The importance of pricing in a business

Business drivers: a focus on price management

Price management is a disciplined process in understanding different cost components of a business transaction as well as in eliminating unclear decisions. Its purpose is to improve the bottom-line growth of a business.

Maximizing profits is very important in every business transaction. The process is a very important approach for companies in indentifying and leveraging on new opportunities.  A lot of companies these days go through a lot of pressure just to increase their shareholders' income as well as to satisfy the demands of their customers. Price reduction is one of the things they usually do. Price management helps business owners to increase their efficiency, increase their sales, manage their supply chain and raw material sources.

Each company has its own maturity level with reference to the three basic areas of price management. These are:

*Price Optimization (Price Determination) – The process wherein the prices are determined.

*Price Execution (Price Delivery) – The process wherein the price is communicated to the buyers eventually which would eventually convert into a sale.

*Price Enforcement – The process supporting the negotiation and contract between sellers and buyers.

In order to conduct an effective price managing strategy, you need to learn its three important components. These are:

1. Recognize and qualify the value added to different customer

The costs do not matter to the customers as well as the pricing. The value added by the product drives the customers to buy. The added value differs for each customer. You need to know that your product line adds a different value to each respective buyer. It is important to know how to qualify the value of the product based on customer satisfaction. The "qualified value" helps in capturing some of the value created. Normally, a business can capture only around 10 to 20 percent of value created because of the different reference prices and other alternatives available to the customers.

2. Price changes need to be supported with an incremental analysis

Analyze the changes of pricing and changes in marketing budget. This is important in order to find what it will do to the current profit. It will also reveal how many incremental sales are needed to get back the current profit levels.  Sales management will push for price reductions so that the sales will go up which would help you know the price elasticity of a certain product. Results of a detailed analysis of price changes will help in determining the true price of a particular product.

3. Focus on the total margin for each customer

When you own a business, you need to look at the profit margins for each product as well as the total cost per customer. A single product may not drive the over-all profit, but it can generate corresponding sales to increase its total. Another factor with regards to profit equation is the cost. If you know the cost in serving the customer through the sale of a product, it will help your business decide the level of service that needs to be provided. You will also determine if the customer will help you profit or not. Classify each of your customers into Gold, Silver, Bronze, etc. based on profit that can be derived from a single customer. Keep the top customers happy in order to gain more profits. Good customer service equals profit.

Price management helps your business to focus on profitability through volume sales, to improve marketing and selling cycle times, and to promote faster implementation of selling targets and goals. All in all, price management makes every sales transaction easier as well as to keep track of your over-all business profit.