One of the more common things we see is pricing strategies and tactics succumbing to fear, uncertainty and d-doubt (FUDD). When that happens, companies frequently begin a cycle of value-destroying pricing decisions. You can prevent those decisions by recognizing the symptoms and stopping Elmer Fudd from leading your pricing strategies.
The fear component of Elmer Fudd pricing is the fear of trying to raise any prices. The most common belief in many organizations is that sales simply follow a price demand curve, so any suggestion of raising any prices are met with “We will lose the business if we raise prices.” The fear is your customer will simply switch to another supplier or product and the volume will be gone. That fear is usually misguided.
There is ample evidence in most industries that price is not the primary factor in purchase decisions. Before customers worry about prices, they make sure the product or service meets their needs, they make judgements about who they like to do business with, and they evaluate the quality of service. Even products that might seem to be pure commodities like gasoline and water have different prices from different providers, because customers value attributes other than price. If your prices are not out of line with the value you provide, modest price increases should not result in lost business.
Uncertainty comes from not utilizing your data to gain valuable insights into how prices are affecting customer behavior. Every client we work with has a rich set of transaction data just waiting to be mined. Although it is not easy, analyzing the transactions and customer data to understand who bought what, under what circumstances, and at what prices as well as how customers have historically reacted to price changes can be very insightful. Doing this analytical work and getting the facts will help you assuage your organizational fears. Failing to do the work enables the uncertainty to amplify your fears.
Doubt arises when your sales and customer service teams don’t believe your customers value your offerings differently than your competitors. Although your team can discuss how you compete, and they can describe your competitive advantages, they also need to believe that those differences create differentiated value. When they doubt there is any difference in value, they find it very difficult to ask for a higher price.
Doubt can also creep in if you don’t believe that different customer segments can value your products or services at different levels. It can also arise when people don’t believe that smaller customers might be willing to pay more, or in some cases the opposite – large customers might be willing to pay more. Lastly, doubt that price optimization tools can be better than an individual sales person’s local knowledge, can doom you to the consistent under-performance of gut-feel pricing. By analyzing your transaction, customer, and demographic data, pricing tools can identify the customers and situations that offer the greatest probability of successfully increasing prices. Doubting those recommendations in favor of rules of thumb can be costly.
Damage is the final D. It is what happens when you don’t have a clear-eyed, data driven approach to pricing. Your profitability is the first and most obvious thing to be damaged. When you set prices lower than needed, you make less money. When you make less money, you have less available to invest in new capabilities, product features, people, facilities, etc. And that can lead to slower growth.
The less obvious area damaged by too-low pricing is your value perception in the market. If your customers prefer your product or service to their next best alternative, but you price it lower than needed, you are communicating that you don’t believe in your own value. When you don’t believe you add more value, your customers will not either.
Don’t let fear, uncertainty, and doubt damage your pricing strategies and tactics. You will be much more profitable by keeping Elmer Fudd away.