Optimizing Price Balancing for Maximum Effect

06.16.20 10:00 AM

In the world of competitive business, determining the pricing at a company is one of the most significant challenges that upper management will face. Set prices too high and consumers will not engage with the brand, nor will the margin for profit remain in the business’ favor after considering the cost of supplies. Set pricing too low and it may be difficult or even impossible to recover the cost of production and turn it in to profit, regardless of how much is sold. This is where the idea of price balancing becomes critical.

What is Price Balancing?

 

Price balancing is the method used by businesses to weigh the aspects of service and determine an appropriate price that both generates revenue and remains fair and accessible to customers and partners. The idea of price balancing works in more than one way—it is not just about customers. Suppliers are also important to factor into the equation. While many businesses will spend significant time on optimizing the pricing for consumer-facing products, fewer will expend the effort to balance and tighten the relationship with suppliers, which can have a significant impact on final revenues (and will also provide information that can be used to determine an appropriate cost for the consumer).

Set vs. Get

 

The “set and get” mindset is so named because it directly tackles both sides of the issue: consumer pricing (what price a business will “set” its products or services at) and supplier pricing (the cost to “get” any necessary materials or resources needed to provide service). These issues—and especially “get”—tend to get pushed to the wayside in favor of increasing production or reducing costs. However, cost reduction is not the same as price balancing with suppliers; do both, and a business will see even more significant savings (with the caveat that cost reduction may lead to quality reduction). 

 

Cost reduction is achieved via choosing different options during the production or delivery of a product or service. A business may opt to use cheaper plastic or reduce its delivery radius to save money. Price balancing is different; this falls further in the realm of working out good relationships with suppliers on financing and building a strategic relationship to ensure that prices for the desired materials and services remain low.

How to Establish Better Pricing

 

Because price balancing is a two-pronged issue, establishing better pricing also falls into separate categories. Both are important when trying to improve the overall spending of a company, cutting unnecessary costs, and boosting profits while retaining (or even gaining) customers.

 

On the supplier side, a business that is trying to price balance with its partners will be trying to achieve or consider the following:

 

  • A strategic relationship: This includes primarily strategies like discount negotiations.

  • Customization: Is customization an option for the product or service? If so, does it cost more? Does customization need to continue, or can a standard product or service be offered? 

  • Order features: What sort of changes occur in pricing based on orders? For example, considering size (bulk ordering typically costs less), urgency (overnight or fast orders are more expensive), and delivery requirements that may be impacting the profit line.

Credit: If financing terms and credit agreements are part of the relationship, evaluate where this can be tightened through refinancing or otherwise improving rates and terms to benefit the company.

One important thing to note is that—perhaps unsurprisingly—even these supplier-centric considerations can (and should!) also be applied to consumers. Take a second look:

 

  • A strategic relationship: Does the business offer discounts to the consumer? Are these helping or hurting profits?

  • Customization: Can consumers customize the product or service? Is this required? Does the current cost structure of customization make sense?

  • Order features: Do any changes need to be made to order offerings like bulk ordering, shipping speed/options, or delivery requirements? Do customers have too much freedom in this area currently?

  • Credit: Can consumers avail themselves of any credit or financing options for the product or service? If so, are the terms both fair and favorable to the business?

 

As many businesses may have suspected, customer-facing considerations are the elephant in the room. Besides the above supplier-oriented questions, companies must also consider their direct costs in providing the good or service to the buyer.

 

  • Input: This is the area on which most businesses set their sights first. It includes common areas of renegotiation such as raw material costs, inbound freight expenses, quality, and composition.

  • Conversion: Consider the variable costs of offering the product or service. Is one location able to make two products but another can only provide one? Which locations have the most favorable terms? Can processes be joined to improve flow? Is production too labor intensive?

  • Freight: Consider the current offerings in outbound freight. Is the company paying more than it should based on distance, mode of transportation, itinerary, or location? What is the mode of fulfillment (fulfillment directly from the plant/business or via a depot)? Depots tend to account for higher cost due to overhead, secondary freight costs, and depot costs.

 

Businesses must also bear in mind two more generic but important considerations: competition and substitutes. If competition around the product or service is strong within the geographic area or among the target demographic, the company must consider ways that it can either differentiate itself to move away from the competition or double down on its offerings and beat out the competition directly. The answer to this issue will be unique for each business.

Similarly, businesses must evaluate whether appropriate competitive substitutes for their product or service exist. For example, a high-quality headphone producer might offer a product packed with features, but if the demographic has no interest in those high-end features, a low-end substitute that gets the job done will pose a significant problem—for more than one reason. Consumers will not only be unwilling to pay the price for the high-end item, but the business will also likely be unable to reduce pricing into the competitive range without making some amendments to features.

 

All companies will have to do their due diligence in examining these considerations, but price balancing has been shown to be extremely effective in improving overall profits and tightening the efficacy of a business. It should remain a high priority for businesses and should not be allowed to shift down into projects that will be tackled “someday but not now.”

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