OnDemand WTP Pricing Research

How good is your pricing strategy and how well does your sales team apply it? | Aggregate Research

In this, the second in our series of “ARI Management Masterclass” features, we are taking a look at pricing strategies. Between now and the end of the year, we are going to present you with a carefully selected group of in-depth features looking at the “Six Deadly Sins” that many aggregates businesses commit every day. Don’t be a guilty sinner. Be a business angel. We want to help you run things better, faster and more profitably. Today, it is all about getting the best possible pricing strategy in place.

The best way to value any business is to look at its pricing strategy. And the nice thing about pricing is that it is very easy to understand. It allows you to see how well your company is managing its processes. If you would like to find out how your business is doing, we have included a small quiz at the end of this article. Fill it in and get a set of personalised results along with an overall ranking of where your organisation sits as far as pricing maturity is concerned. Be warned; in our experience aggregates companies often leave at least 5% revenue on the table … and that is a big number.

Running a business in a way that creates shareholder value while staying focused on customers is a management challenge. On the one hand, the shareholders want the value of their investment to increase but, on the other, the customers demand competitively-priced products based on a sound understanding of their needs.

In theory, these are conflicting interests. The challenge is to find a way to see them as complementary and identify to what extent they are complementary.

The long-term success of any business is based on its financial performance, especially in terms of wealth creation on behalf of the shareholders. As we outlined in our previous feature, Economic Value Added (EVA) is a modern corporate financial metric being used by many leading companies to assess just this … their financial performance.

EVA gives a true sense of the business’s profitability because it includes the cost of capital. Stern and Stewart, who conceptualised EVA, claim that EVA has got better predictive powers than normal accounting procedures if you really want to measure and analyse the financial performance of a company.

And this is where accurate pricing comes in, because pricing has a huge impact on total revenue and is a key component in a company’s profitability. But how much time, effort and structured thought are you placing on this obvious driver for a healthy P&L statement and, eventually, a healthy balance sheet?

How many times have you heard company executives complain about how short-term profitability pressures are forcing them to sacrifice long-term wealth creation? In order to create wealth, the company has to maximise its total value and enhance its performance through the various operational activities it undertakes. If a company is giving more returns to its shareholders, not only will it be judged as a strong performer, it will also see its shareholder base increase … and vice versa.

Most aggregates companies set prices on the basis of their cost structure, or on their competitors’ prices. By doing so, they neglect the customers’ individual requirements and their perceptions of value. In contrast, aggregates customers usually assess the price they have to pay, and the value of the offer, according to its potential to generate a beneficial outcome.

Customer relationship management systems assist in managing the gap between the value assessments of customers and providers. Setting prices according to customer-perceived value is something we would recommend if you want to optimise profits and focus on customer lifetime value (CLV).

“The integration of CLV with pricing and customer profitability principles ensures efficiency of immediate pricing and inventory allocation decisions without sacrificing long-term revenues, resources, or valuable customer relationships,” say the experts at Commercial Performance. “Customers are increasingly being viewed as assets that bring value to your company.”

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How good is your pricing strategy and how well does your sales team apply it? | ari.