Price Tag Strategy

Eight pricing practices that maximize profits, rather than merely increase revenues

By Per Sjofors

For a range of industries, price strategy is emerging as the most important resource for many companies to increase their competitive advantage. The vast majority of companies, like community banks, have spent years achieving gains through cost cutting, outsourcing, process re-engineering and innovative technologies.

However, the incremental benefits from these important activities are diminishing, and companies are looking for other ways to improve their business results. Many savvy companies are adopting price optimization efforts. However, there are good and bad pricing policies used by companies in various industries.

The following eight best practices come from companies that most successfully manage product and service pricing to maximize profits, but not necessarily overall revenues.

Best Practice #1: Set prices based on customers’ perceptions of value, not solely on company costs. Costs only establish a lower boundary for prices. But only when prices are set according to the perceived value of the product or service can profits be maximized.

Best Practice #2: Replace “marketplace pricing” with value creation. To avoid the price dilution of the mass commoditization of their products or services, the best pricing companies create additional value that extends solely beyond their products and services. The best-known example of this practice is Starbucks. By rethinking the entire experience of consumers’ coffee consumption, the company convinced many people to happily pay nearly $5 for what used to be a 99-cent cup of coffee.

Best Practice #3: Establish different pricing among different product lines. An iron law of pricing is that different customers will assign different values to identical products. For any single product, profit is optimized when its price reflects what the customer is willing to pay. Pricing should reflect a customer’s perception of his or her overall value of that product, making the price of another product completely irrelevant.

Best Practice #4: Create different pricing schedules for different customer segments. The value proposition for any product or service is different for different customers, and the best price strategies reflect those differences. Tailoring a product, its packaging, its delivery options, its marketing messages and its pricing to particular customer segments can create additional value among certain customers. The result is different profit margins among those different customer segments, and greater profits if done right.

Best Practice #5: Incentivize salespeople to achieve greater profitability, not merely greater sales volume. Volume-based sales incentives drain profits when salespeople are compensated to push volume, even at the lowest possible price. A sales team’s goals should be defined to maximize profitability. Profitability guidelines should be set for product sales, with strict controls imposed for pricing discounts and clear alternative offers established for salespeople to manage inevitable price negotiations.

Best Practice #6: Devote resources to managing pricing practices. Most companies use highly sophisticated procedures and technologies to track and control their costs in minute detail and in real time. Yet many companies undermine those efforts with simplistic price procedures. Good pricing strategies use hard data generated by modern methods—such as value attribute positioning, conjoint analysis or Van Westendorp’s price sensitivity meter—to drive a full understanding of the perceived value of a product or service, thereby enabling mangers to optimize prices and maximize profits.

The best price optimization also requires data, analysis and discipline. It comes from focused research, including surveys conducted by professionals who know how to obtain the most important information. Solely relying on salespeople and frontline customer service staff to learn about the value customers place on products and services can be unreliable; such information gathering is often haphazard and merely anecdotal, rather than precise and quantifiable.

Best Practice #7: Adapt pricing to changes in costs, competitive environment and customer preferences. Most companies fear a negative uproar from their price changes, and so they put off such changes. The best pricing strategies make customers and sales forces accustomed to regular price changes. The value proposition of a product or service changes along with changes in its marketplace, and pricing should always adjust, up or down, to reflect those changes.

Best Practice #8: Anticipate competitor reactions to pricing changes. Smart pricing companies know their competitors well enough to accurately anticipate and prepare for the reactions to their pricing changes. These companies understand that when they significantly lower their prices—which may temporarily drive increases in sales volume—competitors often follow suit, a reaction that could simply drive down overall prices in the marketplace.

Per Sjofors ( is managing partner for Atenga Inc., a pricing consulting and training company in Westlake Village, Calif.