAS
ED PRICING
Value-based pricing is the method
of price determination by which
the company calculates and tries
to earn the differentiated
economic value of its product for a
particular customer.
It has six steps.

VALUE-BASED PRICING: VACATION RENTAL EXAMPLE
• Product: Listing a vacation rental house on a beach to rent on airbnb.com by
the week. What should its price be?
Sources: How to price effectively, Chapter 10; The 1% Solution, Rafi Mohammed

• Step 1: Identify target customers. Vacationers. Airbnb users.

• Step 2: Determine competitive offers & the focal competitor. Neighboring beach
houses. Their listing price is a starting point.
Your
House
Neighbor’s
rental price?

• Step 3: Conduct head-to-head comparison. Collect information on features of
your beach house & neighboring houses.
Your
House
Neighbor’s
rental price?
Feature Neighbor You
Bedrooms 2 2
Bathrooms 1 1
Kitchen yes yes
Internet yes yes
Pool no yes

• Step 4: Identify differentiators and deficiencies. Your house as a pool, the next
door one does not.
Your
House
Neighbor’s
rental price?
Feature Neighbor You
Bedrooms 2 2
Bathrooms 1 1
Kitchen yes yes
Internet yes yes
Pool no yes

• Step 5: Assess their economic value. Vacationer will pay a 20% premium on
weekly rental for the pool.
$750 = Reference value
(includes all features that are common to the two
houses)
$900 = Positive differentiation
value (the value of your pool to the renter)
Neighbor’s rental price
Your maximum price

• Step 6: Calculate the value-based price. Is the neighbor’s
price realistic? Can I make money at this price? Can I at
least cover variable costs?

VALUE BASED PRICE FOR A VACATION HOUSE WEEKLY
RENTAL
$750 = Reference value
(includes all features that are common to the two
houses)
$825 = Value-based price
(after sharing differentiation value 50-50)
$900 = Positive differentiation
value (of having a pool)
Costs
Neighbor’s rental price
Your maximum price

PRICE
EXECUTION
Now that we have covered
the inputs into pricing
decision, the next important
step in the value pricing
framework is price execution.

PRICE
EXECUTION
• Price Execution reflects the gap
between prices companies ask for and
what they actually get. It is one thing
to quote a price, another entirely to
receive payment for the full amount.
• Gaps may arise from quantity
discounts, free products or shipping,
advertising allowance, or simply from
customer negotiating the quoted price
lower.
• Every incentive adds to the gap
between the asked-for price and the
earned price and has a negative impact
on profit.

PRICE EXECUTION GAP
Source: McKinsey
Study

PRICE
EXECUTION
The main takeaway is that you may have
significant price realization gaps in your
company. In some companies I have worked
with, such gaps can be 50% or more. The
company is realizing less than half of its average
asking price.
In such cases, even improving price realization
by a small amount can result in significant profit
improvement without changing asking prices.

HOW TO
IMPROVE PRICE
REALIZATION
• Stop giving blanket discounts to all customers.
Instead offer targeted discounts only to
customers who deserve this incentive.
• Offer “shallower” discounts instead of deep
discounts. Why give a 20% discount to
customers, when 10% will work just as well?
• Cut out free services such as free shipping,
complementary training, etc. and start
charging for them gradually. Make your
mantra “free to fee.”
• Use à la carte pricing (i.e., charge for every
service separately) instead of charging bundle
prices.
• Reward your sales staff that are stingy with
offering incentives to close the deal.

“Low prices and high profits rarely
go together.”
- Peter Drucker

HARDWORKING MARKETING
FOR HARDWORKING PEOPLE
Thank you!

How to Price Effectively to Boost Your Company's Growth and Profits

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