Having an effective pricing strategy can put your company worth on steroids
When you look to sell your company one day, an acquirer will probe your pricing strategy during their due diligence. If they see that you have a strategic approach that is reflected positively in the gross profit your company earns, this will go a long way in giving them reason and confidence to pay more for your business. But if they see you are lacking good pricing disciplines, it might excite them to buy your company so they can fix and benefit from this, but you can be sure they won’t be rewarding you in their purchase price for this opportunity they can pursue.
Let’s get right to great questions to sit with your sales, marketing and finance teams to discuss:
- As we look at our portfolio of products/services, are we clear on which ones are delivering our target gross profit and which ones are not?
- For those products/services we are not achieving our target gross profit, is it our raw material costs, labor cost and/or pricing that we should address?
- Is our pricing strategy set for each product/service and segment we serve, or do we have a less effective one strategy serves all approach? Optimal pricing strategy is when you set it by product/service and by submarkets because the value derived by your customer is different potentially by submarkets so your pricing should reflect this.
- What is our pricing strategy based on? Do we set our prices based on our costs, on where our competition is priced, or on the perceived value by our customer (in each submarket)?
- Over time, has our product/service pricing become predictable? Do competitors find it easy to predict what our pricing will be and set theirs accordingly or have we done a good job of being unpredictable?
- Who owns establishing the pricing strategy within our company? If it’s not being owned by a particular person or department then it’s very unlikely that your pricing is not optimal.
- Who is the market leader in terms of setting pricing in your industry? Most often in industries there is a company that sets the bar for the other players – is it you, is it someone else that is the market leader as it relates to setting the baseline for pricing?
These are just a few good questions to facilitate a pricing strategy discussion. Use time as a friend to have these types of discussions with your team and leverage pricing to help build the long term worth of your company.
