Pragmatic Pricing

Here is a blog from Al Berger, a 30-year professional photographer, giving pricing advice to new people entering the field.  To be in business 30 years he must be doing many things right, but giving pricing advice is not one of them. This is a great example of how prevalent cost plus thinking is.

The article describes how you should gather all of your fixed and variable costs, estimate how many customers you will get, and then bury the prices for these overhead costs into the prices of prints or studio time.

This couldn’t be more wrong.

Understanding all costs is important to knowing if you can make money at this profession, i.e. whether or not you should be a professional photographer, but they are irrelevant to setting prices.  The only thing that matters to what price to charge is how much your customer is willing to pay. This is pricing to capture the value you create and it is called Value Based Pricing.

Your customer’s willingness to pay is determined by how much better (or worse) you are than your competition and how much your competition charges.

Once you begin thinking this way, you can use price to your advantage.  Some people are very price sensitive.  Offer them a low priced package.  Some people are not price sensitive at all.  Be sure to have some very expensive offerings to capture more of what they are willing to spend.  You can price your portfolio, where prices on some products are aggressive to attract customers, and prices on other products are higher to make more profit.

Pricing isn’t easy to do well.  However, if you want to make the most money given your talents and experience then understanding and using value based pricing is imperative.

To be fair to Al Berger though, I believe he was addressing a problem that new photographers enter the field and don’t charge enough to cover their costs.  This drives these new photographers out of the market quickly while at the same time lowering the overall market price for photographers.  On this point I agree.  If the revenue from Value Based Pricing doesn’t exceed the costs of doing business, get out of the market.  Or better yet, don’t get in.

Mark Stiving, Ph.D. – Pricing expert, speaker, author

Photo by UggBoy

The Wall Street Journal posted a column by Al Lewis called Info-Age Shoplifting, railing against Amazon’s new Price Check app for iPhones.  He references and builds on another scathing article, Amazon’s Jungle Logic, by Richard Russo published in the New York Times.  Both of these are ill-informed knee-jerk emotional reactions to a smart and reasonable business strategy that just may help the people that these writers are claiming to protect.

Price Check is an iPhone app that Amazon released so shoppers can scan the UPC code of an item while at a brick and mortar store and then upload the price of that item to Amazon.  The shopper earned a $5 coupon on Amazon.  (There are more details, but that is the gist of it.)  The intent is for Amazon to collect prices of competitors, enlisting the masses to help.

The anti-Amazon crowd whines that this allows Amazon to know everyone’s prices and undercut them.  This will eventually put all brick and mortar stores out of business.  The poor mom and pop stores have no chance.

BS!  What an amazing extrapolation of fantasy.  It could quite possibly do the opposite.

The issue here is price information.  Price information works one of two ways.  Two companies, who know each others’ price information, compete vigorously on price, enter into a price war, and everyone loses.  Or … the same two companies know that each other knows their prices, and choose to compete on attributes other than price.  This is implicit collusion, holding prices higher in the market.  Think of two gas stations across the street from each other.  They could compete aggressively with price, or attempt to stay at a value-adjusted parity.

The complaint against Price Check is that Amazon will learn prices from the mom and pop stores.  So what?  Amazon is not going to change prices to compete with mom and pop.  Amazon may change prices to compete with Wal-Mart or any retailer that is dominant in their market space, but this is not the emotional put-mom-and-pop-out-of-business scenario. Small retailers can charge anything they want and Amazon will not respond.

You’re a small business owner, what should you do?  Three things:

1.  Don’t worry about someone using Price Check in your store.  This person is tech-savvy and probably isn’t going to be a customer anyway. However, try not to waste resources serving them.

2.  Use Amazon’s same technique.  You have access to the prices that Amazon charges.  Watch them.  Use that information while setting your prices.  This is especially true for all products where you think customers will shop for prices.  Check out the web site www.camelcamelcamel.com for Amazon’s historical prices.

3.  Most importantly – DO NOT COMPETE ON PRICE against Amazon.  Know their prices, and charge a little more.  Focus on the value that you add:  immediate delivery, personable help, easier returns, etc.  Your role is to add value over Amazon so you can charge a little more.  People who do not appreciate your added value will buy from Amazon.  You need to attract and capture the customers who do appreciate your value.

Although it is impossible to tell, my belief is that Amazon’s Price Check is more likely to hold prices higher.  When Wal-Mart knows that it can’t stealthfully undercut Amazon, they will do it less often.  Mom and Pop’s real fear should be a price war between Amazon and Wal-Mart.  If these two behemoths get into a price war, mom and pop stores will suffer.  But if Amazon and Wal-Mart find a way to implicitly collude by knowing each others’ prices, it holds prices up so the mom and pop stores have more room to make money.  There is more money to share between them when they implicitly collude.

As small businesspeople, let’s hope they implicitly collude.  Of course as consumers, we prefer the price war.

Everyone is different.  We have different needs, wants, desires, tastes, habits etc.  Most relevant to Pricing, everyone has a different Willingness To Pay (WTP). We don’t force everyone to wear the same clothing style, or eat the same foods, or drive the same cars.  Similarly, we don’t have to force everyone to pay the same price.  We can customize pricing.

Car pricing is customized.  Not the sticker price, but the actual price people pay.  I just bought a new car and it is very unlikely that I paid the same price as anyone else for the same car at that dealership.  I certainly negotiated differently and had a different WTP.

Airline seats are pretty customized.  Although a few people on the plane may be paying the same price, not many are.  The airlines have figured out great techniques for charging different customers different prices, trying to capture more of each customers’ WTP.

Some items, like potato chips, are harder to customize for just a few people, but they do customize for larger groups.  They charge different prices for different flavors in different regions of the country.  They offer coupons to let the price sensitive pay less.

Pricing is customizable.  The first step is thinking of two customers or customer types that have different WTPs.  The second step is figuring out how to let people with lower WTP pay less while not letting people with higher WTP have the low price, all while everyone thinks it is fair.  That’s where the fun comes in.

The answers are in several past blogs and in part 2 of Impact Pricing: Your Blueprint For Driving Profits.  (Shameless plug.)  I’ll certainly write more on this in the future as well (for anyone too price sensitive to buy the book.)

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

Photo by istolethetv

One trick that professional purchasing organizations commonly use today is to tear apart your product, calculate how much it costs to make, and then negotiate with you starting at your cost.  This makes it challenging to sell value.

Interestingly, as consumers we do the same thing.  When you buy a car, do you try to find out the dealer’s invoice price to help with your negotations?

In fact, we assume that companies price using cost plus.  For example, when a company tells you they have a fuel surcharge because the price of gas has gone up, this implies cost plus.  When Hershey’s says the price of chocolate is going up because sugar prices go up, we think cost plus.  Every time we see an announcement that oil prices have gone up, gas prices go up instantly.  This implies cost plus.

How about when a disaster hits an area and the store sells bottled water at a price much higher than normal.  The store owner is selling value, but we’re upset because we believe he should be cost plus.  (I’m not suggesting you gouge customers during a disaster.  Just using this as an example.)

I once consulted with a couple guys doing consulting.  They knew they wanted to use value based pricing, so when a client asks them what they charge, they used to say, “we have to wait until we understand how much value you get out of this.  Then we can give you a price.”  They were effectively telling their potential customers there were going to “gouge” them.  Ouch.

The point is buyers assume you price using cost plus.  Although it is much more profitable to use value based pricing, you want to allow your customers to continue to believe you use cost plus.

All you people selling software, you have this easy.  There is no variable cost, so everyone assumes you are selling value (or development costs).  Cost Plus Buying only applies to products where there really is a cost.

The lesson: use value based pricing, but look like you are using cost plus pricing.  Just another reason why pricing is … secret.

Mark Stiving, Ph.D., Pricing expert, speaker, author

Photo by Gavin St. Ours

Thanksgiving weekend I was sitting at breakfast with a brilliant 8 year old girl. I asked her questions like what she wanted to be when she grows up. “A teacher, I think,” she answered shyly. After several brief answers she began asking me questions. “What do you want to be when you grow up?” I answered that I work in pricing. “What made you want to get into pricing?” Good question. “What do you do when you price things?” Great question.

We talked about pricing for a half hour or so with her continuing to ask fantastic questions. I could see her contemplate every answer before she came up with the next question. She runs a small t-shirt business with the help of her mom and grandma and tried to apply some pricing concepts to her business. Did I mention she was brilliant? And only 8?

Later, we were in the living room where we were telling stories. She told a story she had memorized about an “Anxious Leaf”. I told the story about meeting my wife. She started another story. After hearing the first 3 lines I stopped her and asked her to start over so I could record it. What you see in this video was not prompted or coached in any way, which makes it even more amazing.

www.MarkStiving.com
Impact Pricing: Your Blueprint for Driving Profits

Price segmentation usually means charging different prices to different customers with different willingnesses to pay.   However, it can also be charging the same customer different prices depending on the situation.  Here’s an example.

On November 27 I had my car washed at the Car Spa.  At the checkout, they gave me the coupon you see in the picture.  Notice that this coupon is only good for 2 weeks from the day of the car wash.

It is very unlikely that I would get my car washed again within one week a wash and probably not even within two weeks.  This means I have a low willingness to pay for a car wash shortly after having it done.

And that is what price segmentation is.  Charging less to customers with lower willingness to pay.  In this case, the customers willingness to pay changes in a predictable manner over time.  Willingness to pay increases the longer it has been since the last car wash.  This coupon takes advantage of this characteristic.

Does this concept apply to your business?  Does your customer’s willingness to pay change in a predictable way?  If so, you will likely be able to create a mechanism to sell more by targeting discounts during the times when willingness to pay is at its lowest.

Here are some other items that could likely benefit from this exact technique:  Haircuts, manicure/pedicure, a specific restaurant.  Can you think of more?  If so, please share.

Mark Stiving, Ph.D.

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If you haven’t done so yet, please check out my book, Impact Pricing.   The reviews on Amazon are amazing (thank you to all who have written one.)