Tip Sheet
5
The Price Is Right:
5 Key Steps To
Optimal Pricing
When you set a price that’s too high or too low, it has real consequences for
your company in terms of revenue or margins.
If your price is too high, it’s fairly obvious: You don’t sell as many products as
you projected or your margin suffers. Customers may still be willing to purchase
the product, and it may fit a need, but it doesn’t have the value you originally
thought. This leads to heavy discounting.
It’s more difficult to know whether your price is too low, because customers
won’t tell you. In this case, no news is not necessarily good news.
The people responsible for launching products (sometimes called “profit-andloss owners”) use the initial price offering to calculate certain projections and
targets. If they are moving along and hitting their quarterly numbers, by the end
of the year, they think they’re doing great. But if you’re not getting feedback
from the sales team and customers that some think your price is too high, you
probably don’t have optimal pricing.
In the event of pricing too high or too low, the product owners have several
corrective options available: tweaking the product, pricing, bundling or
packaging.
UNLOCK YOUR DATA • UNLEASH YOUR SALES
The Price Is Right:
5 Key Steps To Optimal Pricing
How long it takes to correct this problem depends on the product, market and industry. Companies usually get
quarterly reports, and must meet quarterly and annual projections. Generally, it takes one or two quarters to get
the sales data back and re-strategize, but that depends on the product value: A simple product that costs $100
takes less time than a complex configured product that costs $100,000.
No matter what, the time it takes to identify and correct these pricing errors is time your sales are likely to suffer.
So it’s best to get the price right from the outset.
Setting The Right Price
Here are five key steps when creating an optimal pricing range for a new product:
1 Determine the type of product you’re pricing
Are you launching a new product to replace an existing product? Is it a “me too” product that
copies a competitor?
2 Determine the pricing strategy
The strategy depends on the product type. If a company is just copying a competitor, there’s
not much to be done when setting the price range. But if you’re launching a new product or
solving a new challenge, you have the option to focus on a value-selling strategy when creating
the price range.
3 Use competitive data to determine need
Here, the goal isn’t necessarily to set your price range but to see what products competitors are
offering. Use this data to determine if there’s a need in the market.
The Price Is Right:
5 Key Steps To Optimal Pricing
4 Analyze historical data and segmentation
A number of different data points go into creating the price range, but the two that deserve the
most scrutiny are historical data and segmentation. Here, you’re looking at past history or other
customers to determine purchase patterns and what products go together.
5 Analyze market trends
If you’re introducing a brand new product and using a value strategy to create the price
range, you should focus on market trends, rather than analyzing competitor or historical data.
For example, you might conduct a survey to figure out what value this product brings to the
market.
Once you’ve gone through these steps, the pricing typically needs to be approved by whoever owns the
profit and loss for that business or specific product. In manufacturing, for example, the product manager
usually decides on the price, because he or she is ultimately responsible for the profit and loss, margins and
performance. In distribution, consumer packaged goods or food, it’s probably a category manager.
In some situations, the department vice president may also need to review and approve pricing. Occasionally,
finance or sales get involved, because sales ends up determining in the field the customer’s perception of that
product and if it actually contains the value that the product manager perceived.
Other stakeholders, such as pricing analysts and sales managers, may also influence and provide feedback to
those who have the profit and loss responsibility. Decision makers should take their feedback and experience
into account.
Given the amount of time and effort that goes into setting your pricing — and the risks of getting it wrong —
it’s important to get pricing right from the beginning.
Ready to learn more about how pricing and revenue optimization could help your organization?
Visit the PROS Pricing Effectiveness Blog for expert insights and guidance.
About PROS
PROS Holdings, Inc. (NYSE: PRO) is a big data software company that
helps customers outperform in their markets by using big data to sell
more effectively. We apply 29 years of data science experience to unlock
buying patterns and preferences within transaction data to reveal which
opportunities are most likely to close, which offers are most likely to sell
and which prices are most likely to win. PROS offers big data solutions to
optimize sales, pricing, quoting, rebates and revenue management across
more than 40 industries. PROS has completed over 800 implementations
of its solutions in more than 55 countries. The PROS team comprises more
than 1000 professionals around the world.
To learn more, visit pros.com.
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