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What’s Really Behind Most Pricing Problems

If you had a broken leg, would you want some ibuprofen to treat the pain or would you rather have a surgeon set your leg and give you a cast? If you had pneumonia, would you like a cough drop or an antibiotic to get rid of the infection?

When it comes to a serious illness or injury, treating the symptoms isn’t going to cut it. A painkiller might help in the short-term, but you need to address the root cause if you’re going to find true long-term relief.

The same is true for pricing problems. Unfortunately, organizations frequently spend their time trying to treat a symptom instead of addressing the root cause of the problem. They jump from the symptom right to solutions without taking he time for investigation, findings, and diagnosis.

To understand what we mean, it’s helpful to consider a real-life scenario. At one B2B firm, product managers noticed that a particular line wasn’t meeting the organization’s profitability objectives. This was the symptom of the problem.

The product management team wanted to jump right from the symptom to a proposed solution, namely raising prices.

But in this particular case, the pricing team did a little investigation before giving in to the product team’s demands. First, they triple-checked all the data that had led them to their current pricing levels, and they confirmed that current prices appeared to be sound. Next, they ran simulations which showed that increasing prices would decrease sales, making the product line even more unprofitable, so they knew that raising prices wasn’t the correct solution to the problem. Then, they took a deeper look at the numbers the product team was using to calculate the profitability of the line.

They discovered that part of that calculation included a transfer cost for a component being manufactured by another division of the same company. The transfer cost being used was actually the other division’s list price for that particular component—even though all other customers were paying a much lower price for the same item.

The team presented their findings, and everyone agreed that the real problem had been the methodology of the profitability calculations. The obvious solution was to use a more realistic transfer price when determining the cost basis. The pricing team also put together a stacked-margin model that better explained the true profit the company as a whole was seeing from the product, and they discovered that it was actually one of their most profitable lines.

In this case, the quick-and-easy solution to the perceived symptoms would likely have led to the elimination of one of the company’s best products. While the results might not be as dramatic in every case, it’s always a good idea to do some investigation, put together some findings, and make an accurate diagnosis before proposing a solution to a given pricing problem.

To see how this process applies to other real-life pricing problems, check out the article titled “Exploring the Root-Causes of Pricing Problems.” It walks you through seven case studies experienced by other B2B firms, and shows the importance of treating the root cause—not just the symptoms—of pricing problems. You might just find a parallel to your own experiences that will help you better diagnose and treat perceived issues at your firm.

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