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START UNCOVERING YOUR HIDDEN PROFITS TODAY:
5 WAYS TO IMPROVE YOUR PRICING
By Rafi Mohammed, founder, Culture of Profit LLC
Are you charging the “right price” for your product? This is a question that every company I’ve met struggles with and for good reason. After all of the hard work, stress, and money you’ve invested to bring a product or service to market, your pay-off depends on the prices you set. In my experience, there’s a big upside to revisiting your pricing strategy. The power of better pricing is clearly illustrated by a recent study of the Global 1200. This study found that if prices were increased by just 1%, on average, profits would increase by 11%. What effect would 1%, a small number, have on your bottom line?
For most companies, pricing is an unsettling exercise of marking-up costs, matching competitors, hitting target margins, or following “that’s how we always do it” logic. The inevitable result is money left on the table…what I call “hidden profits.” The good news: with a few simple tweaks to the way you think about pricing, you can start uncovering your company’s hidden profits… almost immediately. These five tips set the foundation for your company to price for profits and growth.
Tip # 1. Pricing is about capturing value, not marking up costs.
This key concept is best illustrated by street vendors who sell umbrellas. At the first hint of rain, these savvy vendors double the price of their umbrellas. This increase has nothing to do with cost; instead it’s about the increased value customers place on an immediate haven from rain. This insight of the fluctuating value of an umbrella is not just relevant to street vendors; it’s applicable to every company in the world. No matter what product or service you sell, every pricing decision should be based on the value customers place on your product.
Tip #2. Different customers have different valuations for the same product.
Think about your most treasured possession (mine is a lime green couch). Would the average person pay the same price as you would? Probably not (and certainly not for my couch). This interesting anomaly makes pricing an ongoing strategic exercise instead of a search for the “perfect price.” A key goal of your pricing strategy should be to design a series of tactics to sell your products at different prices to different customers.
Tip #3. Promote differential pricing to sell your product at different prices to different customers.
Key differential pricing tactics include:
- Characteristics – offer discounts based on customer attributes like age (child, senior) or occupation (student).
- Hurdles – make consumers demonstrate that low prices are important to them by offering discounts to those who clip coupons or wait for “end of the season” sales.
- Distribution – offer lower prices to those willing to shop at out of the way outlets with limited product selections or wait for mail order.
- Negotiation – individually negotiating with customers helps you understand how much consumers are willing to pay and enables you to offer them a customized price.
Tip #4. Versioning captures profits from different customers.
A typical versioning strategy involves offering good, better, and best product selections. For example, high-end restaurants often offer early-bird, regular, and chef’s-table options. This enables restaurants to profit from chef’s-table customers willing to pay a premium to sample the chef’s latest creations, as well as grow by serving early-bird diners who otherwise would not patronize due to price. Additional versioning options include offering expedited service (premium for faster service) and different levels of uncertainty (ordering Broadway tickets in advance vs. buying “last minute” discounted tickets at the door).
Tip #5. Activate “dormant customers” by offering new pricing structures.
Customers may love your product but refrain from purchasing simply because your pricing structure doesn’t work for them. For example, some may prefer to rent instead of own. Similarly, consider the pricing concept of buying a fraction of an asset instead of owning it outright. Offering fractional ownership pricing has been a key growth driver for the vacation condominium and private jet industries. Other pricing structures that can activate your dormant customers include leasing, all-you-can-eat, prepaid plans, and bundling products.
These simple tips will put you on the road to pricing for profits and growth. Not only will these pricing tips make more money, it will help you better serve your customers. By offering new pricing options, both existing and new customers benefit because they can select the one that works best for them. Pricing for profits and growth is both “win-win” and easy-to-implement…it’s time to start uncovering your company’s hidden profits.
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Rafi Mohammed is the founder of Culture of Profit LLC, a price strategy consulting firm based in Cambridge, MA. He is the author of The Art of Pricing: How to Find the Hidden Profits to Grow Your Business (Crown Business, 2005) and writes a pricing blog that can be found at www.pricingforprofit.com. Rafi can be reached at rafi@cultureofprofit.com. He is an economics graduate of Boston University, The London School of Economics, and Cornell University (Ph.D.)
Copyright © 2007 Rafi Mohammed
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