In the first post of this series, we learned that value is the only common ground between a customer and a business when it comes to pricing. In the second entry, we examined what the value conversation is and how it helps us set expectations with our customers. Now, we are going to compare a couple of different pricing strategies that you can utilize when working with a customer. We want to look at pricing strategies because a change in price can have the biggest impact on your financial situation. Here is how a 1% change in different financial measures can increase profit:
Too often, businesses focus on growing the top line or reducing costs, when in actuality, an increase in price can provide the greatest benefit.
The first pricing strategy involves looking at four different pricing categories:
- A price that is too expensive and the customer will not buy
- A price that is expensive and the customer will buy
- A price that is cheap and the customer will buy
- A price that is too cheap and the customer will not buy
After having the value conversation with the customer, you should have an idea of the value that you are providing, and what price range is expected. This will help you place a price for each category.
Ideally, you would like to have a price that is expensive, and the customer would still be willing to buy. This would indicate that you have had a successful value conversation with your customer. Inversely, if the price is too cheap, then the product or service will be regarded with very low value. Remember that pricing is very subjective. What may be expensive for one customer may not be costly for another. If we understand this, we can maximize our earning potential.
Airlines are great at utilizing this pricing strategy. Whenever you fly, the person next to you did not pay the same price that you paid. That is because one of you is more willing to pay a higher price. For example, let’s say that an airplane can hold a maximum 200 passengers. Of those passengers, 200 are willing to pay $200 for the flight. However, 100 of those passengers are willing to pay $400 for the flight. If your ticket price was $200, you would make $40,000. If your ticket price was $400, you would still make $40,000. However, if you charged 100 passengers $400 and another 100 passengers $200, you could increase your revenue by $20,000 and sell $60,000 worth of tickets. We can utilize this same method by determining the highest price we can charge each customer in order to maximize our profits.
The second pricing strategy is to offer the customer three different pricing options. The first price will include the core products and services that your customer wants plus a couple of extra items that could also benefit them. This price will provide the highest value added to your customer and will similarly charge the highest price. The second price would simply offer the core products and services that the customer wants. Since this option does not feature the bonus items, there is less value associated with this option and would therefore have a lower price. The third option would not offer the customer everything they wanted, but would offer what the customer could get by with. If your customer wants XYZ, this third option may only include XY, or some combination thereof, since that is all that he/she needs. This is the cheapest option.
This pricing strategy operates on the idea that a business should always negotiate value, not price. If a customer only wants to spend $x, then it is easier to understand how much he/she can expect in return. It helps the customer understand that the value is the underlying driver in the price. Typically, if given three options, the customer chooses the middle option. It also gives the business a chance to test out different pricing packages to see which one(s) is (are) the most beneficial.
These two pricing strategies are not mutually exclusive. You can utilize a combination of both that best services your needs. If most customers choose the middle option when given choices, then it could help to price that option at a price that is expensive and the customer would still buy.
Pricing expertise is not going to occur overnight. You will have to remain confident and continue to keep trying different strategies until you find one that fits your business. Remember that pricing is very subjective causing each person to be different. Sometimes, customers are so price resistant that these strategies will not work with them. In that case, do not be afraid to walk away. This will allow you to focus more on your target customers. Once you have the right strategy, you should be able to deliver the best price at the level of value your customer needs.