Winter 2006: by Brent Banda, MBA

Creative Pricing

When setting a price you can adopt simple tactics that work in other industries. Remember, every industry has its own nuances, and not every tactic will work for your company. So, take what fits and modify it to your situation.

Give Price A Voice
A high price says that your product is better. Imagine you must choose between two bottles of glue to repair your broken antique china teapot, one priced at $10 and the other at $12. The cost of the teapot far outweighs the $2 price difference. If the teapot is important, you will pay 20 per cent more for the possibility of better glue.

Take the time to consider how simple changes to product pricing can impact the way your customers buy.

If you cannot charge a premium, make price silent. Customers focus on price when they cannot tell the difference between two products. If you are negotiating with a customer, protect your gross margins and offer concessions on less-costly variables such as delivery time.

Increase Quantity
Selling higher volume often has a dramatic impact on gross margin. Service companies often find small and large jobs result in similar costs. In the banking industry, the cost of providing a $5,000 and a $50,000 loan is nearly identical. Most manufacturers can almost double their price for twice the volume with only a minor increase in production cost.

For this to work, quantity must be important to your customer. In the teapot example, selling 500ml for $15 and 100ml for $10 may not increase your total sales. Most people do not repair fine china often, and they would have no need for the larger bottle.

Package Your Price
Salespeople often introduce a premium product and then show the mid-market option. The customer references everything against the premium product, and chances are they will spend more than they planned.

Imagine shopping for a mountain bike, and the sales person first shows you the top-of-the- line. You will now compare every other bike against what you truly want, and most likely upgrade your purchase. There are many ways to package your price. Telephone companies bundle local phone service, high-speed Internet and long distance. Bundling works because it takes the customer's eye off the individual price of each service.

Customers are happy with a slight discount and the convenience of a one-stop-shop. Tiered Pricing is also commonly used. Charge a basic price for a basic product and higher prices for a product with a clearly defined additional benefit. For example, some airlines increase price as a flight date approaches. Consumers are willing to pay higher prices for the convenience of a short-notice flight.

Use Wasted Capacity
Scheduling work during traditional downtime is found money. The key is to price the work properly. Imagine a manufacturing facility that shuts down Fridays in July because orders are traditionally slow. Use this time to schedule lower priced work. Assuming your overhead is accounted for through regular sales, this additional revenue only needs to be priced higher than variable costs. Be careful when using this strategy. Will your core customers be offended that they do not receive the same discount price? This works best when selling to a different region or a different customer base.

Discount Selectively
Everybody loves a deal. For many industries, discounting tools such as coupons or sales can move inventory, generate short-term profits and introduce your product to new customers. If you sell a premium product, protect the integrity of your brand by providing a different benefit (free furniture cleaner with every kitchen table purchased) rather than discounting the price.

In the long term, price discounting can also work well when used as a tool to strengthen relationships. A high-end men's clothing store that holds a special sale exclusively for existing clients is saying they value loyal customers more than new customers.

Getting your foot in the door can be difficult. Companies that rely on long-term customer relationships, such as software companies who require future product upgrades, often initially set a discounted price and retain customers through non-price factors such as reliability and exceptional service.

When To Charge For Extras
Most owner-managed businesses allow hidden value to creep into their customer experience. By not charging for every little thing, like rush orders, international shipping and training, they offer something small that means a lot to the customer. The trick is to realize which free extras are beneficial. If these extras are not important to your customers, recapture lost gross margin by adding these costs to your price. However, if your customer recognizes the value and you need to distance your company from competitors, be generous.

New customers may be willing to pay a premium for your standard service if you offer a complimentary benefit, such as free shipping. Few business owners think through their price. Paralyzed by indecision, companies often simply adopt industry standard prices and hope for the best. Take the time to consider how simple changes to product pricing can impact the way your customers buy.

> Back to Latest Ideas & Articles