Financial Disease # 3
This is the 3rd blog in a seven part series regarding common financial issues. In this series I have coupled a common known medical disease with a common financial issue. In two previous blogs, I discussed Cash Hemorrhaging and Financial Ebola. This week, I will share Financial Disease #3 Cost to Price Dyslexia.
The medical definition of dyslexia is a difficulty with learning to read fluently and with accurate comprehension despite normal or above-average intelligence. This includes difficulty with decoding, processing speed, language skills and verbal comprehension. Dyslexia is the most common learning difficultly.
Cost to price dyslexia is a goods and services costing/pricing disorder characterized by difficulty in properly understanding your internal costs and markets. This is a common disability in small businesses. It occurs in businesses with normal to above normal vision and intelligence. Its primary cause is the presence of a collection of careless or stubborn traits that affect how your brain works. This condition can lead to sub-optimum pricing decisions, which can go undiagnosed for years. This imbalance decreases revenue and strains the bottom line. Once diagnosed and corrected a failure to communicate or manage this pricing change, can cause a loss of customers or create branding confusion within the marketplace. Below are three steps your organization can take to correct this common issue.
Step 1 – Take care to accurately determine your product cost under various discrete allocation assumptions and at various volumes levels.
Step 2 – Develop a price optimization model process; these are mathematical programs that calculate how demand varies at different price levels and assumptions. This modeling allows companies to play what if pricing scenarios in order to evaluative revenue and profit impact with changing price assumptions. Pricing is a powerful profit lever, which is inconsistently used by small to mid-sized companies. Price optimization models can be used for all products and services to uniquely tailor pricing for customer segments or other factors by simulating how targeted customers will respond to price changes with data-driven scenarios. Pricing hundreds of items in highly dynamic market conditions is very complex given all the variables, so modeling provides unique insights and can help to forecast demand, develop promotion strategies, control inventory levels and improve customer satisfaction. Another real value of price optimization models it that in the process of running different scenarios it will force the organization to clarify the business’s value proposition and establish strategic objectives.
Step 3 – Price is also a useful branding tool. Organizations must determine if they should compete on price or value. This decision will depend on a number or variables. For example, the core pricing factors are manufacturing costs, market place, competition, market condition, brand, and quality of product. Pricing is also a key variable in microeconomics price allocation theory, which makes decisions on the allocation of limited resources. Pricing is a fundamental aspect of financial modeling and is one of the four P’s of the marketing mix.
In summary, companies that have a good handle on their internal costs under different scenarios coupled with a clear understanding of their pricing sensitivities and the impact it has on their financial eco-system gives them a substantial competitive advantage in the marketplace.