This post originally appeared on INSIGHT2PROFIT.com.
Several years ago, an Ohio-based specialty metal business made the decision not to charge for freight costs, even though their products were extremely heavy. The rationale? None of their competitors were charging, so they couldn’t either.
In reality, this company was No. 1 in the industry, so all those competitors were actually just following their lead. When the company realized what was going on, it had the opportunity to change the policy for its entire industry.
And so it did—collecting more than $1 million in additional revenues.
Smart companies know pricing strategy isn’t just about the price on the invoice. To have an immediate impact on your bottom line without formally raising prices, here are three areas to tackle first.
1. Freight Costs
If you’ve been operating for decades, your freight policies have probably been in place just as long. Maybe you don’t charge for freight at all, or fees are the same across all territories—or you charge the same as you did 50 years ago even though shipping rates have risen dramatically.
To start, ask yourself:
- When was the last time our freight terms were updated?
- What is our justification for our freight policy?
- What are our competitors doing in this space?
This line of questioning can help internal stakeholders determine if there’s opportunity for improvement without much effort, as the aforementioned specialty metal business discovered.
2. Rush Orders
When you place an order on Amazon.com and you want 2-day shipping, you understand you’ll have to pay premium pricing—in this case, $99 for a year of Amazon Prime.
Your customers realize this, too. Yet many manufacturers and distributors don’t charge extra for rush orders.
If your lead time is two weeks, but your buyer needs his order in three days, are you charging extra? In order to get that order to the buyer within his limited time constraint, you’ll have to disrupt your operation, move around other orders, and pay higher shipping costs. You might even put other orders at risk. You should be paid for those efforts, but many manufacturers don’t actively seek compensation.
Remember, if a buyer needs an order faster than usual, they’ll most likely gladly pay to get it sooner.
3. Volume Discounts
It’s natural to want to offer discounts to your biggest customers, but if you don’t have a discounting strategy in place, the practice can steadily erode your bottom line.
Discounts shape your customers’ perception of your pricing: With every discount your give, the lowered price becomes the new standard. The next time that customer calls with an order, she will expect that same price, even if the order is only half the size.
The key here is to communicate early and often regarding volume discounts. When buyers understand why they are receiving discounts for a specific order, they will begin to understand the rationale behind your invoicing and, therefore, not expect discounts with every order.
Additionally, the threat over-discounting poses on profit often goes undetected since most companies don’t truly know how much profit is lost when sales reps offer discounts. Your company does not need to ban discounts all together, but a discount ceiling should be put in place to keep your profits from decreasing too drastically.
Start Small (and Risk-Free) with Freight, Expedites and Discounts
Raising prices throughout each of your product lines can be a highly complex process that demands a lot of analysis. Freight, expedites and discounts are areas you can impact quickly without upsetting current customers.
Start by identifying improvements that can deliver the most profit with the least amount of risk and effort. The extra revenue you uncover can be used to support larger-scale strategic pricing efforts in the future, such as increasing product prices, which will require more time, effort and commitment.
Bad pricing practices are more common than you’d think. Find out why bad pricing happens to good companies in our free guide. Just click here.
Read here for more posts from Insight2Profit:
Pricing Challenge: Actual Versus Plan
Pricing Challenge: Price Leaks