In today’s competitive marketplace, pricing strategy can make or break a business. A thoughtful approach must balance covering costs, keeping prices reasonable, and ensuring sufficient profit margin. A successful pricing strategy will create value for customers while allowing the business to capture a reasonable share of that value to fuel business growth.
Below are three actionable pricing strategies that can be implemented to boost profitability as well as simplify pricing discussions with customers.
Pricing Methodology 1: Standardized Unit Pricing With Tiers
Off-the-cuff and untested pricing can be risky. To combat this, consider using standard unit pricing as a starting point for discussions with customers. Standard unit pricing can be further refined via tiers based on relevant customer sales metrics.
Recently, I was asked to create a standard pricing strategy for a large private-equity-backed logistics firm’s warehouse storage. The client’s footprint contained several distinct warehouse space types. However, the firm lacked a standardized price per pallet for each of the 10 or so warehouse space types. As a result, there were several examples in which Customer A’s price per pallet was four times lower than Customer B’s price per pallet for two pallets right next to each other in the same warehouse space type.
To maximize profitability, I prepared standard pallet pricing for each warehouse space type. I incorporated internal factors, including CapEx and operating costs, as well as external market influences, such as competitor warehouse space types. I also established standard pricing tiers, to allow for more competitive pricing to customers exceeding annual revenue thresholds. In collaboration with the pricing and sales teams, the new pricing strategy was rolled out, leading to an incremental $3 million in annual EBITDA the following year.
Pricing Methodology 2: Optimizing Pricing Curves Based on Price Elasticity
Customer price elasticity is the effect of a change in the price of an offered product or service on customer demand for that product or service. This concept is critical in effectively using pricing tactics.
One of my clients in the health-care distribution industry struggled with elasticity. They had lowered pricing of several SKUs, thinking that incremental volumes would compensate for the lower profit margin, but volumes sold remained relatively unchanged.
In response, I prepared a new pricing strategy to reflect empirical customer price inelasticity. I drafted new pricing curves for several key SKUs. These updated pricing curves addressed the fixed cost versus variable costs of production. The modified pricing curves also incorporated fundamental pricing best practices, such as monotonically decreasing pricing for incrementally larger quantities. The new pricing curves eliminated pricing incongruities — e.g., 120 ML SKU previously priced higher than 240 ML SKU. As a result, my client increased profitability by $2.5 million per year due to higher profits on 90 percent-plus of the SKUs with new pricing curves.
Pricing Methodology 3: Hybrid Pricing Model for the SaaS Industry
Certain industries, such as software as a service (SaaS), present special pricing challenges due to the idiosyncrasies related to usage. By offering a menu of distinct pricing options, companies can address these concerns.
One SaaS startup was growing rapidly, but its pricing strategy was unstructured, inconsistent, and inadequate. The CEO tapped me to develop a novel pricing strategy to increase sales and reduce complexity in customer contracts.
I drafted a hybrid pricing model that allowed customers to select their preferred pricing structure, including a combination of a base fee, a variable fee, and fees based on usage. In addition to identifying 10 pricing approaches, I developed a simple customer pricing tool that calculated customer pricing based on customer usage assumptions. The tool was rolled out to the sales team, to be leveraged on calls with potential customers. After a few months, the CEO shared positive feedback: Pricing was easier to understand, was simpler to communicate to clients, and generated significantly more sales.
Benefits of Leveraging Pricing Methodologies
Implementing the three pricing strategies above can help to navigate market challenges, attract loyal customers, and achieve sustainable growth. When sales and marketing teams understand and support these strategies, they are set up for success in effectively communicating new pricing to customers.
Whether you are a small business or a multinational corporation, it is imperative to continuously optimize pricing. Companies may also benefit from leveraging consultants with pricing expertise to successfully implement these strategies and generate incremental profits.
Brad Maltz W07, president of Brad Maltz Consulting Inc., is a pricing and profitability expert and has assisted clients in generating more than $125 million in incremental annual EBITDA via pricing and procurement initiatives.
