Pragmatic Pricing

Most of the time we think about pricing a single product (or service).  When we do it well, we think of value based pricing – how much is the next best alternative and how much more or less value do we offer through differentiation.  Perfect!

Perfect, except that much of the time the pricing game should be much bigger than this.  Grocery stores often charge very low prices for milk, and advertise that low price, to attract shoppers to their store.  This loss leader helps the grocery sell products that have much higher margin.  Notice, when pricing milk the grocery doesn’t use simple value based pricing, because the game is much bigger than just milk.

Selling multiple items to a single customer is very similar to the grocery store.  The goal should be to maximize overall profitability with the customer, not profitability on each item.  You may need to offer deeper discounts than you would like on some items to make your customer happy.  Do it, as long as you are getting significant additional business at prices that make up for your deep discounts.

How about freemiums?  What a horrible pricing strategy on its own.  After all, how do you make money with free?  Well, you make money with free when you think about the bigger game of pricing.  Free attracts attention and trial to help convert to paid.  Of course you knew that, but you probably hadn’t thought of it in terms of pricing.

A second example of the bigger game of pricing is for customers who buy multiple times.  We have discussed in the past how you don’t want to use simple value based pricing on your most loyal customers because if you upset them, and you will, you will lose a lot more revenue than any amount you could have made optimizing the price for each transaction.

This blog usually touts the simplistic mantra – use Value Based Pricing.  Value Based Pricing is fundamental to understanding your customers’ decisions.  But many times to optimize profits you must think of the bigger game.  Ask yourself, what other customer decisions are linked to this one purchase decision?  Here you read about two general situations where other decisions are linked: additional products and future purchases.  You should definitely be thinking of these two.  Can you think of others?

If you enjoy these blogs, sign up for The Pricing Perspective, a monthly newsletter that provides links to the previous month’s blogs, a Q&A on pricing, and other interesting sections.  Sign up on the right column or at www.MarkStiving.com

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

Photo by briancweed

How is this possible?  In the last blog we wrote that pricing is win-win.  Aren’t win-win and zero sum games contradictory?

The phrase “zero sum game” means that when one person gains another has to lose.  Think of a pie.  If you get a bigger slice then there is less for me.  Zero sum means we have to split what is there. Win-win means we find a way to grow the pie and share the growth.

We saw that pricing is win-win because both the company and the customer are better off after the purchase transaction than before.

However, let’s look at this from a different perspective.  After a customer has made a choice to purchase your product, in her mind she says something like, “the most I will pay for this item is $100.”  Now, it’s a zero sum game where you and she are trying to decide how much she will pay.  In other words, who gets how much of the $100.  She may negotiate with you.  She may wait for a sale.  She wants the lowest price she can get.

Of course you want as much of the $100 as you can get.  You don’t know the $100 number, but you do your best to estimate her willingness to pay and try to charge her as close to that as possible.  It really is a game where the more you get the less she keeps.  You are splitting the $100.

Prior to the shopper deciding what/where to purchase, pricing is win-win, where both sides gain from doing a transaction over not doing a transaction.   However, once the choice has been made, the fact that there will be a win-win situation has already occurred.  Now you’re simply negotiating, which is a zero sum game.

Of course, you can’t always tell when the decision has been made.  The customer won’t tell you and will still ask for a discount.

Here is an example.  Shop at Macy’s (or probably any higher end store), find something you want to buy then walk up to the register and ask for a discount.  Most of the time you will get one.  Wow!  If you’ve already decided to purchase why would they give you more of a discount?

Your lesson: Learn to tell when the purchase decision has already been made, then stop negotiating on price.  If your price was too high the decision wouldn’t have been made.  When your customer finds ways to get discounts after the choice decision has been made, you are simply giving your money to your customer.  It’s a nice gesture, but not necessary.  If you’d like to give money away as a nice gesture, please email me.  I can help.

If you enjoy these blogs, sign up for The Pricing Perspective, a monthly newsletter that provides links to the previous month’s blogs, a Q&A on pricing, and other interesting sections.  Sign up on the right column or at www.MarkStiving.com

Mark Stiving, Ph.D. – Small Business Pricing Expert

Photo by Kaptain Kobold

Pricing is usually seen as that step in business where companies try to trick consumers out of their money.  Although in some circumstances this may be correct, I much prefer to think about the win-win aspects.  Your customer wins and you win.

Customer:  Someone only buys a product (or service) when they get more value than the price they have to pay.  This means whenever a purchase is made, whenever a customer exchanges cash for a product, the customer receives more value than it cost him or her.  Of course, otherwise they wouldn’t have made the purchase.

When you set a price for your product you must choose a price below your customers’ willingness to pay.  Otherwise they won’t purchase from you.

Company:  From your company’s perspective, you win when you charge more for your products than they cost.  That is the only way to make a profit and stay in business.

The customer wins with excess value.  Your company wins with profit margin.  It’s a win-win.  Pricing is such a great job.

If you enjoy these blogs, sign up for The Pricing Perspective, a monthly newsletter that provides links to the previous month’s blogs, a Q&A on pricing, and other interesting sections.  Sign up on the right column or at www.MarkStiving.com

Mark Stiving, Ph.D. – Small Business Pricing Expert

Photo by Search Engine People Blog

Have you ever noticed that the cheapest customers require the most support?  I read a blog titled “Why Cheap Customers Cost More” which gave me an Aha! so I had to share it.

Imagine there are two types of customers.  Type A are very involved, they study the product category before buying.  They look at the features and benefits of different alternatives.  They understand the value tradeoffs when they make their decision. They are informed before they make their purchase decision.

Type B customers are not involved.  They just want to make a decision.  But if they don’t know the differences between the products, then what attribute can they use to make their decision?  That’s right … Price.  They probably go for the lowest price.

Which customer type is more likely to call your service department with questions?  Which customer is more likely to return the product because it didn’t work for them?  Which customer will have more user errors?  Type B.

Hence the title of the blog.  Technical support people use the phrase “it was an ID Ten T error” when referring to user error, to customers who didn’t know what they are doing. When you sell the lowest priced product you are bound to get more type B customers meaning more ID Ten T errors.

The lesson is to not compete on price.  Compete on value and win the type A customers.

In case you haven’t figured it out:  ID Ten T = ID10T.

Mark Stiving, Ph.D. – Small business pricing expert

Photo by StuartPilbrow