Pricing is one of the most powerful — yet underutilized — strategies available to businesses. A McKinsey & Company study of the Global 1200 found that if companies increased prices by just 1%, and demand remained constant, on average operating profits would increase by 11%. Just as important, price is a key attribute that consumers consider before a purchase.
These 5 pricing tips can reap higher profits, generate growth and better serve customers by providing options.
The most common mistake in pricing involves setting prices by marking up costs (“I need a 30% margin”). While easy to implement, these cost-plus prices bear absolutely no relation to the amount that consumers are willing to pay. As a result, profits are left on the table daily.
The right way to set prices involves capturing the value that customers place on a product by thinking like a customer. Customers evaluate a product and its next best alternative(s) and then ask themselves, “Are the extra bells and whistles worth the price premium (organic vs. regular), or does the discount stripped-down model make sense (private label vs. brand name).” They choose the product that provides the best deal (price vs. attributes).
Every company should have a value statement that clearly articulates why customers should purchase their product over competitors' offerings. This statement will boost the confidence of your frontline so they can look customers squarely in the eye and say, “I know that you have options, but here are the reasons why you should buy our product.”
Realize that a discount today doesn't guarantee a premium tomorrow. Discounts serve price-sensitive customers, but often devalue a product in customers' minds. This devaluation can impede future full-price purchases.
Customers are often interested in a product but refrain from purchasing because the pricing plan does not work for them. While some want to purchase outright, others may prefer a selling strategy such as rent, lease, prepay, or all-you-can-eat. A pick-a-plan strategy activates these dormant customers. New pricing plans attract customers by providing ownership options, mitigating uncertain value, offering price assurance, and overcoming financial constraints.
One of the easiest ways to enhance profits and better serve customers is to offer good, better, and best versions. These options allow customers to choose how much to pay for a product. Many gourmet restaurants offer early-bird, regular, and chef's-table options. Price sensitive gourmands come for the early-bird specials while well-heeled diners willingly pay an extra $50 to sit at the chef's table.
Differential pricing involves identifying and offering discounts to price sensitive customers by using hurdles, customer characteristics, selling characteristics and selling strategy tactics. For example, customers who redeem coupons are demonstrating that low prices are important to them.
Think of your potential customer base as a giant jigsaw puzzle. Normal Normans buy at full price (value-based price), Noncommittal Nancys come for leases (pricing plans), High-end Harrys buy the top-of-the-line (versions), and Discount Davids are added by offering 10% off on Tuesday promotions (differential pricing). Starting with a value-based price, employing pick-a-plan, versioning, and differential pricing tactics adds the pricing related segments necessary to complete a company's potential customer puzzle. Offering consumers pricing choices generates growth and increases profits.
Rafi Mohammed, Ph.D. is the author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow (HarperBusiness).