Taking pricing seriously

crossroadsMany posts in this blog have been about how arts organizations, especially in the nonprofit or public sectors, can learn a thing or two about strategic pricing from other organizations, including non-arts commercial firms. But at The Economist, blogger Schumpeter writes that the private sector is not all that sharp when it comes to pricing either:

Firms should simply take pricing more seriously: have a clear policy and make everyone stick to it. Obvious? At a recent conference organised by Simon-Kucher, the 100 or so delegates were asked to put their hands up if their company had a written pricing policy. Just two did so. Setting prices, promotions and discounts is often left to junior people and local sales offices. Even where a policy is set from the top, the salespeople may ignore it because they are still being rewarded for maximising sales and keeping customers. Neil Hampson, a pricing expert at PWC, says he sometimes starts his client meetings by asking: “When was the last time you congratulated a salesman for walking away from a client?” Most have never done so.

It’s not so hard to cut prices in order to increase sales, and that will positively impact ‘market share,’ but to what end? Strategic pricing involves knowing when a general price cut is not good strategy, when it will lead to a fall in net revenues.

This was striking:

Equipment-makers who sell to other businesses can be especially prone to a “cost-plus” mentality, in which they charge the same margin to everyone instead of identifying those that are less price-sensitive and finding ways to earn more from them.

There is nothing strategic about setting prices by adding some fixed percentage to costs. Smart pricing is all about knowing your potential audience, whether there are groups more or less price sensitive to what you offer, the degree to which there are different demands for different levels of quality, or quantity, which consumers are interested in package deals, and so on.

So don’t assume the private sector always knows what it’s doing when it comes to pricing.

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