Pricing Errors & Irrationality Affect Your Most Valuable Asset: Customers
Logically, it makes sense that a company might lose customers when they consistently quote prices that are too high or have the longest quote turnaround time among competitors. What’s surprising to most company leaders, however, is just how persistent and costly that problem is.
Pricing errors, i.e. invoicing prices you did not intend to charge but show up on customer invoices nonetheless, is the first factor in this cost equation. Customers quietly ignore those mistakes which result in underpricing in their favor, but complain loudly about mistakes which result in overpricing. Left unchecked, persistent pricing errors (albeit unintentional) will lead to lost customers. The second factor in the cost equation is a lack of price consistency and rationality, better put as irrational pricing.
In these cases, pricing doesn't make sense for a given circumstance, or customers can't correlate prices to their buying behaviors, or they receive inconsistent prices for similar transactions. They suspect they are being improperly charged most of the time, even if they can’t put their finger on it, and ultimately will defect to suppliers in whom they have price confidence. At Zilliant, we commonly observe that pricing errors and irrational pricing can each nip away one percent of profit dollars on an annual basis.
In fact, we worked with an MRO distributor having $690 million in annual revenue that discovered this firsthand. The business had 18,000 customers, each bringing in roughly $3,000 in profit dollars each year. With an estimated 1 percent of customers lost each year due to pricing errors, this MRO distributor was losing $540,000 in profit dollars per year. Compounding the effect of pricing errors, this distributor was also experiencing about 1% customer churn as a result of irrational pricing – an additional $540,000 in lost profit dollars. In total, something as simple as pricing errors and irrationality added up to a whopping $1.1 million in lost profit dollars each and every year.
Recovering Costs: Look Beyond Process Improvements
Undeniably, the true costs of process inefficiencies can be shocking with major repercussions throughout the business, and as a result, the initial instinct could be to focus on better automation. However, managing workflows won’t do much to improve costs in the long term.
The real breakthrough occurs when company leaders stop accepting cumbersome processes as an inevitable part of doing business and instead realize that certain processes should not be happening at all. After all, the shortest amount of time you can spend on an activity is to simply not do it in the first place. Price optimization can certainly boost you into that innovative echelon where inefficient processes don’t exist, but first, you’ve got to do your homework and find out where – and by how much – undertaking that innovation can benefit your company.
Seeking more insight? Learn more from Barrett on this topic in his Professional Pricing Society-hosted webinar: Are The Hidden Costs of Poor Pricing Lurking in Your Business?