In our blog Five Steps to Successfully Implement Dynamic Pricing, we encouraged you to start by defining your company’s commercial objective.
But how do you determine your business goals? And how do those goals relate to your pricing strategy?
A good commercial objective needs work. In this post we’ll explore the process of defining this objective and give you practical advice on how to get started.
What is the commercial objective?
The commercial objective is an explanation for why your company exists and what customers can expect from your organization. In many ways, the objective is a compass that helps you make business decisions that align with your brand, goals, and consumer interests.
Creating a commercial objective might seem easy at first, but it’s actually difficult to pin down exactly:
- Why you exist
- What makes you unique
- What your overarching message is
- Who you’re targeting
But once you have the answer to these questions, you can make more strategic decisions that match your organization’s goals.
An example of a commercial objective
Home Depot has a great example of a commercial objective:
“The Home Depot is in the home improvement business and our goal is to provide the highest level of service, the broadest selection of products and the most competitive prices.”
This simple sentence clarifies several aspects of the company. They target consumers working on do-it-yourself projects around the home. It’s also clear what they want to achieve: quality service, numerous choices, and competitive prices.
What does a commercial objective have to do with pricing strategy?
A defined commercial objective is crucial for both your internal and external aspects of business. Internally, it helps to add measurable objectives for your departments. For example, Home Depot’s internal goals could include:
- Our service need a Net Promoter Score (NPS) of at least 8 (Operations team)
- We always offer 10,000 products per store (Category management)
- Our prices will never go above the market average (Pricing team)
An important link with pricing already starts here: it’s hard to combine low prices with high service offering. Services cost money, so if a high quality of service is part of your objective, you need to factor these costs into your product prices.
Looking back at Home Depot, you can see this in action. Notice that the company specifically keeps its language about prices vague with the words “most competitive.” This is because they need to factor in their high-level services, consumer perception, and more into their prices. If they promised to have the lowest prices, they could never provide the same level of service to their consumers.
Since your commercial objective manifests in your prices, it also is crucial for the external aspects of your business. Price points act as signposts for consumers, and customers know what to expect from a service at every price point. If consumers see high prices for your products, they’ll assume that it includes a certain amount of service. High prices with low service offerings will brew customer resentment and be detrimental to your business. Your competition will either out-price you or offer a better value-for-money option for consumers.
How to define your commercial objective
There are two major steps in the process of determining your commercial objective: market research followed by business introspection. Both reach to the foundations of your business and serve as the base for your commercial decisions.
Step 1: Analyze your market
How do you want consumers to perceive your company? What is your ideal position and image? Before you can answer these questions, you need to analyze your market and see where you stand among your competition.
There are numerous ways to do a market analysis, but for our purposes it’s important to drill down what you want to know about your competition. Consider the metrics you’ll use for bench-marking, and which companies you’ll analyze. At a minimum, evaluate your competition’s:
- Product prices
- Service agreements with customers
- Assortment size
- Specialization levels
Use this information to evaluate different stores in your industry, then categorize them broadly. The graphic below is an example of how you can organize the data in a benchmarking map. This graphic looks at the number of products vs. price and service across a market:
A matrix like this clarifies who your direct competition is and where there are gaps in the market.
Step 2: Think about your goals
After examining the market, it’s time to turn inward and focus on where your company stands in relation to the rest.
Ask yourself what kind of company you want to be, and how you want to achieve those goals. Do you want to be a discounter with loads of products? Or a specialist in one product category (such as bags and suitcases)? Or somewhere in between the two? As a specialist you could have a higher price and a better value offering through services (such as fast delivery and product knowledge), but you will also make fewer sales. As a generalist you’ll make more sales, but you can only raise your prices to a certain point.
Other good questions include:
- What are the opportunities in the market? Are their gaps in the above matrix?
- What are your current strengths and weaknesses?
- How do consumers perceive you now?
- How large is the gap between your current position and your ideal position?
The answers will help you decide where you want to be in the market. Remember to write your goals according to SMART principles: Specific, Measurable, Achievable, Relevant and Time-bound. These principles help ensure your goals are actionable.
Move on to your pricing strategy
After you’ve done the work of determining how you want the public to view your brand and what level of service you plan to offer, you can build a strategy that reflects your goals. We’ll cover this more in another post, but this is a good time to think about how your business goals translate into monetary needs.
Since your commercial objective should drive your pricing strategy, not the other way around, this process is an important foundational step towards automated pricing. As the overarching goal of your company, it should answer the question of how you want consumers to perceive your company and what they can expect from you. It’s an important step towards achieving your maximum profitability, and it’s the basis for everything to come.
Have you defined your commercial objective and are interested in automated pricing management? Click the button below to request a free demo of Omnia today.