How diverse products can ruin your business

Yesterday I talked to a dear friend who is also a web shop owner. She sells STEM-education kits to Swedish parents and sometimes to Swedish schools. If you didn’t hear the term STEM before it stands for Science, Technology, Engineering, and Mathematics. These skills are most likely good to know in the future.

“In kids-electornics we have two big-sellers” she told me. “One small kit retailing around $60 and a bigger kit retailing at around $130.”

“Then we have some other similar kits in the range from $80-$100. You basically get what you pay for, the more expensive the more STEM-experiments you can do.”

There’s basically only market demand for the big-sellers and therefore she decided to lower the price on the mid-range products to reduce stock. This is when something strange happened…

The surprise

Instead of an increase in sales (when prices were cut) there was an overall reduction in sales.

After some analysis there was one obvious but maybe not intuitive conclusion.

When prices of the mid-range kits came to close to the small kit (with the discount there was only a 10 % difference) it became more difficult to decide what to buy. And when it becomes difficult to decide there will be no sales.

What can we learn?

When deciding how to price make sure that it’s easy to differentiate products. Remember that price is a very important factor in making this decision. By keeping a clear separation of prices you help your customer to decide what to buy, and thereby speed up the purchase processes significantly.

Prices don’t need to be logical, just make sure they help the customer decide how to pick and choose your various options. It's equally important, no matter if you run a web shop or if you're responsible for a CPQ-system.

As a "pricing officer" you need to do quick changes and sometimes quick adjustments. Don't forget that the correct prices will help you both to sell and earn some money while doing so.

Five common pricing mistakes a CPQ solution will address

Pricing is difficult and also very sensitive. Changes in pricing is one of the most effective way to level overall profit.

This list of pricing mistakes can be used to build a good business case for a CPQ (Configure-Price-Quote) investment.

Weak controls on discounting

It’s not uncommon that sales representatives are given a lot of freedom when it comes to negotiating the price. This means what the profit per deal is very dependent on the person executing the sales.

Discounts are often given without a controlled won/loss analysis and are more based on gut feeling. This means that prices will vary very randomly.

Without analysis and a proper approval process these issues will not go away. This is something a CPQ solution will address.

Inadequate systems for tracking competitor selling prices and market share

It’s difficult to understand the completion and most companies don’t put any effort into analyzing the lost deals.

With a CPQ solution it’s possible to benchmark the won and lost deals in a very structured way. It’s possible to find what key features of the product that correlates with won deals and also what features that are typical for lost deals.

Cost-plus pricing

Cost plus pricing is still very common in the manufacturing industry. The problem with this approach is that it assumes that the customer value is dependent on the production cost. Everybody knows that this is not the case.

A CPQ solution can price on factors that are actually valued by the customer and at the same time ensure that margin.

Price increases poorly executed

There is a problem when price increases can’t be motivated. If we’re not providing any new customer value, why should I pay a higher price?

It’s essential to plan ahead and do price increases as your product improves. If your new engine will cut fuel consumption there is no problem to pay a higher price.

That’s why price increase should be coordinated with product development. This means that timing is essential. Do the math and plan ahead. This is a process that a CPQ solution should support.

Worldwide price inconsistencies

In a global market it’s no longer possible to have inconsistent pricing.

By introducing a central storage for local price it’s possible to understand and correct price inconsistencies. A CPQ solution normally connects the global and the local prices. This means that a CPQ solution introduces the possibility to have governance for local pricing.