During times of fiscal duress, pricing is often seen as quick way to diffuse the situation. In these situations, some react by wanting to raise prices while others want to discount pricing.
- 87% of executives and directors feel most pressured to demonstrate strong financial performance within 2 years or less
- 65% of executives and directors say short term pressure has increased over the past 5 years
Unfortunately, folks who advocate both approaches are sometimes in the same company. To allow cooler heads to prevail, stay on track to capture enterprise value over the long term and handle these pricing situations and many more, pricing governance is needed.
Download our Governance Best Practice Checklist Tool for help comparing your company’s practices to our list of best practices, and to achieve an overall picture of where your company stands with Price Governance.
Do not Raise Prices without Governance
Lets look at a real world use case of raising prices. Raising prices may be the quickest way to increase gross profit, improve earnings and increase enterprise value. If you have customers not on a contract, raising their prices will provide an immediate increase in revenue. However, without governance, this short-term fix can erode all three of these importance metrics; gross profit, earnings, and enterprise value.
For more information on creating and growing enterprise value, watch these two videos:
- Creating Enterprise Value- From Due Diligence to Post-Acquisition Integration
- Grow Enterprise Value with Customer Success
Wondering what you can learn from Uber’s pricing strategy? Click here.
The reason a short-term gain can lead to long term loss is because price is an important factor to how customers perceive value and differentiation. Maybe the most important. This perception can impact your sales process when selling to new customers and when asking existing customer to renew. How can governance help? A governance process can help since several stakeholders in the process can ensure sellers are armed to justify why the value delivered justifies higher price.
At the same time, customer success and support teams can explain that added services and other value is being delivered again justifying higher prices. If these teams are knowledgeable about competitive pricing and switching costs they will be more confident defending changes. If prices are raised without alignment and support from other teams customers can easily feel harmed, take to social platforms or look for alternatives. Over time, new sales can decrease, churn increase and brand perception take a knock.
Want to know more on value based pricing? Read “Why is your Value-Based Pricing Strategy not working?”
To illustrate why and how governance can increase enterprise value lets discuss governance best practices.
Do you have these Governance Best Practices in place?
- The CEO actively promotes a message of pricing to value
- Leaders hold sales leaders accountable for maintaining pricing levels
- The Strategy leader or Head of Pricing is responsible for pricing and reports to the CEO
- Several functions have input into pricing decision making
- Your pricing organization is responsible for strategy and does not get caught up in transactions
- The pricing strategy is aligned to corporate objectives
- Pricing strategy is refreshed based on competitive intelligence, market disruption and/ or when corporate objectives change
- All members of the governance team are held accountable to support and implement their part of the strategy
- Sales is armed with positioning and enablement in line with the strategy and how they need to execute
- Up to date competitive pricing information from sales, new hires, win loss and competitive intelligence is continually provided to the pricing team
To see how you can compare to best practices, leverage our Governance Best Practice Checklist Tool.
For additional help evaluating your Revenue Growth strategies, click here to download SBI’s mobile app.