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:

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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:

  1. A price that is too expen­sive and the cus­tomer will not buy
  2. A price that is expen­sive and the cus­tomer will buy
  3. A price that is cheap and the cus­tomer will buy
  4. 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.

To read the whole Val­ue Pric­ing series please click here.