You want ask for external help with your pricing, hire someone more experienced in the topic, or consult your decisions with a specialist, but, considering your current plans – your budget is already stretched.
Is this your case, I have a solution.
Before you go for any consultant, either Valueships or someone else, I’m bringing you four exercises you can run in your company to roughly check how well you can optimize pricing and value to boost profits.
This is created for most companies, irrelevant if they’re SaaS, B2B custom software development, or e-commerce. Totally doable for most of you.
So let’s go.
Increase Your Profitability with Our 4 Steps
Our exercises include only 4 simple steps. They will allow you to make good pricing decisions on your own, give you a lot of insights, and perhaps – solve a few problems.
Here they are.
Step 1: Identify margin leakages – check your catalogue and invoiced prices
One of the easiest growth hacks I’ve experienced as a pricing consultant was using a simple delta method to determine price changes between catalogue prices and list prices.
First, you need to take the list of your transactions (if you have one-off sales) or monthly recurring revenue (if you’re subscription) and then run primary school-level mathematics. Effectively, you need to calculate the difference between how much customers paid you in terms of realized price vs. target price.
You can do multiple actions with it, to name a few:
- Increase prices to existing customers.
- Grind your sales reps for too-high discounts.
- Reduce the % sizes of the discount base to boost price positioning.
All of it will drive more top-line revenue, impacting your margins. We have written about it on our blog posts here.
Step 2: Build a price waterfall chart of your organization to gain visibility
As seen in the previous example, the waterfall chart is a powerful visualization of the flow. This is a money chart for every organization that allows you to gain insight into multiple things. Waterfall Charts are used to visually illustrate how a starting value of something (say, the beginning of a sales funnel) becomes a final value (deals made) through a series of intermediate additions (lead qualifications, conversations, stages) and subtractions (customers without reply, deals lost, etc.).
In pricing, it’s great to run it to determine the journey of your price via costs to serve the customer, discounts you give, and to identify where you leave money on the table.
Simply look at the example below:
At Valueships, we love them, as they are the simplest, most compelling explanation of obvious margin leakages. Every organization should have them.
Step 3: Redefine your quantified value proposition again
How many times did you do the value proposition exercise? The answer is not enough. You should be constantly in question of your messaging to the world. If something lasted for the last year, there is a high probability it’s already outdated.
We believe every value proposition can be quantified. Try to determine it via Economic Value Analysis.
For instance, the calculation is straightforward if you’re generating leads for other companies. You can determine the revenue uplift: # of new opportunities generated and the average price of new opportunities.
If you want to add a component of cost reduction, you can also add # employee hours saved and their cost. It builds a compelling ROI equation you can use to:
a) set your price with confidence,
b) defend it in potential conversations.
Step 4: Increase prices to existing customers for your best offering
You probably have that one product, which is your best-selling offering. Increase the prices for it by at least 20-30%. That’s it.
If it’s more competitive, you probably need to think of how much you can do it, but in most cases, there is a high probability of success here. Most of your clients are in a situation of “Will I purchase this solution?” instead of “Which one to pick?” Use it to maximize the likelihood of getting a higher willingness to pay.
Understanding Pricing Psychology to Maximize Profitability
You may ask: Okay, but why even bother yourself with understanding the whole pricing psychology? Why not outsource the job to others? And does it really matter for profitability?
First of all, you should be the one who knows how your company works, not someone from the outside. And if you understand your prices, how they work, and what value they bring to the customer, you can strategically set them to drive sales and increase revenue.
And it would be good to make your customers understand your prices, too.
Customers are more likely to make a purchase when they perceive the value of a product or service to be higher than its price. So, you can leverage this principle by highlighting the unique features and benefits of your offerings and framing them in a way that emphasizes their value proposition.
Another important consideration is shaping consumer perceptions. For example, using pricing tactics such as bundling and tiered pricing can influence how customers perceive the value of a product or service and affect their willingness to pay.
Moreover, by strategically timing and framing your prices, discounts, and promotions, you can create a sense of urgency and incentivize purchases without eroding their profit margins.
So, yes – incorporating principles of pricing psychology into your pricing strategy can help you maximize profitability and drive business growth. Then, you can make smart moves that ultimately increase your bottom line.
Parting Words
In general, our four steps are entry-level exercises. They work well if combined. Their concept is all about opening eyes and pushing you into certain margin-related aspects of your offering and company.
From our perspective, the more of them you perform, the more likely you will play with prices and build well-oiled revenue operations.
It naturally serves our mission to help build healthy, profitable companies, no matter if we serve them as clients.
If you have any questions about what you just read or anything else – feel free to ask.
