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, operating profits would
increase by 11% on average. Using a 1% increase in price, some
companies would see even more growth in percentage of profit:
Sears, 155%; McKesson, 100%; Tyson, 81%; Land O’Lakes, 58%;
Whirlpool, 35%. Just as important, price is a key attribute
that consumers consider before making a purchase.
The following 10 pricing tips can reap higher profits,
generate growth, and better serve customers by providing
options.
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. This hike has nothing
to do with costs; instead it’s all about capturing the
increased value that customers place on a safe haven from
rain. 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).
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. 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.”
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. It is
also important to reinforce the truism that most customers are
not loyal – if a new product offers a better value (more
attributes and/or cheaper price), many will defect.
5. Realize that a discount today doesn’t guarantee a
premium tomorrow.
Many people believe that offering a discount as an incentive
to try out 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. 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.
7. 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. New pricing plans attract customers by
providing ownership options, mitigating uncertain value,
offering price assurance, and overcoming financial
constraints.
8. 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.
9.
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.
10. 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 to the puzzle. Normal Norman’s 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, then 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.
Since pricing is an underutilized strategy, it is fertile
ground for new profits. The beauty of focusing on pricing is
that many concepts are straightforward to implement and can
start producing profits almost immediately.
What better-pricing windfall can your company start reaping
tomorrow morning?
Rafi
Mohammed, Ph.D is the author of The 1% Windfall: How
Successful Companies Use Price to Profit and Grow (HarperBusiness).
He has been working on pricing issues for the last 20 years.
Rafi Mohammed is the founder of Culture of Profit LLC, a
Cambridge, Massachusetts-based company that consults with
businesses to help develop and improve their pricing strategy.
He also holds the title of Batten Fellow at the University of
Virginia’s Darden Graduate School of Business. A frequent
commentator on pricing issues to the print media, Rafi has
also made prime time appearances on CNBC as an expert pricing
commentator. He is an economics graduate of Boston University,
the London School of Economics & Political Science, and
Cornell University (Ph.D.). Find his book at
www.amazon.com/1-Windfall-Successful-Companies-Profit/dp/0061684325/ref=ntt_at_ep_dpt_2
