In the previous articles, we have shown you how to:
_create a focus article list in just 60 minutes,
_segment your focus articles intelligently into four groups, and
_tap into the secret of effective pricing rules.
In the following article, we will show you how to skillfully define your pricing floors.
By this method, you will be only one step away from independently and individually determining your pricing strategy in order to secure long-term margins whilst simultaneously gaining shares in revenue.
Decide for yourself whether you wish to avoid profit destruction or instead operate according to the motto, “No risk, no fun”?
Controlled evolution vs. aggressive revolution.
Consider, first of all, which strategy is best suited to your company and select this carefully, appropriate to your business goals. Ultimately, the lucrative potential of price reduction or increase is dependent upon the resulting reactions in volume.
The current profitability of your items represents the safety net of your pricing strategy. Avoid in any event profit destruction with regard to your current state.
Advantages: Things can only get better, since you have already decided against a destruction of profits. Even modest price reductions with associated increases in sales can counteract value destruction for you. (See example)
Disadvantages: DThe leeway within your price management is restricted. You can only act slowly and achieve smaller scaling effects. You thus have a poorer bargaining position with your suppliers and less influence upon your purchase prices.
- Roughly predict, first of all, what sales increase is possible upon reaching your individual pricing position. To this end, you will be using your market knowledge and experience.
- Calculate the price, which, at the current margin given and with the possible increase in sales, suggests to you no profit destruction.
Top Artciles: Top Articles: You reach Position 1 and as a result expect a volume increase of 33%. At a gross margin of 20% you can absorb a price reduction of 5% without destroying profits. Your pricing floor thus becomes your current price minus 5%.
Always strive for Position 1 in pricing, even when this implies a loss in margin for you.
Advantages: Through your leading market position, you will achieve a growth in sales, form a pricing image and rapidly attain high scaling effects with these reduced prices.
Your increased market share places you in a better position with regard to your suppliers and, if necessary, you may negotiate new conditions. Such scaling advantages thus offer young companies, above all, a major advantage.
Disadvantages: The dangers of price spirals and loss of profit are increased. Pursuit of the desired pricing position can lead to the resultant price reductions fuelling unrealistic (or unfeasible) volume increases. Additionally, an unfavorable pricing image risks badly selected prices arising amongst your focus articles.
The long term adoption of transparent pricing measures offers more promise of profit than short duration pricing campaigns, as the example of Praktiker has shown. During its pricing campaign of 20% off everything, except for pet food, the Praktiker DIY chain positively influenced customer pricing perceptions initially. This, however, led to many customers buying from their stores only during the campaign, followed by a retreat in turnover during those campaign-free periods.
The significance of correct pricing floors will become obvious upon observing the following two extreme situations:
_ If you set your floors too conservatively, you will be preventing attractive price reductions, , which can lead to rising sales and thus a profit increase.
_ Pricing floors too broadly defined, on the other hand, lead to value destruction, that negatively influences your pricing image and can result in heavy margin losses.
In the fifth and final part of our Online Pricing Guide, we will be showing you how to actively rollout your defined pricing management.