On  Price: Eight Tips to a Better Pricing Strategy

BY RAFI MOHAMMED

Published in the June 2012 issue.

Pricing is one of the most powerful — yet underutilized — strategies available to businesses. A McKinsey & Co. study of comapnies on the S&P Global 1200 Index found that if they increased prices by just 1 percent, and demand remained constant, on average operating profits would increase by 11 percent.

 The following eight pricing tips can reap higher profits, generate growth and better serve customers by providing options. Stop marking up costs. The most common mistake in pricing involves setting prices by marking up costs (“I need a 30 percent margin”). While easy to implement, these “cost-plus” prices bear absolutely no relation to the amount that consumers are willing to pay. As a result, profits are left on the table daily.

Set prices that capture value. Street vendors understand the principle of value-based pricing. The moment that it looks like it will rain, they raise their umbrella prices. This hike has nothing to do with costs; instead it’s all about capturing the increased value that customers place on a safe haven from rain. The right way to set prices involves capturing the value that customers place on a product by “thinking like a customer.” They choose the product that provides the best deal (price vs. attributes).

Create a value statement. Every company should have a value statement that clearly articulates why customers should buy their product over a rival’s offering. Be specific in listing reasons. This statement will boost the confidence of your frontline so they can look customers squarely in the eye and say, “I know you have options, but here are the reasons why you should buy our product.”

Reinforce to staff that it is OK to earn high profits. I’ve found many employees are uncomfortable setting prices above what they consider to be “fair” and are quick to offer unnecessary discounts. It is fair to charge “what the market will bear” to compensate for the hard work and financial risk to bring products to market. It is also important to reinforce the truism that most customers are not loyal — if a new product offers a better value, many will defect.

Realize that a discount today doesn’t guarantee a premium tomorrow. Many people believe that offering a discount as an incentive to test a product will lead to future full price purchases. In my experience, this rarely works out. Offering discounts serves price-sensitive customers but often devalues a product in customers’ minds. This devaluation can impede future full price purchases. Offer product versions. One of the easiest ways to enhance profits and better serve customers is to offer good, better and best versions. These options allow customers to choose how much to pay for a product. Gourmet restaurants do this by offering early-bird, regular and chef’s-table options.

Use differential pricing. For any item, some customers are willing to pay more than others. Differential pricing involves offering tactics that identify and offer discounts to price-sensitive customers by using hurdles (such as coupons), customer characteristics, selling characteristics and selling strategy tactics.

Use pricing tactics to complete your customer puzzle. Think of your potential client base as a giant jigsaw puzzle. Each new pricing tactic adds another piece to the puzzle. Normal Normans buy at full price (value-based price), Noncommittal Nancys come for leases (pricing plans), High-end Harrys buy the top-of-the-line (versions), and Discount Davids are added by offering 10 percent off (differential pricing). Starting with a value-based price, employing pick-a-plan, versioning and differential pricing tactics adds the pricing-related segments necessary to complete a company’s customer puzzle.