Pricing Policy (Part 2)

How to obtain higher prices:
Many firms reduce prices since the experience curve, increasing competition and rising customer price sensitivity stimulates such actions. The other side of the coin is that inflation, stock market expectations for growing profits and the difficulty of finding enough products to replace established ones creates pressure to increase margins.

There are six ways to increase prices:

1. Influencing the psychology of the sales team
The sales training would focus on:
Profit rather than orders
Negotiate the benefits rather than the price.
Instill courage in the sales force to take risk in pushing for a justified price increase
Sales force incentives to encourage a focus on prices
Professional negotiating skills

2. Contracts and terms
The shift towards long-term relationship favours such an approach and can have enormous influence on profit margins.
The common type of contract is that which has an escalation clause built in.
The cost plus formula also protects the margins.
A reduction in discount acts as a price increase.

3. Demonstrating values rather than products.
The aim is to demonstrate how the product differs from others in the market rather than selling a product.
Sell packages that include services, technical support, terms and guarantees.
Show the economic value to the customer.
Build the brand to reduce the risk and confidence involved in buying a well known brand.

4. Segmentation and positioning
Recognise that customers differ greatly in the levels of price sensitivity. For some its the dominant criterion, while, for others, its the service, quality and image.
Understand the factors that influence the buying decision of individual customers and formulate segments.
Devise different types of packages and price levels to each segment.
Multi-branding strategy - differentially priced brands are targeted to different segments of the market.
Use fighter brands to defend market share in low-priced segments without cutting prices across the entire market.

5. Exit Barriers
Barriers make it difficult to switch to another supplier. Barriers include:
Levels of service
Loyalty schemes
Electronic data exchange links between supplier and customer
Provisions of specialised equipment
R&D partnerships.

6. Innovation
Innovation offers the customer superior value and this is the only way to achieve better prices. The obvious source of innovation is
Improving old products
New products
New market concept