Blog 3: Your Pricing Strategy is Flawed!

Let’s address the elephant in the room: the way many companies determine their pricing is, to put it mildly, unwise. And I’m not even starting on Excel sheets that don’t tally, impossible combination calculations, or discounts scribbled on a beer coaster. No, I’m referring to strategies like basing prices solely on cost-plus a profit margin or relying exclusively on a technical BOM. In my view, that’s unwise. Here’s why, along with some improvement tips.

Risking to sound like a know-it-all, I aim to spark a dialogue. Over the years, I’ve scrutinized the sales process of more than 100 companies and, using our savvy sales configurator, optimized various processes. Often, it’s about rolling up our sleeves and securing agreements in the configurator. Here’s why a straightforward cost-plus approach falls short.

A Shortcut Approach

Traditionally, the cost price is the sum of all costs directly or indirectly associated with a product or service. By adding a certain profit margin to this, many companies arrive at their selling price. This approach, however, can significantly undervalue your offering. Imagine your purchaser secures goods for half the usual cost, reducing the cost price and, consequently, the selling price for your customer. Why pass the benefit of your purchaser’s savvy directly to your customers? After all, they were content with the original price.

Distinctive and Smarter

It’s wiser to calculate your selling price based on costs, profit margin, VAT rate, but also on your unique value proposition, industry, and competition. Start from your strengths. What unique value does your company offer? Use that as a lever while keeping an eye on the market landscape. Your selling price should also consider the competitive environment. Absence of competition might warrant a higher price; intense competition might necessitate a lower one.

Differentiating your pricing for options can lead to smarter deals. Giving discounts is another matter. Everyone loves discounts, and they’re often given away too readily. Differentiating your prices can be key.

Illustrating Price Determination

Let’s exemplify this concept: a product with a cost price of €97, after adding all overheads, is valued at €100. This is the factory-price. The next step is determining the base price, the price at which our sellers and dealers may purchase the product from our factory. In the Benelux, we find €100 reasonable. In England, we value it at €105, but in Sweden, where we’re still breaking into the market, €90 seems wiser. We then set our negotiation margin, resulting in our standard selling price. In the Netherlands, for example, it’s €115.

Here, there are opportunities to give discounts for valid reasons, controlled by salespersons, dealer managers, or directors. This way, you might even sell below the base price, but it’s a considered decision by three responsible individuals. This method allows for different strategies in different countries, known as price differentiation.

In Summary…

Simply adding a markup to the cost price is oversimplifying. Look at your added value and ensure you can differentiate. A good configurator enables you to tweak various settings without losing your mind, maintaining control over your bottom line. You can even sell below price and still feel good about it because it’s a calculated decision. If this sounds complex, it’s because it isn’t straightforward. However, we’ve thought it all through and encapsulated it in a smart configurator. This ‘gatekeeper’, a comprehensive toolkit, smartly guides you through the entire sales process. Want to know more? Read my earlier column ‘Unveiling the Power of a Sales Configurator’ or get in touch!