Fear of change and fear of failure often cause companies to abandon their efforts to be more strategic in their pricing decisions. Statements like “We will lose business if we raise prices”, or “Sales knows their customers best and how much their customers are willing to pay” are symptomatic of those fears. While there may be elements of truth in those statements, there is still significant opportunity to improve profitability by making gradual changes that raise margins without putting your business at risk, and build confidence in the process.
In How a Small Change Can Boost Your Motivation and Performance, Edmund Lau reported that studies have shown people perform better when their goals are to improve, rather than to hit certain targets. So rather than focusing on hitting some end goal of performance, he encourages people to focus on just getting better. I would say that principle also holds in pricing. When clients review the underpriced customers and products we have identified for them, if they get nervous about certain customers or situations or the magnitude of the changes, we simply dial them back a bit. Rather than trying to get all of the change at once, we encourage them to just get a little better, and resist accepting the status quo.
In a somewhat related vein, as a parent of competitive swimmers, I observed that the swimmers who focused on steadily lowering their times, rather than finishing in a certain place, were consistent, motivated performers. Swimmers are able to get objective measurements of how they stack up against others because times are widely published. The NCAA Division 1 swim meet is one of the most difficult meets in the world to reach, and most swimmers don’t make it. However, at meet after meet and league championship after league championship, we see individual swimmers and relay teams posting personal-best times. They are excited when they do it, and they continue to work hard to get better.
One other important point is swimmers usually don’t get better by just doing the same old thing and being content. They set specific improvement goals, they measure progress toward those goals, and they measure small components that are part of the overall challenge. For example, they measure reaction times on their starts and practice drills to improve their reactions. They also measure time between strokes, the angles of their hands and feet at certain points in the strokes, turn times, strokes between breaths, etc. And they work on small things to improve each component.
At this point, you should realize I am not suggesting you stick with modest goals and be happy with mediocre performance. I agree that there are plenty of examples of companies rallying around big audacious goals and accomplishing extraordinary things. However, not all situations call for that and not all companies can do it. And often, as Lau pointed out, the fear of failure can sometimes demotivate the team, causing even worse performance. I am suggesting you set goals for logical incremental improvement. Those incremental steps can certainly lead to big audacious goals, but take them in chunks that are manageable by your company. Use your analytics to identify the logical steps to take and build confidence along the way.
Strategic pricing involves pricing to value instead of cost, segmenting your customers and identifying the level of value for each segment, using your data to identify opportunities and risks, recognizing when you have pricing power and when you don’t, measuring results and continuously improving. If a change to more strategic pricing creates fear in your company, remember you don’t have to be perfect. Small changes over many transactions can add up to a lot of money and can build the confidence of your team.
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