How successful is your company in increasing prices without losing volume to competitors? That depends on your pricing power. This is part 2 of our Pricing Basics series.
In an ideal world, your company sells a unique or patent protected product, and there are few or no other players in the market. Then your pricing power is likely to be substantial. You can increase your prices without major risk of losing business to a competitor. However, for most companies, this is not the case, and pricing power is much more difficult to achieve.
What is pricing power?
The good news is that pricing power can be achieved, and low competition or market shortages are not the only criteria. When talking about pricing power, what actually is being referred to is, a company’s ability to get the price it deserves for the value it delivers. It has additional facets, for example the ability to transfer cost increases into higher prices, to establish new pricing principles and standards in a market, and to implement sustainable pricing strategies. This doesn’t come down to chance, but rather depends on the right measures and focus.
When is pricing power especially important?
Pricing power is often the difference between a company that succeeds and one that fails. There are, however, circumstances that indicate pricing power is getting especially important:
- You are not earning your cost of capital: Your products are chronically underpriced and you need to move up margins substantially.
- Industry pricing practices work against you: You have to cope with market disruptions and need to change industry practices in pricing.
- A price war is on the horizon: You have to cope with short-term opportunistic behavior in the market in order to avoid a price war.
How can you get pricing power?
Striving for pricing power often requires your entire company to embark on a challenging transformation journey. Here are four areas that are necessary to build pricing power:
1. Draw up a price roadmap
Only with a price roadmap can you ensure a clear and common internal understanding of where prices should be and align your pricing strategy and tactics. A price roadmap outlines the vision of target prices for the next three to five years. It is typically driven by profitability requirements, differentiated by products, segments or markets, and capped by import parities or substitution risk. How can you measure pricing power? Price roadmaps are also a useful tool for monitoring and controlling your actions to ensure your pricing strategy is enforced accordingly.
2. Enforce a pricing framework
Establishing clear pricing principles, standards, and tools within an overarching pricing framework is a prerequisite for discipline and guidance in pricing. A pricing framework helps you to clearly communicate and share pricing principles with everyone in your company. You may need to review and clarify your existing pricing principles internally, or establish completely new ones if they no longer reflect the market requirements or strategy.
3. Be clear about your targets
Transforming toward pricing power requires the best communication practices. Share your view on future prices with customers to allow them to plan ahead for respective price increases, and make sure your company speaks with one voice. Train your sales teams. You need to deliver a consistent storyline: send precise messages to your customers and reinforce the reasons for your price strategy and roadmap over time.
4. Lead to win
How do you get pricing power? You strive for it with your head, heart, and guts. Head means strong leadership of a skilled team that creates and delivers your roadmap to success. Heart is the belief that you deserve to make a return on your investment, and that a price increase is what needs to happen for you to win. Finally, your sales team needs the guts, will, skills, materials, and confidence to embark on your pricing power journey, execute your strategy, and ultimately reach your goals. Making this happen is a leadership task.
Read more from our expert blog series Pricing Basics:
Part 1: The Importance of Pricing
Part 8: Skimming or penetration pricing?