The majority of people, especially seasoned corporate leaders, are hesitant to establish pricing.
Because there are few "golden principles" and practical guidelines to rely on, most of us take the road of least resistance. We continue what we've always done or emulate our rivals in the marketplace.
That's a pity because improving your pricing plan is the quickest way to increase earnings and expand your business.
Even better, pricing is the only method that can be introduced on Sunday night and generate profits the following morning.
McKinsey & Company studied the Global 1200 corporations worldwide and discovered that raising prices by only 1% would increase operational profits by 11.2 percent. This is where the title "The 1% Windfall" originates.
Let us take you on a journey for the next 12 minutes. This way, you may learn how to establish a superior pricing strategy and begin reaping the benefits of the world's most powerful profit-generating technique.
Why Pricing Is So Important
Yes, pricing is simple to apply and has a big impact. But how does it relate to your company's other objectives, such as market share, operating margin targets, and profitable growth?
It's nice that you took the time to ask.
Traditional thinking about increasing market share is that you must decrease costs to buy more items.
The following sections will discuss how, when it comes to "how low can we go," playing the game seldom results in successful outcomes.
Operating Margin Targets
The two most important contributors to operating margins are:
- cost reduction
- increased efficiency
The traditional aim has been to reduce expenses while also improving productivity. Of course, raising prices is only one side of the equation. We'll look at how to do it successfully for a profit.
Achieving growth at all costs is never a smart approach unless Amazon or Walmart. Creating a pricing strategy is crucial if you want to continue profiting while you develop.
Capturing Value by Thinking Like A Customer
Setting prices that represent the value you've generated with your product, rather than how much it costs to make it, is an excellent pricing approach.
For example, street sellers (some of the world's most astute pricing ninjas) raise prices according to the current worth of their goods. Is it about to start raining? The cost of the umbrella has suddenly gone up.
Understanding how to build a successful pricing plan necessitates an understanding of the three main ways that consumers differ:
- Customers are looking for a price plan that suits their needs. For example, they may want to lease your goods rather than purchase them entirely. It's crucial to know which strategies work best for various clients.
- Customers have distinct requirements. Some of your consumers, for example, may require modest doses of your product, while others may need it all at once. It's crucial to know how to make multiple versions of your product that take advantage of this.
- Customers place varying degrees of value on your goods. A fundamental component of any effective pricing plan is to charge different customers different rates for the same product.
One-on-One and Multi-Customer Pricing
When selling a single product to a single individual, you should employ one-on-one pricing. For example, selling a used automobile, a property, or a personalized service.
There are five phases in this process:
- Determine who your target market is.
- Determine the next-best option accessible to those individuals and use its cost as a starting point.
- Determine the features that set your product apart from the competition.
- Calculate the worth of your product based on that distinction.
- Check the cost of the next-best alternative. Make sure, for example, that the cost of the next-best option isn't too high.
When selling many pieces of a product to a range of consumers, you should adopt a multi-customer pricing plan. The majority of businesses fall under this category.
There are four phases in this process:
- Determine the next-best option for your target customer and price it realistically. This is your beginning point, much like with the one-on-one pricing method.
- Determine how you'll set your product apart from the competition. There are several aspects to consider here, including your brand, the convenience of use of your product, the quality, and the degree of service you give, to name a few.
- Make a demand curve assuming that various clients would value your goods differently. If you need a refresher on the demand curve, check out our summaries of The Strategy and Tactics of Pricing and Confessions of The Pricing Man.
- Finally, do a profit maximizer study to determine the most lucrative pricing. Basically, you analyze revenues, costs, and profits at several pricing levels from high to low, then choose the one that makes the most money.
Let's go into the deep detail of how you can develop multiple pricing models based on what we've learned so far now that we've covered the basics.
You'll discover that some of your prospects aren't buying since the price plan doesn't work for them when you begin your path toward a lucrative pricing model.
Pick-a-Plan techniques attempt to address this by providing clients with many options for purchasing their goods.
The first thing you can do is provide your consumers with various ownership options. Pose the following questions to yourself:
- Ownership of intervals. Is it possible to break down your entire product into smaller ownership pieces and sell it separately?
- Leasing. Is it possible to sell the product's use rights for a set length of time?
- Rental. Is it possible to sell product usage for a shorter amount of time?
- Subscription. Can you provide clients with a rental that gives them access to your full product suite for a set length of time (typically monthly or annually)?
The second thing you can do is develop price strategies that will make utilizing your product less risky. Pose the following questions to yourself:
- Success fees. Can you charge a basic cost and then collect a bonus if a customer's key success metric is met?
- Licensing. Is it possible to link the value your intellectual property provides to your price structure? This is typically true in franchising or reseller agreements.
- Auctions. Accepting bids and selling to the highest bidder, can you determine the value of your product?
- Price alternatives in the future. Can you create pricing that allows a buyer to acquire a product later for a price that you set today?
The third thing you can do is come up with solutions for clients who are price sensitive. Pose the following questions to yourself:
- Set fee. Is it possible for you to charge a fixed price rather than a variable cost for your service?
- Guaranteed tranquillity. Is it possible for you to set pricing for your goods for a set period?
- All-you-can-x. Is it possible to give a single fee for limitless use?
- Pricing split into two parts: pricey and cheap. Can you charge a one-time fee for access to variable pricing lower than the standard rate? Consider Costco.
Finally, you may handle any current or prospective finance limits that your consumers may have. Pose the following questions to yourself:
- Financing. Is it possible for you to allow your consumers to pay overtime?
- Job-loss insurance. Is it possible to issue refunds or compensation if a consumer loses their job?
- Layaway. Can clients pay in installments and then get the merchandise after the balance is paid in full?
- Prepaid plans: Do you have any plans that allow users to pay in advance and then use their credit over time?
Let's move on to how you may construct multiple versions of your product to extract even more value and profit. Now, we've explored various methods to sell plans for your product.
A few minor changes to your product might sometimes be all it takes to unleash new market value.
This method may be used to persuade current consumers to "trade up" the value chain, as well as to locate new clients with specific demands and a lower value for your product.
The first thing you may do is improve your product's features to charge a greater price. Pose the following questions to yourself:
- A higher standard. Is it possible to add features to your product to boost its total value?
- Guaranteed access. Can you ensure that your clients will be able to utilize your product or service even if it is otherwise sold out?
- Priority access. Is it possible to offer a version of your product or service that eliminates the need for customers to wait? Consider Disney World's FastPass system.
- A product that is delivered faster. Many clients place a high value on quickness and are ready to pay a premium for it. Is it possible for you to provide a speedier version of your product?
The second option is to provide a more basic version of your service or product at a cheaper cost. Pose the following questions to yourself:
- Lower quality. Some clients are ready to forego quality in exchange for a reduced price. Is it possible for you to provide it to them?
- Further limits. Can you design constraints for customers to use your product that limits the amount of value they receive?
- Unbundling. Can you separate your product's features and sell them separately?
- Off-peak. Is it possible to get a discount if you use your product or service at times when it isn't often busy?
- Private label. Is it possible for you to sell your goods under the name of another merchant and charge a lesser price?
Finally, you may improve your service by adding new features meant to attract important target clients. Consider the following scenario:
- Dimensions of the package: Can you cater to diverse consumer segments with varying sizes?
- Extended and improved warranties. Is it possible to get a contract that is longer or better?
- Clubs that meet once a month. Can you develop new ideas for clients that value novelty and "firsts"?
- Bundling. Can you design new features and combine them with current ones to create a whole new offering?
- Platforms. Is it possible to use your product or service on a different platform? HBO, for example, allows cable providers to sell their service while simultaneously having their own forum.
- The goal of the application. Can you think of another way to use your product? Drug companies, for example, frequently manufacture pet-friendly versions of human medications.
Let's move on to how to generate multiple pricing for the same offering. We've covered a variety of methods to provide plans for your product and how to build alternative versions of your product.
Some clients are prepared to pay a higher price than others. So, suppose you just have one price. In that case, you're losing money in two ways: you're not charging enough to certain individuals, and you're not selling anything because it's too costly.
Differential pricing is the solution to this dilemma.
The first thing you may do is put up barriers for clients to overcome to get discounts. Pose the following questions to yourself:
- Rebates. Is it possible to offer a discount to individuals prepared to complete paperwork and wait for a refund check?
- Sales. Can you provide reductions regularly to lure customers who are hesitant to pay full price?
- Coupons. Can you offer discounts to those prepared to go out of their way to find and use coupons?
- Price matching. Are you able to match the pricing of your competitors?
- Distribution. Is it possible for you to provide reduced costs in less convenient locations?
- The time it takes for a sale to close. Can you start with high costs and gradually drop them to attract customers prepared to wait?
The second option is to design various rates based on the qualities of your customers. Pose the following questions to yourself:
- Geography. Is it possible to set different rates for different locations? People in certain areas may value your goods more than in others.
- Characteristics that are easily recognized. Is it possible to set varied pricing depending on the customer's age, status (student, military member, etc.), and proximity to your location?
- Membership in a club. Is it possible to provide members of an organization discounts in exchange for marketing benefits?
The final thing you may do is examine your clients' purchase habits. Consider the following inquiries.
- Quantity. Is it possible to get reduced per-unit pricing if I buy in bulk?
- Bundling using a variety of items. Can you provide discounts to individuals who purchase several goods from you?
- Alternatives to the finest. Are you able to alter pricing in response to market conditions? In highly competitive marketplaces, you can charge lower prices while charging higher fees in less competitive areas.
- Pricing split into two halves. Is it possible to have one pricing for one component of your product and another for the other? Consider the price of a razor and a razor blade.
That's all there is to it. There's a long list of alternative methods to price things that should generate fresh ideas for making more money.
And keep in mind that price is the one marketing technique you have at your disposal that you can conjure up on Sunday night and put into action the next morning.
My pals, that's a quick profit.