Pricing to increase profit margins

To improve profit margins we need to understand two things:

• If everyone offers the same product customers will choose on price (well wouldnt you?)
• If what we offer appears to be the same as everyone elses offering what we can do to differentiate it?

Most new products or services begin at the top of the curve in the diagram. The producer can charge more because it is new and different. But as products reach maturity and more competitors come into the market prices fall. Unfortunately many building and engineering products and services fall into this category. Look at bricks!

If we don't adapt or differentiate our offering, then we too will slip down the commodity slide to enter a commodity market, where goods and services really are bought on price.

Companies at the bottom of the slide can still survive but they have to reinvent their offering by getting closer to the end users and finding a new way of meeting their needs. Often this involves a broader offering and a new distribution channel that is shorter. Or maybe they decide to sell the basic core product at the lowest price. At this competitive end of the market there is only room for one large player. Unfortunately, many companies in the construction industry havent yet understood this which is why they are still complaining about low prices and margins. It is all in their own hands!

In any market the 'core' product or service accounts for 80% of a product's costs. But to the customer this part of what you are offering is just the same as the product your competitors' offer. So, how can you develop your offering to be perceived as very different, so you can charge more?

When you look at the diagram you can see that the 'soft issues', of the offering, shown in the outer ring of the diagram, focus on your service. This may only account for 20% of costs, but these things are what really makes your customers chose you. In fact the impact of these can be 80% of customers' perception of your organisation or its product/service.

We tend to think about the product as being the only thing that a customer buys. But in reality, customers chose on things like your company's reputation, whether you deliver on time, your payment terms and whether you phone back when they leave a message. In practice customers want a solution to their needs and they prefer to buy certainty. This is why some small garages are very successful. They give that personal service and even fill up your tank with petrol for you if you want. Just what some people need and they will pay extra for it.

There is usually an opportunity to beat competitors if we differentiate the way we meet customers' needs by choosing which elements of the augmented product are important to the customers you want to attract.

Even contractors can analyse the market and then break it down into smaller segments, which they can dominate. They do this by understanding which of the soft issues are important to the clients in that segment and by becoming experts at including them. With this expertise, they can often find even better ways of meeting clients' needs. The same applies to all markets.

Case study - Market research helps develop a pricing strategy to increase sales for a new product

Sales of a new cladding product were slow, in spite of its obvious advantages over traditional brickwork. The company needed to decide whether to halt production, adopt a new strategy to market the product or go in for a redesign. They asked us to find out why the product take-up had been so slow, and to review the pricing strategy.

We spoke to a large number of specifiers, contractors and clients working on a range of projects using some form of wall cladding. By taking a broad sweep across all the potential market we homed in on the ones most likely to deliver the highest sales levels.

Respondents said that lack of awareness and cost were the main reasons why the product was not more widely used. Splitting out the data from different industry sectors, identified which ones were most price sensitive. Comments from specifiers and contractors also highlighted that they still clearly perceived traditional brickwork to be the cheapest option.

After analysing the data, we suggested reviewing the installation process rather than the ex works price to find ways of reducing the products cost. One way to do this was to make the system less labour intensive to put up.

When the product was not going to be the cheapest option on a project, the company needed to promote the savings that it could make people in other areas, such as reducing construction times.

By looking at what drove the buying decision in each sector, the company could then determine if it was price or another factor that influenced sales the most. An appropriate pricing strategy was then developed for different sectors and project types.

What our clients have said when using us for Pricing projects:

• "We would work with them again - and recommend them."

back to top | home