Pricing Power, setting prices based on value creation

Reduce the price by 5% means having to increase sales volume by 5.3% to even more sales, but? 14.3% for the same benefits (with a gross margin of 40%) 300% if the reduction is 30%!

Only 17% of companies claim to have a responsible price and only 39% is based on a computer program to help you in the decision making.

It is generally a function performed from other positions in the company, General Directorate, D. Sales, Marketing D., D. Purchasing and Product Manager, are those usually set prices.

And although two-thirds of the retailers have well-fixed prices, a third states that could improve and commits substantial failures.

Pricing Power, setting prices based on value creationHere are some facts falling from the II Study in Retail Price Management developed by Simon-Kucher & Partners conducted on 8,500 companies of which 50% turnover of over 100 million turnover.

The pricing is a key element in the company because they depend on the viability of it.

And if in companies of this size, highly qualified and with a functional division this is the situation, what will be happening to my neighborhood grocer?

A question I hope to answer in a few months, since I am preparing a course on Pricing Entrepreneur of the Bay of Cadiz and will be the time to know their concerns and needs.

One of the main enemies we encountered when implementing optimal pricing policy is the price war, is the 2nd country behind Italy most concerned about this and the obsession with volume.

The levers that determine corporate profits are the price, volume and costs (fixed and variable).

And the price lever is the least exploited as they often put the focus on costs and above all volumes.

But the price is also the biggest profit lever.

Profit = Price x Volume – Cost (fixed + variable)

Reduce the price by 5% means having to increase sales volume by 5.3% to even more sales, but? 14.3% for the same benefits (with a gross margin of 40%) 300% if the reduction is 30%!

But in terms of a reduction of 10% (with a margin of 20% and 50% share) should increase the volume by 100% for the same benefits.

In case of setting a rise of 10%, profit increased by 100%

Move prices up or down has a much more direct impact on the benefit of what at first seems.

Most companies set prices based on factors related costs. Few they based on the perceived value or delivered to the customer.

“The most important criterion for evaluating any business is, without doubt, the Pricing Power” Warren Buffett (2011).

The Power Pricing is the ability of a company to determine the price according to perceived or delivered to the customer value.

It is based primarily on the study of price elasticities rather than traditional factors such as costs or other associated with price declines.

Sensitivity to price changes are determined by the value that companies provide to their clients.

As Jack Trout said, why people pay 6,000 euros for a Rolex, possibly more inaccurate than 60 euros a clock quartz?

Perceived value. But the value, so that customers perceive it, the company has to create it. And here comes the communication

In 2011 the best driver image communication price was not reduced.

It’s time to change the USP (Unique Selling Proposition) by an emotional proposition associated with the sale, to an experience (experiential marketing) to serve as a lever to increase the perceived value and customer is willing to pay a higher price.

In addition, the prices associated with high added value / perceived, have a lower elasticity (sensitivity to price changes) to variations in them.

So forget about the price war, well control your pricing policy, and works hard to communicate your value and deliver it to your customers, your competitors are those who continue to work in the old way.

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