Pricing Can Be Your Best Strategy
Rafi Mohammed is the author of “The 1% Windfall: How Successful Companies Use Price to Profit and Grow” (HarperBusiness) and founder of Culture of Profit LLC, a Cambridge, Mass.-based company. He recently provided these 11 tips on pricing, which he calls “one of the most powerful—yet under-utilized—strategies available to businesses”:
1. Stop marking up costs. 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.
2. Set prices that capture value. Manhattan street vendors understand the principle of value-based pricing. The moment that it looks like it will rain, they raise their umbrella prices. The right way to set prices involves capturing the value that customers place on a product by “thinking like a customer.”
3. Create a value statement. Every company should have a value statement that clearly articulates why customers should purchase their product over competitors’ offerings. Be specific in listing reasons…this is not a time to be modest.
4. Reinforce to employees that it is okay to earn high profits. I’ve found that many employees are uncomfortable setting prices above what they consider to be “fair” and are quick to offer unnecessary discounts. It is fair to charge “what the market will bear” prices to compensate for the hard work and financial risk necessary to bring products to market.
5. Realize that a discount today doesn’t guarantee a premium tomorrow. Many people believe that offering a discount as an incentive to trial a product will lead to future full-price purchases. In my experience, this rarely works out. Offering periodic discounts serves price-sensitive customers (which is a great strategy) but often devalues a product in customers’ minds. This devaluation can impede future full-price purchases.
6. Understand that customers have different pricing needs. In virtually every facet of business (product development, marketing, distribution), companies develop strategies based on the truism that customers differ from each other. However, when it comes to pricing, many companies behave as though their customers are identical by setting just one price for each product.
7. The key to developing a comprehensive pricing strategy involves embracing (and profiting from) the fact that customers’ pricing needs differ in three primary ways: pricing plans, product preferences and product valuations. Pick-a-plan, versioning and differential pricing tactics serve these diverse needs.
8. Provide pick-a-plan options. Customers are often interested in a product but refrain from purchasing simply 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.
9. Offer product versions. 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.
10. Implement differential pricing. For any product, some customers are willing to pay more than others. Differential pricing involves offering tactics that identify and offer discounts to price-sensitive customers by using hurdles, customer characteristics, selling characteristics and selling strategy tactics. For example, customers who look out for, cut out, organize, carry and then redeem coupons are demonstrating (jumping a hurdle) that low prices are important to them.
11. Use pricing tactics to complete your customer puzzle. Companies should think of their potential customer base as a giant jigsaw puzzle. Each new pricing tactic adds another customer segment piece.
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SIPA 2011, June 5-7, at the
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