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Direct Marketing Article |
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10 Tips to Better Pricing
Start Generating New Profits and Growth Tomorrow Morning
Rafi Mohammed, Ph.D
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%. 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.
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.
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).
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."
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.
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.
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.
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.
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.
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.
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, 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?
About the Author:
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 (in residence, Spring 2001). 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.).
The 1% Windfall |
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