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Leaving Money on the Table?

What’s the right price? What’s a fair price? There are no easy answers when it comes to pricing. But if you’re not wrestling with these questions, you’re likely leaving money on the table. Here are some ways to approach pricing.

Pricing has fascinated me for a long time. In b-school, I ghost-wrote a chapter of my professor’s text on pricing, which forced me to examine all my assumptions. Later I helped shatter pricing models in a conservative CPG category by launching a brand at more than double the price per ounce of the existing premium brands, and over triple the category average – and it worked. So I believe a good starting point for thinking about pricing is to identify your assumptions and biases, then put them on hold. They might be valid. But then again…

Let’s examine the definition you learned in Econ 101 class. Price is the mechanism for achieving equilibrium between supply and demand. That’s just fine in commodity markets. But strategic product design, segmentation, and branding have destroyed most of those. So junk the idea. Try this instead: Price is a tool for maximizing profit by sharing value with customers. If they value your product more, they should happily pay more. And vice versa. Isn’t that fair? Everyone wins.

This is not intended to be a complete overview of pricing. Instead, here are some thought starters:

  • Uniform pricing is unfair. Some customers value your product more than other customers. So why should they all pay the same price? That means you are giving those customers extra value, which gives them undue competitive advantage. Unfair!
  • There is always give and take between price and quantity – just not always in the direction you expect. Most marketers have heard of or experienced categories where high priced brands outsell the value brands. Price is a signal for quality, whether real or not. Would Gucci sell as many of those ugly bags if they charged $19.99? I think not.
  • Price can clobber the competition in many ways. Of course you can temporarily undercut the competition, and if it doesn’t signal poor quality and until they match you, you may gain share. But consider options. What if you rebrand your same product and sell it at three times the price? Suddenly the heart-of-the-market might be seen as mediocre. That’s exactly what happened to the premium shampoo leader, Finesse, when Pantene launched at an obscenely higher price. Finesse never recovered. Why buy premium when it’s middle-of-the-road?
  • Never stop with one offer. Segment the value equation with a menu of choices, because there is always a chance to trade the customer up (which means making more money by providing more value). If one widget normally costs $X, offer five widgets of $4X and save yourself the selling expense of repeat sales. If the subscription is for 12 months, offer one year free to lock them up for 36 months. If you like our base model, for only $1000 more you can get it in metallic blue.
  • Position higher price as a value by shifting context. Isn’t that what they’ve done with compact fluorescent bulbs? These new bulbs save energy charges that offsets their price premium, and marketers get to share that value with the customer.

The list goes on. In the end, as with all things, you want to start with objectives and strategies. What are you trying to accomplish – gain share, increase profits, build loyalty, lock the customer up for a longer period, build a relationship…? Then remember that pricing is one of your most effective tactics. As long as you suspend assumptions.

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