Is pricing strategy an art or science? It is some of both. The business owner / CEO know
the art of appealing to the company’s customers. The CFO must ensure the science of pricing
provides the critical foundation to execute the strategy profitably.
A strategy of ‘Simple Pricing’ may capture the attention of customers who shy away
from confusing pricing options. However, as I learned from a peer company, unintended
consequences can be a loss of profitable sales in excess of profits from new sales. Tiered pricing
usually evolves to provide consistent profit margins for varying product/service options with
varying costs. Converting to ‘Simple Pricing’ may be effective IF the mix of sales of the varying
options can be maintained, or profits from new sales exceed lost sales. In order to maintain
overall profit margins, ‘Simple pricing’ usually requires some customers accepting a higher price
while others enjoy a lower price than previously available.
The peer company I observed discovered that many customers realized the ‘simple price’
was higher for them and they were willing and able to pursue competitor products. The tough
question is how many customers are truly in a captive sales channel and will accept the higher
price to avoid the effort to change? At the other end of the spectrum, will new customers reflect a
mix of the previous tier options in order to provide a similar overall profit margin? Or, will new
customers consist primarily of those who will realize the simple price is lower for their respective
service/product option, and therefore provide lower profit margins from new sales? Again, the
peer company I observed saw a predominance of new sales with customers who realized the
‘simple price’ was now more favorable for them and they changed from existing relationships.
A strategy of a ‘Loss Leader’ may also gain customer interest. However, as I observed
happened to a company before being introduced to me, unintended consequences can be
significant cash losses. This company experienced sales shifting from 15% to 85% for the ‘Loss
Leader’ product. And the company was locked in to the price for a period of time as a supplier.
An acceptable overall profit margin may be achieved if product / service sales mix can be
controlled, or if additional profitable product / service sales are generated in conjunction with
selling the ‘loss leader’.
Whether considering a ‘Simple Pricing’ strategy or ‘Loss Leader’ pricing strategy, the
CFO must effectively communicate with the Business Owner / CEO to assess potential
consequences. Then, the CFO must develop effective scenario analyses to identify acceptable
versus unacceptable combinations of the change in product / service sales mix and overall sales
volume. Scenario assessment and analysis modeling can also be applied to compare ‘value
pricing’ and ‘low cost pricing’ strategy options.
A B2B CFO®
Partner can help with cash and profitability management to enable the
business owner / CEO to spend more time as the entrepreneur finding revenue opportunities.