What Businesses Must Know to Establish an Effective Pricing Strategy Today

Three tips to devising an effective pricing strategy, according to Susan Lee, Commercial Strategy Leader for EY-Parthenon Americas:

• When setting prices, first determine your business’s “strategic intent,” Lee says, by asking key questions such as: Are you trying to achieve higher profit margins? Or are you aiming for greater market share? What kind of customer segment are you pursuing?
• Leverage your market position and where your business has earned credibility among customers to charge higher prices for a product or service.
• Follow market trends to tap into what customers are willing to pay a premium for today, such as sustainable goods and health-and-wellness-related offerings, Lee said.

Businesses plotting pricing strategies today must cater to inflation-weary consumers, and set prices with “surgical,” data-informed precision based on key factors — from the cost of goods and services to the target end customer to market trends, said Susan Lee, revenue growth expert and Commercial Strategy Leader for EY-Parthenon Americas.

Lee should know. She brings more than two decades of experience to advising Fortune 500 firms to small businesses across industries — from consumer-packaged goods to retail to industrial sectors —on integrating profitable pricing strategies into their sales and marketing plans.

Here, Lee unpacks the key issues businesses face as they make pricing decisions in the current inflationary landscape, and the core tenets of an effective pricing strategy in any market.

Consumers’ price-sensitive mood calls for ‘surgical’ pricing strategies

It’s no secret that a perfect storm of factors has given rise to a challenging business landscape. “We work with clients across sectors and sizes,” Lee said. “What we are seeing is that with inflation, market volatility, labor cost increases, difficulty finding labor, and supply chain issues, companies have been struggling to stay afloat,” Lee told CO—.

The EY 2022 Global CEO report, which surveyed more than 2,000 executives from across the globe, found inflation to be their top concern, with 87% noting an increase in “input” prices, the costs incurred to develop a service or product.

“We’re now at the point where consumers are struggling,” Lee said. Unlike recent years where B2C businesses could pass along cost increases to consumers, that’s no longer the case, she said. Consumers faced with price hikes are now switching to lower priced brands and private label products, EY’s consumer sentiment research revealed.

In turn, “Businesses have to be a lot more surgical about where to take price increases and where to not take price increases,” otherwise they risk losing market share and losing sales volume, particularly for discretionary purchases like clothing and consumer electronics, she said.

[Read: Why Top Brands Are Using These Pricing Strategies to Drive Business in a Challenging Environment]

An effective pricing strategy begins with setting your business’s ‘strategic intent’ by asking these key questions

Before implementing a pricing strategy, business leaders must first answer a key set of questions to determine what precisely they’re seeking to achieve, Lee said. These include: “Are you trying to achieve higher [profit] margins? Higher market share? Who are you trying to go after? What kind of customer segment [are you seeking], and what product are you [selling]? Are you trying to capture the more premium market or are you going after the more value brand?’” she said. “Before you start to think about the price point, you have to think about your strategic intent.”

[Read: 6 Winning (and Adaptable) Customer Acquisition Strategies From Growing Brands]

Price execution: Measuring results by tracking both the net selling price and the list price

To track the results of a price execution strategy, businesses would be wise to give more weight to one critical yet undervalued metric: the net selling price, which reflects the price of a product or service after all discounts, costs, and taxes have been calculated, Lee said.

The list price, by contrast, also known as the catalog price or manufacturer’s suggested retail price (MSRP), reflects the price set on goods and services excluding trade discounts, deals, or promotions. When businesses make pricing decisions based on both the net price and list price, versus just the list price of a product or service, they’ve factored both upfront and hidden costs into the price-cost equation, which can lead to more profitable price execution strategies, Lee said.

When pricing a product or service, B2B and B2C companies often fail to recognize that their list price “goes through a journey of discounting to the customer,” she said.

For example, “Supermarkets will have a lot of flyers and promotions, and B2B companies might be offering rebates and invoice discounts,” Lee said. “What companies oftentimes don’t know is they may set a price increase at 5%, but once they go through that journey of discounting, they might be only achieving a 1% of price increase. The simple measure of what we are getting [via] the net realized price is a critical piece [of the pricing equation],” she said.

Lee also advises B2B businesses to track the “price achievement” of individual salespeople to optimize their price execution strategies. “We always encourage companies to actually look at the price achievement by salespeople. You can see which salesperson is doing a good job at price negotiation and which salespeople may need more coaching and training,” she said. “That’s certainly a way to get to the bottom of price execution.”

Smart pricing year-round and amid the critical holiday season: Charge a premium where it makes sense and lean into trends

Pricing doesn’t exist in a vacuum, Lee said. It’s one piece of a business-strategy puzzle that includes knowing your company’s market position and where it has earned credibility among its customers to charge more for a product or service.

Companies should determine where they can charge a premium, retreat from commoditized products and services that yield nominal profits, and “start to adjust their product assortments to win,” she said.

Those assortments should also reflect the trends that consumers are spending on, such as sustainable goods and services and health-and-wellness-related products, Lee said, particularly heading into the holiday selling season, when so many companies generate a disproportionate amount of their annual sales. “Having offerings that consumers care more about means you don’t need to discount as much,” Lee said.

Businesses must also consider the supply chain implications of their product mix. “Taking into account supply chain risk as you plan your upcoming offerings is critical,” Lee said. “You don’t want to be going to your customer with an empty shelf.”

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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