Do Business Well

9. Strategic divisionalising of the policy

Your pricing policies are first and foremost intended to result in a profit for your company. There are several instances where an adjustment in price can achieve a particular objective, such as:

• the maintenance of present activity levels;
• to dispose of slow moving stock;
• to introduce a new product to the market;
• to deter the competition;
• to increase the sales of other products by the use of loss leaders.

You should always proceed with utmost caution and remember that the main objective is to achieve a profit for each and every item you sell.

10. Evaluate the cost of price reduction in the form of discounts

If discounts are part of your pricing policy they need to be evaluated in just the same way as any other expenditure. Without a corresponding increase in sales a price reduction simply takes a slice of the profits or adds to the losses.

11. Review the discount policy

Again, this needs to be positively reviewed periodically. Discount review may provide an opportunity for increasing your company profits. A change of emphasis may change product sales mix to your advantage.

12. Educate the sales and commercial staff about the purpose of the discount policy

In many companies pricing policy is determined at management level and then issued as a policy to the sales team. Perhaps if they were aware of the reasoning behind the policy, the objectives might be achieved more quickly.

13. Examine discounts/price reductions

There may be a tendency for certain sales areas, product or customer groups to be rather more costly than the average. Certain sales staff may offer discounts as their main plank to achieve a sale whereas another sales person taking a different ack may be just as successful without incurring the same cost. Similarly, customer or product groups need to be watched, and branches and divisions also.

14. Control discounts

Referrals to management for approval to allow a discount enable the manager to have control of the cost of discounts.

15. Link discounts to a specific benefit for your company

Wherever possible, discounts should be earned by the customer. Discounts may be more cost-effective for your company if they are linked to customer performance levels, eg bulk orders, prompt payment, target achievement, stock levels, market support etc. At the very least, try to make the customer feel as though he has to earn his discount. Otherwise he may look upon you as an easy touch and you will end up selling discounts instead of products.

16. Relate discounts on sales to discounts on purchases

It is a good sign if your buying is as profitable as your selling. As a general guide you should be earning discounts on purchases equal to, or at least in proportion to, the discounts you are giving to your customers.

17. Examine the effect of an increase in selling price on profitability

In the same way as companies frequently calculate the effect on profits of a reduction in selling prices, a calculation of the effects of the opposite alternative may be worthwhile. Such an upward movement in price levels may result in a downward demand. A lower level of profits may not necessarily follow and for certain loss-making product groups it doesn’t follow that losses will increase. A lower activity level at better prices could be more profitable. Such a policy will give you the opportunity of examining all other operating cost levels.

18. Calculate break-even points and profit volume ratios per product group or division

The finance department can calculate the optimum mix/ volume of your products sales to achieve the highest overall level of profitability.

19. Use the occasion of a price increase as an opportunity to increase sales

Try and roll a price increase into as attractive a package as possible for your customers. By giving advance warning of the effective date of an increase and by timing the increase to coincide with a slack period in the year you can capture additional sales. Be careful, however, to avoid simply bringing forward orders that you would have received anyway and at a better price. At all times make sure that out-of-season discounts are of real benefit to you.

20.Present your prices in the most suitable manner for your customers

Orders can be lost because the pricing policy falls short of what the client really needs. Every customer wants to know how much the product is going to cost him. That is inclusive of such items as packing, delivery, installation, insurance, freight etc. A client in an overseas market is unlikely to be impressed with an ex works unpacked price. He needs to know the total cost or at least have to hand enough information, such as a packing specification, to enable him to calculate the total.

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