Pragmatic Pricing

The Cost of Shopping:  Why Your Customers Pay with Their Lives

Business is like a game.  You make a move.  Your competitor makes a move.  Your distribution channel makes a move.  Your prospects make a move.  You win when prospects buy from you at a profit.  The more profit, the greater the victory.

The strategy of winning any game is to look ahead as far as possible and then reason backwards to make your best decision (move) for the current situation.  In chess, you think several moves ahead, both for yourself and for your competitor.

The strategy for winning at business is the same.  Look ahead as far as possible and then reason backwards.  In the game of business, the last move is a prospect buying from either you or your competitor.  That was not your move.

Your last move is to set a price.  Product development happens very early.  Then marketing and channel development.  Then maybe direct sales and customer support training.  Because price is so easy and quick to change it is the last decision you make.

Typically a company does everything necessary to launch a new product and then, just prior to launch, finalize the price.  And then, if they find the price wasn’t good enough, they can change it.

Why do you care?  Read carefully.  This concept is important.

Price is your last move … strategy looks ahead and reasons backwards.  It only makes sense that people in product development and marketing and sales absolutely must understand pricing concepts in order to do their job the best they can.

Product development must know that value comes from differentiation.  How is their product different from the competition?  They must understand segmentation, developing different products for different markets.  They must understand good, better, best, allowing customers to segment themselves.  They must understand complementary pricing, razors and blades.  If they understand these concepts, they will create product strategies that can win with more customers.

Marketing must know that value comes from PERCEIVED differentiation.  Customers only value what they know and believe.  It is marketing’s job to help the customers believe, to communicate the value.

You get the idea. Everybody in the company attempts to create value.  The question is do they know how value is measured?  How it is captured?  Value is measured by what your customers are willing to pay.  Value is captured through pricing.

The lesson here – evangelize the concepts of pricing throughout your organization.  This will help them create even more value.

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Read more from Mark in his book Impact Pricing: Your Blueprint for Driving Profits

Photo by dsb nola

How Your Customers Use Price to Make Buying Decisions

Everything your company does either creates or destroys value.  Value, when measured by a customer’s willingness to pay, is in the mind/wallet of each customer.

You design products, marketing programs and sales training specifically to create and communicate value to your customers.  Most of your company resources are dedicated to these three areas: new product development, marketing and sales.  The purpose of these are to create and communicate value.

Then why do you destroy it?

Every customer touch point creates or destroys value.  Price can’t compensate for bad customer interactions.

Here is my worst customer service story ever (although a lot of companies seem to be competing for this recently).

I ride an expensive bicycle and am very picky about who works on it.  I would love to give my business to a local bike shop, but I need to trust the mechanic.  There is a bike shop very convenient to my house, but I had never taken my bike there.  Oh, I’d purchased a few accessories from them, but they hadn’t worked on my bike.

One day while walking by I met Mike (not his real name), one of their mechanics, out testing a bike.  We started chatting and I came to trust him.  So I made an appointment for Mike to work on my bike.

The day of the appointment arrived.  I walked into the shop and told the guy behind the counter that I was dropping my bike off for Mike to work on.  He replied “I’m the owner and I’ll decide who works on your bike.”  I was stunned.  I truly couldn’t believe what he just said.  Gathering my wits I asked nicely, “Can Mike work on my bike?”  He said, “I can’t make that commitment.”  “Are you serious?” I asked, not believing what I just heard.  He said “yes”.  So I turned around and walked my bike out the door.

To add a cherry on top of this story, I called the owner about a week later and asked if he would reconsider and he said he didn’t want his customers coming in because of his workers, so no, he wouldn’t.

I easily spend $1000 per year on bicycle service, accessories and clothes.  Since that day, this bike shop has not received a dime of that.

This bike shop owner surely puts a ton of time designing his store, making it as inviting as possible.  He carries the products he thinks are best.  He hires good people.  He advertises in the local community.  He does many things to create value for his customers.  With one action, he destroyed every bit of value with me.

Value gets destroyed one customer at a time.

Lesson – Every customer touch point creates or destroys value.  Make sure none of your customer touch points destroy value.  Pricing can’t help you recover.

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Photo by Tony the Misfit

Another blog posted on AllBusiness.

Hey Netflix – It’s All About Your Customers

Here is the latest pricing blog I wrote for AllBusiness.com.  If you like it, please comment on the AllBusiness site.

Pricing Your Products: 2 Questions – 1 Answer

What does your demand curve look like?  If you charge a price 10% higher, how much will you sell? 

Every academic pricing book will tell you, pricing is well understood.  Simply plot your demand curve which is the quantity you sell at each price.  Use that information to plot your profit Qty*(price – variable cost).  If you’ve done this right, your profit looks like an upside down U.  Now select the price that correlates with the top of the U.  That is your profit maximizing price.  Easy, huh?

As Lee Corso would say, “Not so fast my friend.”

There are two huge reasons why this is completely impractical.  First, who knows their demand curve?  It is almost impossible to know the demand at any given price with any certainty at all.  There are many market research methods, based on statistics, to make estimates, and these estimates are probably better than guessing, but not very accurate.  Besides, they still don’t account for the second huge reason.

Reason 2, your demand curve doesn’t include competitive reactions.  How will your competitors respond to your price changes?  If you lower your price, and they don’t change theirs, you gain more share, sell more units, and probably increase profits.  However, if they lower prices too, you probably don’t gain any unit sales, and what you do sell is at a lower price, so profits certainly decrease.  Demand curves do not explicitly take into consideration competitors’ responses.  In other words, demand curves aren’t overly useful in figuring out what price to set.

This is good news!  You don’t have to estimate a demand curve.

So what do you have to do? You must have a set of beliefs about how your competitors and customers will respond when you change prices.  Then, playing mental “what if” games possibly combined with price testing, you will make decisions on how to best set your prices.

You’re probably thinking, “But that doesn’t sound easy.”  You’re right.  I never said pricing is easy, I just said you don’t have to create a demand curve.

A demand curve is a great theoretical tool for economists, but it’s not practical for people who have to actually run a business.  This reminds me of one of my favorite quotes:  “In theory, theory and practice are the same. In practice, they are not.” – Yogi Berra

If you enjoy my writing on pricing would you please do me a favor?  Recommend my book, Impact Pricing, to a friend.  Evelyn said, “I spent an entire Saturday afternoon reading Impact Pricing–and discussing its lessons and insights–with my entrpreneurial son-with-the-small-business. We were both fascinated at the clarity of ideas and workable solutions to his business model.”

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author