The Pragmatic Marketing framework activity of the month is Market Problems. If you know about Pragmatic Marketing you know that the foundation of all that we teach is understanding and then solving market problems.
At first glance, it appears that pricing is directly related to the size of the problem solved. Some life or death medicines sell for thousands of dollars a dose. It’s a no brainer that we would pay that much if it would save the life of a loved one. On the other hand, most of us would never pay thousands of dollars for something with much less impact. Think about a medicine that heals cuts quicker.
This is even easier to understand when thinking about B2B opportunities. If you build a product that will save a customer $10M, companies would pay a lot for it. Compare that to a product that will save them $100K. Obviously the customer would pay a lot more for the product that will save them more.
So far so good. The bigger the problem solved, the more a customer is willing to pay. However, it’s not really that simple.
This situation changes when competition enters the picture. The most a buyer would pay to solve a problem doesn’t really change, but what does change is how much they HAVE to pay.
As an example, assume a buyer would pay $1,000 to a monopolist to solve a problem. Obviously both the buyer and the seller are happy, otherwise they wouldn’t have entered into the agreement. Then, one day a new competitor enters the market and solves the same problem for only $200. Now, the customer would no longer pay $1,000. Assuming the competitor really does the solve the problem, the most the buyer would now pay is $200.
In high technology we see this frequently, where a company creates a new solution, is successful in the market, and then competition enters and drives down industry prices. Another example is in the pharmaceutical industry. Drugs are often protected by patents, making the manufacturer a monopolist, but the moment the patent expires competitors enter the market and prices decrease.
To summarize the point of the blog, the most a buyer would pay is the smallest of these two prices:
The amount they would pay to make the pain of the problem go away.
The price of a competitive product that solves the problem equally well.
So yes, the more severe the problem, the more buyers would pay to solve it. But the price we can get away with charging is often tempered by competitive offerings.
Photo by Tomasz Stasiuk
It is a great feeling when readers tell me they’ve implemented good, better, best because of what they’ve read. (Actually it’s a great feeling that people read the blog, let alone take action.) Then, when they went on to describe what they had done, it became obvious I left out an important detail.
Several times in the past couple months I’ve heard from people who implement good, better, best by creating low, medium, and high priced offerings. The low priced product had the least number of features, the medium had more and the high even more. So far so good.
Then they went on to describe what features made up each package. It almost seemed random as to how the features were assigned to which offering. As an example, the low end product had some features that were not in medium or high. This is not best practice in good, better, best.
The problem with this implementation is we force buyers to make a difficult choice. They must choose between a lower end package that has a feature they want and higher end packages that also have other features they want. They are trading off features between packages, trying to decide which package has the features that are most important.
The power of good, better, best comes in its simplicity. Buyers who have a hard time deciding, buy the one in the middle because it’s better than the good product and less expensive than the best. However, this only works if the product offerings build on each other.
In other words, your better product should be everything that is in good plus more. Your best product should be everything that’s in better, plus more. Don’t make your buyers think too much.
Let’s take a look at iPhones. Apple always offers 3 versions of each model of iPhone based only on the amount of memory. This is a wonderful implementation of good, better, best. When someone buys the one with the most memory, they get everything that’s in the lower offering plus more. It’s simply a price for feature decision.
However, Apple also gives you the choice of the iPhone 5s, the 6 or the 6+. This is NOT good, better, best. Even though they are low, medium and high priced, they do not build on each other. If you want a phone that is not “too big” you will purchase the 5s or the 6, but not the 6+. Even “rich” people may prefer the 6 to the 6 plus.
Good, better, best is a powerful technique to structure your products and prices, but you want to be sure to do it right. One goal is to simplify the decisions your customers need to make. The only trade-off they should be making in their minds is price for features, not choosing between features. We do this by making sure the best product has everything the better has plus more and the better has everything the good has plus more. Good luck.
I can’t believe how tight airplane seats are. They keep on reducing our legroom. It’s ridiculous how small these things are now. And I’m not the only one. Everyone complains about the lack of legroom.
However, believe it or not, we ask for less legroom. Not directly, but with our choices. When people choose which ticket to purchase, they typically find all of the flights that will get them to their destination at a reasonable date and time. And then they buy the cheapest one. Notice legroom didn’t make the list of what they consider.
Admittedly some people do care more about legroom. Many airlines now have 3 classes of fares in domestic travel: First class, front of coach and back of coach. It costs more to sit in the front of coach than in the rear of coach and the only real difference is a few inches of legroom. For example, USAir charges an additional $49 for the extra legroom.
Yes, some people purchase the legroom, but if you watch the way plane seats sell out, the back of the plane sells out before the front of the plane. (Yes, I spend too much time looking at seating charts for airlines.)
Put yourself in the airlines shoes. Their customers constantly complain about the legroom, but most often choose less legroom (lower price) when making a purchase. What do you do? Airlines are simply giving us what we want, lower priced seats at the expense of legroom.
Here is an interesting article by YouGov summarizing a survey done about how we make airline purchase decisions. This is my favorite paragraph:
“42% of Americans who have flown said that they would be likely to purchase an “Economy Minus” ticket offering lower prices for reduced legroom. 15% said that they were very likely to purchase smaller cheaper seats. Women are more likely than men to consider downgrading to a smaller seat (47% compared to 37%) and Millennials (51%) are more likely than those aged 50+ (32%).”
42% would take even less legroom that they get today for a better price. If this is true, why wouldn’t airlines continue to shrink their legroom? We are asking for it.
What pricing lesson can we learn from this? Sometimes our customers complain with their mouth, but they don’t “complain” with their wallet. It’s important for pricing people to be real clear on how customers make their purchase decisions and what role price plays in that decision. We can listen to what people say, but we have to study what they do.
Seth’s blog is the only one I read every day. He talks about a variety of topics, always with insight. His short blog this morning, although not directly about pricing, is almost identical to the concept of Will I? and Which one? Here is the entirety of Seth’s short blog:
This or that vs. yes or no
It’s much easier to persuade a philanthropist to fund your project than it is to persuade a rich person to become a philanthropist.
Encouraging someone to shift slightly, to pick this instead of that, is a totally different endeavor than working to turn a no into a yes, to change an entire pattern of behavior.
When looking to grow, start with people who already believe that they have a problem you can help them solve.
Turning a no into a yes, also known as convincing someone to answer yes to “Will I?” takes a lot of work. If you’re going to use price to turn no to yes, it will take a large price decrease. However, getting someone to pick your product instead of your competitors, also known as the “Which one?” decision, is much easier and can often be accomplished with smaller price discounts. What decision are you trying to convince your market to make?
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.