In class the other day, a student asked why we see companies offering big discounts at trade shows.
It happens not only at trade shows. We often see great deals if we’re willing to make an immediate decision. Go see a professional speaker and at the end of the talk he or she will likely have product to sell in the back of the room … deeply discounted if you purchase today.
Of course, the discount is intended to get you to purchase immediately, but it’s more than that. These companies believe, probably correctly, that if you don’t purchase now you will likely never purchase. Hence, any incentive to get you to act now increases their sales.
However, you rarely see this at retailers. Imagine walking into McDonald’s and they say, if you buy today you can have a Big Mac for 50 cents. Almost never happens. Because once you’re inside, you’re going to buy something from them. By selling you a deeply discounted product they take money away from themselves.
These deeply discounted “act now” deals work best when the potential customer is in a unique place for them, a place they are not likely to be in again for a while. That way, if they want this great deal they have to act now.
If you are contemplating deep discounts to get buyers to act quickly, ask yourself, are you credible? If you say to a potential customer, I’ll give you 50% off if you act this week, what does the buyer think? If the buyer waits more than a week and then offers to buy from you at the previous price, will you reject it? Probably not and your buyers know it. Hence, it’s not credible. In most situations, deep discounts to act now is just giving away money.
Also ask yourself, would I win this business anyway, a little later but at a higher price? If so, it may be in your best interest to wait out the customer. (Of course you’re always at risk of losing the deal to a competitor.)
Deep discounts can motivate buyers to act quickly, and it is sometimes in your best interest to do so. Just be clear about your expectations if you choose to try this tactic.
Photo by supa_pedro
Pragmatic Marketing’s December activity/box of the month is Referrals and References. What does this have to do with pricing? Plenty.
If you are systematically executing the activity of creating and collecting referrals and references, then you probably have a formalized program on turning customers into valuable marketing tools. If you don’t then you are hopefully collecting and organizing data about customers who like you, at least when they fall in your lap.
We gather referrals and references to help us sell more product. Referrals help us find new customers while references help us close deals. But here’s where pricing comes in:
Referrals and References increase new customers’ willingness to pay.
Since pricing is all about creating and capturing value (i.e. customers’ willingness to pay) then anything we can do to create value helps us win at higher prices.
Think about your own decisions. You are thinking about buying a new kitchen appliance, say a panini press. You haven’t shopped yet, but in a conversation with a friend he tells you about the one he has, brand X, and how it makes great sandwiches. He is extremely happy with it. Now once you decide to buy a panini press, wouldn’t you pay a few dollars more for brand X over brand Y just because your friend has it and loves it?
Just like you would pay a little more because one brand comes highly recommended from a friend, so will your customers. Think of a referral as one more “feature” your product has that your competition does not. Your customers value that feature and would pay a little more to have it, all else being equal.
When we put together a program to systematically collect and use referrals and references, we increase both the volume of sales and the price at which we can win. Sure seems like a win-win for us.
Pragmatic Marketing’s activity/box of the month is Product Portfolio. Combine this with pricing and you have a gold mine of great content ideas.
The most important concept at the intersection of these two topics is this:
Knowing how to price product portfolios helps you CREATE much more profitable product portfolios.
You see, pricing a portfolio after it has been created is interesting and useful, but building a portfolio around your pricing strategy is powerful.
There are two key pricing strategies to use for portfolios, versions and complements. Versions (also known in economics as substitutes) are multiple products that you expect your customers to choose between. Complements are products that you expect (hope?) your customers will purchase after purchasing another item from you.
One example of versions is first class and coach seats in an airplane. People tend to purchase one or the other, not both. Some people choose the expensive one, some the inexpensive. Creating a set of products with the right versioning strategy can get your customers who aren’t price sensitive to pay you more, while still getting the price sensitive customers to purchase from you.
Examples of complements include razors and blades, printers and ink, movies and popcorn. The strategy here is to have a product your customers use to make a decision and price that aggressively. Then, for the complementary product (blades, ink, popcorns) you charge higher margins because there is less or even no competition. Here we win customers with the decision product (razors, printers, movies) and then make profit with the complementary product. Of course it’s perfectly OK to make profit from the decision product as well.
Pricing product portfolios isn’t about putting prices on a product in a portfolio. Rather, it is really about understanding pricing and using that to create a portfolio that rocks. When you clearly understand how to price a product portfolio, then you are in a position to create a portfolio that is extremely competitive and captures much more of the value you deliver to your customers.
Photo by Tanguy Ortulo
This article in the International Business Times reports that Walmart may match lower prices from on line retailers. Walmart already price matches other retailers, but so far has not ventured so deep to match prices with Amazon. Is this a wise decision or not?
First, the key reason companies should offer price matching is to reduce price competition. When one company says they will match competitors prices, then there is no incentive for competitors to lower their prices. As a general rule these clauses reduce incentives to compete on price resulting in higher industry profits.
However, it seems highly unlikely that Walmart is thinking this. Even a behemoth like Walmart surely can’t think they can influence Amazon’s pricing strategy. So there must be another explanation.
This is more understandable when we break the market into segments.
1. There are a group of people who believe Walmart has great prices and just shops and buys without comparing to online prices.
2. There are a group of people who will buy online and won’t even consider shopping at Walmart.
3. There are a group of people who shop at Walmart, but still check Internet prices to see that they are getting a good deal.
Segment 1 will purchase at the regular price. No discounts needed to win their business so the price match makes no difference. Segment 2 will not buy from Walmart so the price match makes no difference.
The big question is what happens with segment 3. If Walmart doesn’t price match, then these guys will not buy from Walmart if they find the same product cheaper on line. By offering price matching, Walmart wins customers they wouldn’t have won otherwise. These customers may purchase at prices lower than Walmart wants, but they are likely still profitable.
So, without price matching, Walmart wins segment 1 at full price. They probably don’t win segment 3. With price matching Walmart wins segment 1 at full price AND they win segment 3 at lower prices. Overall Walmart makes higher revenue and higher profits, but a lower average gross margin.
The article says that Best Buy recently offered price matching with Amazon and their margins went down by 4%. The article implied this is bad. However, this could be a positive because Best Buy is really winning customers they wouldn’t have won otherwise, those in segment 3. This result is the same result Walmart should expect if they offer price matching. Margins will go down a little.
The article provided another big reason Walmart may want to offer price matching. Walmart has an image of the low price leader, but this image can be damaged if buyers can consistently purchase on line at prices lower than Walmart’s. Price matching helps Walmart maintain their low price brand.
Price matching, at least for Walmart, seems to make sense. What about your company? Presented here were three reasons you might consider offering a price match: reduce price competition, win new market segments, and enhance your image as a low price leader.
The question: Does price matching make sense for you?
Pragmatic Marketing’s October highlighted activity is personas. So how does this relate to pricing? In many ways, but let’s split this topic in two’s, buyer and user personas. Recall that in general, we build products to solve problems for user personas and we market our products to buyer personas.
But before we start pricing for personas, remember the general rule, Charge what our customers are willing to pay.
User Personas and Pricing – Different user personas have different willingnesses to pay. This is logical because different users have different problems they are solving which drives a different value proposition.
For instance, imagine we are selling lawn care products to two different personas, a homeowner and the greenskeeper of a high end country club. The expectations of results are very different. The homeowner’s problem is to keep the lawn green enough that the neighbors don’t complain. The greenskeeper on the other hand needs the lawn to look perfect so new members will join and current members will not go find a better place. Two different user personas, two very different problems, two extremely different willingnesses to pay.
The solution to charging homeowners and greenskeepers two different prices is usually to create two different products. This is one reason why in many industries we see the “handyman” versions and the “pro” versions of products.
Buyer Personas and Pricing – To price well for buyers, we must understand their buying process. Different buyers use different processes. Although it is very difficult to generalize on this topic, here is one of my favorite examples.
Imagine buyers at two different companies, a huge multinational conglomerate and a small company. If you were to ask which one is more price sensitive, the answer may surprise you. The huge company hires purchasing agents that are brutal negotiators. They get the best deals possible on everything that matters. Note the last three words, “everything that matters”. For large volumes and large dollar values, the huge company is very price sensitive and will undoubtedly get the best price possible.
However, for small volumes, huge companies are horrible at negotiating and finding the best deals. It’s barely worth their time. Yet, for small volumes, our smaller company cares a lot about the price, because they only buy in small volumes. The small company will shop around for the best price, stock up on cheap inventory, anything they can to keep their costs lower.
When you understand the buying process each buyer persona uses, you have the opportunity to capture higher prices. In PragmaticPricing history you will find many posts on how price segmentation works. These are the techniques we need to employ to charge different buyers different prices.
To summarize, knowing your user and buyer personas will effect your pricing decisions. We frequently create different products (at different prices) for different user personas and we should use price segmentation techniques to charge different buyer personas different prices.
Photo by marketing facts
A friend and fellow pricing expert, Jon Manning, posted this article, “Comedy club charges customers per laugh” in the Pricing Propheteers LinkedIn group. If you click on the link and scroll to the bottom of the article, you’ll see a video that describes it well.
To summarize, they hooked up cameras to the seat back in front of each patron and used that camera to count laughs based on facial expressions. The show was free to enter, but entrants were charged approximately 30 cents per laugh up to a maximum of 24 Euros.
Imagine you run a theater company and when you decide how to price it, the most logical choice is to set a price for the seat. After all, it’s common. We see that pricing model in other shows, in movie theaters, in airplanes. We are used to charging and paying by the seat. It’s easy. If you run a theater of course you are going to charge by the seat.
But these guys went way beyond what was obvious and answered the question, what are people really buying? Patrons are buying the entertainment, not the seat. That’s what they charged for, the entertainment, not the seat.
What about your company? Most companies do what is obvious. Charge for the product. Charge by the seat (in software). These are obvious and it’s what your customer expects. But what if you could charge directly for the value?
What are your customers really buying? Do they really buy the right to use your product or software? Probably not. They are probably buying some function, some result. Their value comes from that function or result, not from the right to use your product.
Now the hard question: Can you find a way to price your product based on the value your customers receive instead of simply taking the easy way? Think hard. Be creative. If a theater company can charge by the laugh, surely you can come up with something too.
A frequent question during our Price class is “How should we compensate our sales force?”
Salespeople have a huge influence on our achieved margin. They are the front line in any negotiations. They are the ones who communicate our value to the customer. They set the customer expectations on what price they should be paying.
Since they have so much influence, how do we influence them to do the right thing when it comes to getting the highest price?
You may have heard the phrase, “Salespeople are coin operated” meaning they do what they are paid to do. (Nothing against sales people because I think we all do this.) However, salespeople usually make commission on the sales they make. The most common type of commission is a percentage of revenue.
Unfortunately, when we use a percentage of revenue as their compensation plan, it motivates them to close more deals quickly, even at lower prices. That’s not what we want. We like the more deals quickly part, just not at lower prices.
Here is a good explanation by the Freakonomics authors, Steven Levitt and Stephen Dubner on why real estate agents don’t try to get the best price for your house. The same is true for most sales situations. It’s hard work to get the last few dollars in a sale, and it’s just not worth the salespersons time to go get them.
How can we structure a compensation plan that will go get those last few dollars? First, please know that compensation is a huge topic which we are not exhaustively covering here. Instead, we only want to focus on the price piece.
One idea would be to compensate sales as a percentage of the margin achieved. That way when the company makes more profit, so does the salesperson. Sales would have a decent percentage of the profits so they have more incentives to get higher prices. The big downside to this is most companies don’t want to share their costs with their salespeople. When sales knows the costs to build a product, it often drives prices down, not up. Sales then knows how low they can go and the company will still accept the deal.
A better solution is to determine a target price for each sales situation. What price should a salesperson be able to achieve? This target price is often a function of the industry, geographic territory, type of customer, size of the deal and more. You can determine this target price by what customers have historically paid.
Once you have a target price, you can then offer incentives based on how much above or below the target price the salesperson closed the deal at. For example, you might have a commission structure that looks something like this:
- 10% for any deal at or above 10% over target price
- 8% for any deal at or above 5% over target price
- 5% for any deal at or above target price
- 3$ for any deal at or above 5% below target price
- 1% for any other deal we accept
With a compensation plan that looks like this, small changes in realized price can make a big difference in the salesperson’s commission. Hence, the incentives are more aligned for sales to try to get the highest price possible.
Sales compensation is a big topic, but the lesson here is important. If we want to get that last 1% of the price, we need to find ways to incentivize our salesforce to try harder. This technique does that.
Last week I attended the Train the Trainer class put on by Ed Tate and Darren LaCroix of the World Champions Edge. Great class. There is always something new to learn, but that’s not the point of this blog.
They had arranged a special rate of only $49 a night for a room at the Palms Resort. What a great price. As a very frequent traveler, I haven’t paid $49 in years. And the Palms is a nice resort. My room was as spacious and clean as any 4 star hotel.
When I checked in the agent told me they had a $25 resort fee. Wow! A 50% up charge as a fee! The below is from the Palms website www.palms.com/faqs
The resort fee is a daily fee of $25.00 (plus applicable tax) that is charged at the end of your stay. This is a standard practice at the majority of the hotels in Las Vegas, we promise.
The resort fee includes:
Complimentary In-Room High speed internet service (faster rates available for additional fee)
Complimentary access to Palms Cardio Center & Palms Place Fitness Center
Shuttle Service to and from the Forum Shops 11AM-8PM Daily [please note hours may adjust some]
Daily Newspaper (available at select locations)
Unlimited local and toll-free calls
Airline Boarding Pass printing
Copies and faxes at the Front Desk and Concierge (does not include color and large print jobs)
Many of us at the event joked that we paid $25 for “Complementary WiFi.”
I’m not complaining. $74 a night is still a great price, but notice how well the Palms understands their customers decisions. The room rate is critical in that decision so the Palms works hard to keep that as low as possible. Then, once they have you on location, they try to make as much as possible, not only from their “resort fee” but also from food, gambling, and more.
I ate in the resort the entire time, because it was convenient and there weren’t any restaurants within easy walking distance. Their restaurants were a little pricey, but not ridiculous. My breakfasts were about $15, one lunch was about the same, and one dinner was well over $100 at their steak place. The food was good so again I’m not complaining. Just pointing out their pricing strategy.
Don’t forget the gambling. Of course they want you to gamble. I played a little video poker. Won $6 the first night and lost $20 the second, so they got another $14 from me.
There are many other ways they can get your money that I didn’t experience. For example, they had a spa, a shopping area and even a fortune teller.
The key lesson here though, the Palms Resort clearly priced the room at a very low price to attract customers. The room rate was the factor that helped people choose the Palms over other locations. Then, once their customers check in, they find other ways to earn profit.
You should be thinking the exact same way. What product or service do your customers use to decide whether or not to engage with you? Consider pricing that product aggressively to attract more customers. Of course, that only makes sense if you have add-on products and services where you can make the profit you give up from your aggressive pricing tactics. If you don’t have additional means to make profit from your customers, then it’s very difficult to be aggressive with the price on the original product.
You may be thinking this is deceptive and you don’t want to do it. What happens to you if your competitors implement this strategy? If they have the ability to charge very low prices for the decision product, how will you compete? Maybe the owner of the Palms Resort doesn’t really like doing business this way, but the Rio and the Orleans resorts, both close by, use this pricing strategy. The Palms doesn’t really have a choice if they want to stay in business.
Think hard about how you can use a complementary pricing strategy.
Photo complements of Wikipedia
Usually when we use the phrase “the competitive landscape” we are looking to enter a market and trying to decide how it looks. Is this a market where we want to play or not?
Pricing offers a unique perspective on this question.
First, remember that costs are essentially irrelevant to pricing. What really matters is how much our customers are willing to pay. However, when deciding whether or not to enter a business, costs become extremely important, both fixed costs and variable costs play a role. Today we will focus only on the variable cost aspect.
A key component in looking at the competitive landscape is the margin your competitors are making. If they are selling an extremely high margin product, there may be room for competition. This is a strong indicator that competition isn’t driving the price down toward costs. Of course, when you enter, your competitors may choose to compete on price to hold their market share, but at least it doesn’t start that way.
If your competitors are selling at relatively low margins for the industry, and especially if they are low relative to what you are willing to accept, then you have to decide if you are adding enough extra value that you can charge higher prices. Alternatively, do you have a strong cost advantage, meaning you can manufacture at a much lower cost than your competitors? Something has to be different if you want to enter the market.
Before you enter the market, ask yourself, “what price will I be able to charge?” Use the value based pricing process to see how much your product will be worth relative to your competition. Then, if you plan to price lower than your competitor have a justifiable belief on how they will respond. Will they ignore you because you’re the new kid in the market? Will they aggressively compete to not lose any share? You need to predict your prices and your competitors responses. If they compete aggressively, will you have enough margin in your product to meet your corporation’s goals?
Although costs rarely matter when setting prices, they are critical in deciding whether or not you want to be in a business. Determine your pricing up front, including your competitor reactions, then decide if you want to enter this market.
Costs matter when deciding to enter a business. Knowing your pricing up front is necessary to predict profitability. Understanding pricing will help you understand your competitive landscape.
A Sharks season ticket holder wrote:
I was surprised to learn that the SJ Sharks are printing variable pricing on the tickets for the games. “This means that the price printed on your ticket will reflect the true market value based on the expected demand for each game.”
So if you are in a low priced (Tier 1) game, do you wear your old uniform?
It turns out that the Sharks are considering the opponent and the day of the week the game is scheduled to estimate demand and therefore price. This makes perfect sense for pricing individual games.
What didn’t instantly make sense though is why do this for season ticket holders, who pay for the season, not individual tickets. Why should the Sharks bother printing different prices on each paper ticket?
After a little digging you find that this behavior provides more value to their season ticket holders.
To make sense of this you need to know that the NHL hosts a site called NHL TicketExchange, which is where you can legally go to sell tickets to any game you might not be able to attend. However, you can only sell them for the face value of the ticket. This variable pricing allows the season ticket holders to sell the best games at higher prices.
Also, when you add up the prices of all of the individual games, you get a number larger than the price of the season ticket. This means if a season ticket holder could sell every ticket at face value, he or she would make a profit.
What is fascinating about this example is simply by changing the printed price on a paper ticket, the Sharks provided more value for their season ticket holder. Are you always on the lookout for ways to add value to your customers? It doesn’t have to be with the price label (and rarely will be). When we add value, we make happier, more loyal customers who will likely be willing to pay more.
I love to see unusual pricing behaviors. They are intriguing and often we can learn something interesting from them, even if it’s what not to do. Please send me any apparently inexplicable pricing you run into.