The pursuit of margin will more often than not come back to revenue. Components of revenue are heavily dependent upon decisions around price. Getting your price right is one of the most important decisions you will make. How do you know if your price is right?
While a common answer to this question might be “it depends”, I would suggest that a workable definition for your ideal price is one that maximizes your long term profitability. This simple definition accounts for both the maximization of margin, as well as the range of pricing strategy available.
As simple as this might seem, is this how pricing is established in practice? Do companies base their price today on a holistic picture of how their current pricing affects long term profitability?
While some companies certainly do take this approach, it seems that many companies develop pricing strategy based on the present. Companies tend to be price takers responding to triggers such as;
— What is the competition charging?
— What price will cover my operating costs for the next six month?
— What is a fair price?
In each of the cases an outside force is driving the price, and each of those outside forces is short term.
— The competition today will not be the competition tomorrow. – Competition is given, but changes
— Operating cost in the next six months, as a percent to total revenue, will change dramatically.
— A fair price now is not necessarily the right price for tomorrow – Customer value changes with time
Clearly we cannot ignore present factors, but are the influence of current considerations being balanced against the long term impact of those decisions?
The only way to know if you pricing right now is correct is to forecast and explore changes in pricing and volume over time.
Do you have a pricing forecast you are working from? Is your pricing linked to long term profibility or short term triggers?