- Be a pricing leader
- Set specific goals for pricing improvement
- Understand customer needs
- Deliver value and set prices which reflect that value
- Price to win on high-importance products and price for profit on the rest.
- Involve the whole organization
- Continuously Improve
The first habit is – Be a pricing leader. Avoid the mindset of “that’s not how we do it in this industry”. You don’t have to be the largest, most dominant player in your industry to be a leader. You simply need the mindset to look at all your pricing options and be innovative. In fact, we often see pricing innovations coming from smaller, niche players. Think about how Netflix changed the game in watching movies and recorded shows, or how T-Mobile caused the wireless telephone providers to adjust their pricing models.
Next, Set specific goals for pricing improvement. Covey would say “Begin with the end in mind.” These goals should not simply be margin increase targets, which are affected by customer and product mix. Your goals should be expressed as price increase targets and discount reduction targets, and they should be developed from the ground up. That means setting the goals by customer or segment and by product.
Covey’s 3rd habit is “First things first.” In our context, that means Understand customer needs. If you don’t know what your customers want and how they make buying decisions, you are just guessing. Worse yet, companies who are guessing at pricing frequently try to win with low prices, destroying their own margins and often harming the industry. It takes work, but an understanding of customer needs is fundamental to setting prices appropriately.
Building on the understanding of customer needs is the 4th habit – Deliver value and set prices which reflect that value. This is a win-win for you and your customers. You add value to your customers when you deliver the product specs, product quality, availability, service, and risk mitigation they need. If your products and services provide an edge over your customers’ alternatives, they will pay for it. Setting prices that reflect the value you provide to customers also enables you to provide the profits your shareholders deserve.
The 5th habit in Covey’s list is “Seek first to understand, then to be understood.” In this context, I would revise that to Price to win on high-importance products, and price for profit on the rest. This does not mean you must offer the lowest price on the most important products. It means your customers will be more sensitive to the prices on those products. You should still set your prices on these items to reflect their values, but be realistic and diligent in your assessment of those values. The price to value relationship is always important, but it is scrutinized more on the highest volume, highest importance products. On the other hand, there is typically less scrutiny on non-core products your customers buy, and you have more freedom to price higher on them. As an example, the Cleveland Browns just announced they are lowering ticket prices for next season, recognizing the value of that experienced declined this year. However, I would not count on seeing lower prices next year for food and drinks. I expect those prices will increase modestly.
Our 6th habit is Involve the whole organization. This is a slight variation on Covey’s “Synergize” habit. The point is, the entire organization is involved in delivering value, and they should understand how and why you try to capture that value. If you are delivering value and pricing accordingly, your sales people must be able to sell those prices. It is actually harmful to your business if your sales team thinks your prices are too high, and discounts them every chance they get. In addition, there are opportunities for feedback from all the parts of the company that have a customer interaction. Sales people can tell you what their customers are saying; the web team can analyze ordering patterns and cart abandonment; the collections team can identify when customers short-pay invoices due to price disputes, and customer service can quantify the numbers and types of complaints they are receiving. One note of caution – those are valuable feedback options, but validate them with data (see Be Skeptical of Anecdotes).
Covey’s last habit is “Sharpen the Saw”. Ours is Continuously Improve. Pricing is an ongoing process, not a one-time event. Situations and circumstances will change. Results will differ from your expectations because you are relying on models and hypotheses about how customers will behave. You won’t always be right. Rigorously analyze your data and adjust as you go. This approach will also keep you from being greedy and trying to capture huge price increases that anger your customers. Remember, it is a long game. There is no need to be timid, but make smart choices of where and how to take risks.
I read the 7 Habits of Highly Effective People more than 20 years ago, and it all made sense to me. Covey’s framework can be applied to pricing, and if you follow these 7 Habits of Highly Effective Pricing, you can increase your margins. If you need help in your journey to pricing best practices, contact us at Strategic Pricing Solutions
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