In Series – “Confessions of the Pricing Man: How Price Affects Everything”
For this blog series, I will be dissecting a book titled Confessions of the Pricing Man: How Price Affects Everything by Hermann Simon. Order the book and read along with me or just enjoy my summaries and how it applies to our amazing industry.
What if you could command a rate 35% higher than you have right now?
Pricing power is 35% higher in companies where its top management is involved in setting the framework for pricing decisions instead of delegating that authority (Simon-Kucher Global Pricing Study). In senior living it’s common for the sales or executive director at a community to shop competitors each year, turning that information around to a regional sales or ops director to establish annual rate increases or to adjust pricing in general.
In most organizations, price is set by the information provided from the sales director at each location. This is concerning because there are many factors that go into setting price and one must be objective and know how to obtain accurate rates that drive such a critical business decision. Even more challenging is that there’s street rate and then true rate after discounting. In many cases sales and even executive directors are too close to their own product and oftentimes have strong opinions around particular operators that they compete with directly; meaning they are not objective.
In fact, the study further concluded that companies with dedicated pricing department had 24% more pricing power of the companies without such departments. It’s safe to say that it pays for top managers to make a strong commitment to better pricing and to invest time and energy; or funds to this endeavor. For fun, let’s just play with an example.
In this example we are taking into consideration that the home office had a regional director, someone from the home office or an outside firm gather pricing data on competitors and set rates more accurately as a result. As you can see the annual impact, on just 15 units is strong.
It seems too good to be true right? The Bild team conducts thousands of competitive analyses each year. In many cases, investors or operators hire us to dive into rates due to complaints from the site level that they are set too high. Often, it’s simply not true. Here is one case in point:
Could you be leaving revenue on the table?
Like it or not, everything revolved around price.
As Hermann Simon says in his book, every dollar of revenue and profit that a company generates is a direct or indirect result of a price decision. Yet most people outside of operations know little about prices, where they come from and what affect they have. If you are reading this article right now, do you know who specifically set the prices at your individual community(s)? How attuned is a sales director is to the actual impact of discounting rates (whether it’s waiving the community fee or offering $500 a month off-market rate rent) due to the pressure of a new development cutting prices? Operators are required to do more with less and are seeing profits diminished at every turn.
Is your profitability at risk?
Simon-Kucher & partners interviewed over 2700 managers in 50 countries for its global pricing study. Just 33% of respondents felt that their companies had a high level of pricing power (meaning control over rates). The remaining 2/3 admitted that their companies are unable to implement their desired prices in the market, which puts their profitability at risk. Sound familiar?
In a sea of competition with new developments opening daily, pricing has become a massive pain point. Most likely you’ve experienced this yourself- a competitor comes in and drops rates so low there’s no way you can compete. Odds are you’ve lost a few residents to new competitors as well due to nothing more than rate. As an industry, we must learn how to adapt as this will be a continuing trend.
The Temptation to Discount
In highly competitive markets, price is a sales person’s weapon of choice and the most frequently used form of aggression. They along with many of their leaders wrongly believe that no other marketing instrument is better to increase sales volume fast then price cuts. We see this frequently, to the point that I personally believe we have commoditized senior living and care. Sadly, price wars are the norm and the impact on profits is devastating.
On the contrary, most sales and executive directors are fearful of raising prices as they don’t know the impact this will have on sales and most are under tremendous pressure to net up and grow occupancy. My question is, “how do we know how people will respond if we don’t push our limits on price?” As an industry, we are offering more than ever before in the form of care, technology, design and food service. Rather than discounting, I want to challenge you to commit to learning, educating and testing the theories I pose in this series. The implications can be transforming!
In my next blog for this series, we are going to tackle price, what’s involved in setting it, how to build value and most importantly how to communicate that value to the consumer so there is no need to discount. I encourage you to share this blog with your individual community teams and make it a topic of training and conversation.
Take Action Before Chapter Two
If you would like objective insight into where your rates should be set, the Bild & Co team is happy to help. We can also assist in creating surveys that help quantify the value of your community. For information on our competitive analysis email revenue@tracibild.com. We can move fast and provide critical answers to the most pressing questions in your market service area. Stay tuned for Chapter two that is forthcoming! Questions or comments? Post them in our social media feeds or email me directly at TBild@BildandCo.com.
Written by Traci Bild
Author of Zero Lost Revenue Days & 7 Steps to Successful Selling
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