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The Internal Psychology of Pricing
March 13, 2011
Written By: Michelle Clark, Ph.D.

Pricing is the most powerful and least painful way to increase profit for your company (Fortier, 2011). It’s less painful than reducing costs or increasing your market share, and it has the fastest connection to your bottom line.

 

Over the past month, I have worked with three separate groups of CEOs on the issue of pricing. In each group, I posed the question:  “In your pricing strategy, how do you know you aren’t leaving money on the table?” Of the 30 very competent company leaders I posed this question to, only a handful had a confident answer to that question.

As a business psychologist, I don’t claim to be an expert in pricing strategies. I am, however, an expert at getting to the root cause of problems, how people make decisions, and difficult conversations. What I see over and over again in working with companies is that underneath it all, many internal pricing decisions are driven much more by emotion than fact, although the emotion often masquerades as logic.

In any decision to raise prices, there is a possibility for big gain, but there also is a big threat. The gain is increased profit for your company; the threat is loss of the business. At a time when the economy has caused widespread fear, the threat of losing the business is particularly powerful.

At a physiological level, the amygdala in our brain still responds to threats as if we were about to be attacked by a tiger, with a push to fight or flee. This is not the state from which we make our best, logical decisions. However, push back from our customers can lead us to make decisions in this way. 

How often have you heard this feedback from your sales force?

“The customer won’t buy at that price.”

“If you price it that way, we’ll lose that business.”

For most sales staff, it’s less uncomfortable to push back on pricing internally within the company than deal with the customer’s negative reaction to price increases. So, how do you know if your trusted sales member (above) is accurate in this assessment or taking the easier path?

One company I work with recently revised its incentive program. In the past, the sales force was incentivized based on sales figures. This company had recurring difficult conversations about pricing, generally with the sales staff pushing back whenever there was a price increase. The revision of the incentive program shifted the incentives from sales figures to profit. Thus, instead of making their life more difficult, a price increase now increased the commission of the sales staff. Over the course of 18 months, this company successfully increased the price 14% in the key segment of their business.

In a 2007 front-page article in the Wall Street Journal, Timothy Aeppel describes a revolution in pricing at manufacturing company Parker Hannifin. The historical pricing strategy was based on the assumption that pricing should be approached from the perspective of cost plus a profit margin on top. Their revolution involved shifting to a retail-based strategy. Instead of asking: “What does this cost us to make, and what margin do we need?”, the question changed to: “What is the value of this product to our customer and what is the customer willing to pay?”

As you reflect on your pricing strategy, ask yourself the following questions:

  1. Is your brain convincing you the risk is bigger than it truly is?
  2. Is your sales force choosing the lesser of two difficult conversations and restricting your prices?
  3. Are you building the right relationships with your customers so you get accurate market intelligence? 
  4. What assumptions are you starting from, and how do you question those assumptions?

 

 

 

Aeppel, T. Seeking Perfect Prices, CEO Tears up the Rules. March 27, 2007 Wall Street Journal

Fortier (2011), Presentation to Chief Executive Network, Atlanta, GA.

 


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