Are your business profits in jeopardy?
Years ago one of my bosses came to me and said, “Janene, you’ve got to help me. The management team is having a heated debate about what’s more important value pricing or transactional pricing. As I’m not the expert, I need to know what to tell them. So, which is most important?”
I smiled and said “Neither. Both.” Then I went on to explain to him my theory called the Leaky Bucket of Pricing. Most people have a very limited understanding of what pricing is. Which means they aren’t doing the right things which ultimately affects your business profits.
Prefer to watch this in video format, check it out here.
In this episode
I’ll share with you the theory of the Leaky Bucket of pricing. We’ll take a look at what it means you need to be aware of and what you need to be doing differently. This will help you make better business decisions and do the right things to grow your business profits.
Let’s take a look at the Leaky Bucket of Pricing. Watch the video above or listen to the podcast, click below.
Note: Time stamps are relevant to video and not the podcast audio.
- 0:00 Introduction
- 0:23 In this episode
- 0:57 What are value and transactional pricing?
- 2:11 Which is more important
- 2:31 The Theory
- 5:20 What this means for you
- 8:09 Know your positioning
- 9:19 Price erosion
- 10:59 The ultimate goal
Favorite quotes from this episode:
“The important thing here is that if you are giving discounts all the time and always making special offers to people then the holes in your bucket are quite large and it’s going to make it difficult for you to actually build profit in your business.” Janene
“…as someone who’s doing pricing in the business, you have to pay attention to both how you position your prices originally, as well as what you’re doing on each and every transaction. Because it’s the combination of those two things that allows you to fill up your bucket most easily.” Janene
“What happens with all this discounting is that you think you’re selling at the price that you have on your website (or price list). The reality is you’re selling at all these other prices and they are all lower. Those are holes in your bucket. … Then you can have the situation where you’re actually not aware of the final prices that you’re getting for what you’re offering.” Janene
“When you understand the relationship between those things (positioning and transactions) and you keep them both in the front of your mind, you can actually make better decisions about what to do in your business when it comes to the pricing. Janene
Connect with Janene
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(Note: this transcript has been edited based on the podcast)
In this episode, I share with you, my theory called the leaky bucket of pricing. [00:01:14] It’ll help you understand two of the main areas that you need to focus on when it comes to pricing in your business. Grab that cup of coffee. Sit back, relax, and enjoy the episode.
[00:01:27] Today we’re going to talk about a theory that I came up with a few years ago called the Leaky Bucket of Pricing. Before I get into what it is, let me tell you a bit about how this came.
[00:01:39] I was working in a large corporation and one day my boss came to me and he said, Janene, you got to help me. There are a bunch of executives arguing about what’s more important to focus on in a business, specifically ours at the time. What’s most important? Should we be focusing on transactional pricing or value pricing? [00:02:00] Now for those of you who aren’t familiar with both of those terms. Let me explain. Value pricing is all about how you’re going to position your products. How are you going to capture the money that represents the value that you provide?
[00:02:13]It has all to do with the positioning. Now, transactional pricing on the other hand are the actual prices that you are invoicing people for, or you can say each and every day.. Each and every transaction that you make, what is going on with the products. Because let’s face it. Sometimes the prices we set and the prices that we get end up being different.
[00:02:36] And that’s where transactional pricing comes into play.
The debate amongst the management team
This was the debate that they were having at the top level about, okay, where should we invest our money and our time and effort focusing on the most. When he came to me, they were having quite a debate about this and he didn’t know how to answer that question.
[00:02:54] He wasn’t a pricing expert, although he was at the time, my boss. He came to me and he’s like, what [00:03:00] do I tell these people? Because we need to move on from this discussion. Well, he asked me, so, which one’s more important? I said you both. And neither. It was one of those things that there wasn’t a direct answer to that question.
00:03:15] The best that I could do was explained to him that actually both were important. And here’s where the leaky bucket theory comes into play. If you think of the profit in your business, you’re trying to collect profit and what we use to collect things oftentimes there’s a bucket, right? So think of a bucket, of profit, that’s what you want to achieve in your business.
You positioning & transactions determine your profits
[00:03:35] Value pricing (your positioning) is like the tap. When you try to fill a bucket with water, you put it under a tap and you turn the tap on. Now, when you’re doing value pricing well in your business, then you have a lot of water pressure. A lot of water or profit in this case can come into your business because you’re capturing the value that represents what you’re delivering customers.
[00:03:59]If you [00:04:00] want to have good water pressure, you want to make sure your value pricing is good, so that you’re capturing as much money as you can, based on the value that you’re delivering.
Now, transactional pricing is kind of like the holes that you have in your bucket, right? So if you have lots of little, teeny, tiny holes all around your bucket, then you’re going to be leaking water or leaking profits out of your bucket, right? We call this price erosion, is one of the ways which we refer to this leakiness in your pricing. And that happens through discounts and rebates. The important thing here is that if you are giving discounts all the time and always making special offers to people then the holes in your bucket are quite large and it’s going to make it difficult for you to actually build profit in your business.
Your business profits are related to your actions
[00:04:58] Now you start to [00:05:00] see why it’s so important that as a business owner, as someone who’s doing pricing in the business, you have to pay attention to both how you position your prices originally, as well as what you’re doing on each and every transaction. Because it’s the combination of those two things that allows you to fill up your bucket most easily.
[00:05:22] Right? So with the tap, with the value pricing, you can have good prices and a nice flow of profits coming in, or it can have little drips and trickles coming in because you’re not earning enough on the position that you put in there. Let me clarify. You’re not earning enough because you’re positioned wrongly, right?
[00:05:42] As with the transactional pricing. If you got holes in that bucket, it doesn’t matter how high you have that tap, turn. Yeah. All of your profits, all of that water is just leaking out the backside. That’s what this theory of the leaky bucket of pricing is all about. Let’s take a look at what this really [00:06:00] means for you as a business.
What can we learn from this?
[00:06:02] The first thing is that you need to pay at least equal attention to these two things. Now, if you’re in a business where you are not going to be discounting ever, then the transactional part probably is something that you don’t need to manage as closely.
[00:06:24] This can also apply if you’re selling to different channels. Let’s say you’re selling a bunch of products online for pets, but you also, sell those products that you produce for pets, you sell them directly to pet shops. You have probably a discount that you offer pets. And maybe you have different discounts for big pet shops for boutique pet shops, maybe for animal shelters, you have another discount.
[00:06:53]What happens with all this discounting is that you think you’re selling at the price that you have on [00:07:00] your website. The reality is you’re selling at all these other prices and they are all lower. Those are holes in your bucket. If you’re not consistent about how you’re doing those discounts, and sometimes you offer this here, sometimes you offer that there.
[00:07:15] Then you can have the situation where you’re actually not aware of the final prices that you’re getting for what you’re offering. This again, is going to relate to the holes in that bucket.
What if I have an economy strategy?
Now on the other hand, if you’re in an economy strategy business, so a business where you’re trying to be the low price leader, where you’re really trying to give the best prices at the consequence of value, then with the value pricing [00:07:46] you might have a relatively slow tap, right? You’re not positioning yourself to earn a lot of money on each and every transaction, but that means you’re going to have to spend more time and be even more careful with what you’re doing on the [00:08:00] transactional side, because you’re not going to be able to balance that with being positioned in a relatively high way.
[00:08:07]Those are two exceptions for most businesses. You’re going to need to focus both on how you’re positioning yourself in the market, as well as what the price is for every transaction. It’s really important that you understand both. And in a few cases you may emphasize one a little bit over the other. However, for the majority of you you’re actually going to want to pay attention to both fairly equally.
Your positioning is the starting point
[00:08:33] What’s another thing that is important in this context of the leaky bucket. So the next thing is really about understanding your positioning. Your price positioning, when you have the correct price positioning, then each time you have to, you sell a unit of that you actually get to optimize the price volume point, right? There’s a point that [00:09:00] we kind of searched for and pricing. We’re looking, where’s the price where we can optimize the volume because then we can have the most revenue because revenue is price times volume.
[00:09:10] Well, when you’re focused on value pricing, and your understanding this tap at the top of your leaky bucket, or hopefully not leaky bucket, then you can actually optimize that better and make sure you have as much pressure water, pressure, profit pressure coming out of that tap as you want. Again, this is going to help you fill that bucket up as quickly as possible.
Let’s talk about price erosion
[00:09:35] Now there’s another of topic here. That’s really important that I’ve, I think I mentioned once, but I’ve also been alluding to and that’s price erosion. A lot of times when we’re talking about things, I’m discussing pricing with you or guests on the show, we’re talking about getting those prices up there, pushing them up.
[00:09:52] Well, one of the things that many companies deal with, and even right now, it’s a big topic and that’s called price erosion. [00:10:00] Price erosion is when over time your prices are actually starting to fall and this usually will happen first on a transactional level. Then when you’re doing price reviews, you’ll notice that the prices are starting to fall and you’ll start taking actions to mitigate price erosion. You might take away some of the discounts. You might even lower your price, but remove some of the discounts. So that at the end, the transactional price goes up a little bit. There are different tactics that companies use to do this. This is also important to your leaky bucket.
[00:10:36]You can liken it to putting band-aids over the holes in your bucket, or sealing up some of the holes in your bucket. That will help you reduce price erosion so that when you turn that tap on, as much as you possibly can, your profits are staying in that bucket. So you can enjoy them with your employees and your loved ones and whatever [00:11:00] later on.
[00:11:00] Right. So that’s really important to understand. Price erosion is quite often what’s going on silently behind the scenes and needs to be monitored regularly.
Understand your business profits & make better decisions
The whole point, the whole reason for me wanting to talk to you about this is because I wanted to come at the topic of pricing from a slightly different angle than I usually do, because when you understand, I’ve got to get the positioning and I’ve got to get what I’m doing on each deal I make with a customer… I’ve got to get that right too. When you understand the relationship between those things and (positioning and transactions) you keep them both in the front of your mind, you can actually make better decisions about what to do in your business when it comes to the pricing.
[00:11:42] Right. This is what we’re always working here towards. Is I want you to understand how you can make better decisions around the topic of pricing in your business. If you decide, okay, I’m just going to focus on this one aspect of it. Chances are something else will [00:12:00] come in and start affecting what you’re doing in a negative way.
[00:12:04] And when I go back to this example, when I was working into this company, that was exactly the trap that they were about to fall. Two, if you will, the trap right. That they were saying, okay, which one? Where should we put most of our time, energy and money? Should we put it in transactional pricing? Or should we put it in value pricing?
[00:12:23] And the answer to that question is usually always going to be a bit of both.
Mature versus still figuring pricing out
Now, some companies will be better at one than at the other. Usually the more mature a company is in its pricing, the better they’re going to be at positioning themselves originally and maintaining or adjusting that position over time.
[00:12:47] Whereas the companies who are a little bit less on the maturity scale, they’re going to be kind of focused more on the transactional side. However, as you now know, it’s important in both of these cases that [00:13:00] companies have awareness and are focusing on both things. And so in a small business, you’re going to be doing this on a smaller scale as well, but that doesn’t make it any less important to having a sustainably profitable business.
[00:13:16]Let me repeat this again. What’s really critical here is that you understand that your position, so like your price list in the marketplace is just as important as what you’re doing on each and every transaction.
[00:13:32] Now there are a few businesses out there, right? You don’t discount in any scenario. Your list price and your transaction price are actually the same, but for most businesses out there, their list prices and their transactional prices can and do differ. When that’s the case, you’ve got to keep your attention focused on both of these things in terms of managing them as you go throughout [00:14:00] the time that you’re offering these products and or services.
Wrapping it up
[00:14:05] Ladies and gentlemen, that is what I wanted to share with you today. We talked about the Leaky Bucket of Pricing as an analogy for you to understand that when you focus on the value pricing, you’re actually determining how much water pressure you have on that tap, coming into your bucket.
[00:14:26] Bringing profits into your bucket, if you will. And how the transactional pricing or like the holes in your bucket. So if you’re not monitoring those transactional prices, well, you’re just leaking profits all out, all over the place.
[00:14:41] Thank you for listening to this episode of Live With the Pricing Lady, the Podcast.
[00:14:46] If you enjoyed the episode rate, review and subscribe to it, then share it with your friends and colleagues.
[00:14:52] I love hearing back from you listeners. If you’ve got comments, questions, or topic ideas, go on over to [00:15:00] thepricinglady.com and contact me there.
[00:15:01] Not sure where to start when it comes to improving pricing and profits at thepricinglady.com, you can download a copy of my Self-assessment Pricing Scorecard, find out where it’s going well and where you can begin improving.
[00:15:15] Or just simply book a discovery call with. There we can discuss what’s up with pricing in your business and how I might be able to help you.
[00:15:23] Thanks. Once again, for joining, remember pricing can hurt or help your business. Let’s make sure it’s helping you reach your dreams. See you next time. And as always enjoy pricing!