100 Thoughts on Pricing: #48
This will be the first of several thoughts focused on why it's critically important to know the profitability of your pricing.
Profitability estimates are essential for pricing tools that handle more than a few services and products. The lack or inaccuracy of these estimates is, in my experience, the chief cause of underpricing and overaggressive discounting.
I find companies lacking accurate cost and profitability estimates update their base pricing rates far less frequently than those who follow a rigorous schedule- often skipping one or even several years of updates (the biggest gap I've encountered is 7 years).
Inaccurate estimates (almost always overstating margins) provide a false sense of security that all new business, even when massively discounted, will benefit the business.
Discount approvals are then ultimately based on how cool it would be to win that new logo (for ego purposes), relationship matters that aren't actually affected by the outcome of the deal, clever tactics by procurement teams, etc.
Accurate, up to date profitability estimates in your pricing tool help keep your price rates current and competitive while providing a check and balance against bad deals.