The following is a chapter from the book Pursuing Growth.
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. Take what fits and modify it to your situation.
Give price a voice
A high price says that your product is better than a competitor’s product. Imagine you must choose between two brands of glue to repair your broken antique china teapot, one priced at $10 and the other at $12. The value of the teapot far outweighs the $2 price difference. If the teapot is important, you will pay 20% more for the possibility of better glue.
If you cannot charge a premium, make price silent by charging the same price as your competitor. Customers focus on price when they cannot tell the difference between two products. If you are negotiating with a customer, protect your gross margin and offer concessions on less-costly variables such as delivery time.
Selling a 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 transaction cost of providing a $5,000 loan is nearly identical to that of a $50,000 loan. Some 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 16 oz. for $15 and 3 oz. for $10 may not increase your total sales revenue. 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. The salesperson first shows you the most expensive bike in the store. 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 in part 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 prices as a flight date approaches. Consumers are willing to pay higher prices for the convenience of a short-notice flight.
Use wasted capacity
Work you can schedule during traditional downtime is like 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 production 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 discounted price? This approach works best when selling to a different region or a different customer base.
Everybody loves a deal. For many industries, sales promotions that discount price, such as coupons, can move inventory, generate short-term profits, and introduce your product to new customers. But if you sell a premium product, protect the integrity of your brand by providing a different benefit (e.g., 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 thank you to the people who purchased in the past year.
Getting your foot in the door can be difficult. Companies that rely on longterm customer relationships, such as software companies that require future product upgrades, often initially set a discounted price and retain customers through non-price factors such as reliability and exceptional service.
Offering a drastically reduced price with a “door crasher” feel to the promotion is one of the most effective pricing tactics used today. Most often a true discount strategy involves presenting the lower price as a deep discount and also providing a clear reason why such a low price is being offered. For example, clearance sales to move old stock or limited-time sales to celebrate seasonal holidays are commonly used methods of justifying drastic discounted prices.
The scope of the discount that is required to significantly increase demand depends on your company’s situation. Some industries never discount prices and any decrease is perceived as a deep discount. However, other industries, such as clothing and vehicles, require a significant reduction in price to capture the attention of consumers. The key here is that the consumer will reference the discount against what they feel is an alternative purchase situation.
As with any tactic, discount pricing should be used appropriately for each situation. Companies can face problems when they permanently offer deep discounts. Many retailers have built their entire business around a segment of the market that is addicted to artificially low prices. It can be very difficult to charge appropriate margins regularly when customers are constantly watching for the next big sale.
Pricing a product at $29.99 rather than $30 is certainly a gimmick, but it can work in some situations when selling to consumers. Many times when customers view price as a crucial factor in their purchase decision, they will view an odd number used in the price as a special deal. Intellectually, people realize the company simply chose this number as the sale price. But subconsciously people seem to gravitate away from round numbers.
When to charge for extras
Most owner-managed businesses intentionally allow hidden value to creep into their customer experience. By not charging for every little thing, such as 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 prices. 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 influence the way your customers buy.