consider the value conferred to the customer.
by ed mendlowitz
77 ways to wow!
pricing strategies need to vary based upon what is being sold.
products sold range from commodities all the way to highly customized products or services. factors determining the pricing and value to the customer are the product and its classification, the perception of use and value, the impact of branding in creating the quality, ease of availability or degree of scarcity, how delivered and timing and cost of delivery, volume and frequency of orders, inventory needs and type of customer.
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cost is also a factor in the pricing, but it is unrelated to the value to the customer. no business can sustain itself if the pricing does not permit a profit.
there are many ways prices are set. for retail sales it has become de rigueur to post “list” prices and then offer discounts. this makes people think they are getting a bargain. examples are cars, books, department stores, warehouse clubs and massage and restaurant gift cards with bonus dollars. some prices are lowball come-ons to get people into the store or to call a call center that will try to trade you up, or get critical mass, or to get you to become a customer and buy refills such as low-cost printers where the ink costs more than the printer. that’s how i got started with razor blades with a free razor.
another way is to offer subscription or monthly services and deliveries or membership fees. dynamic pricing is becoming more popular. the airlines do it, so do some major retail chains and i believe amazon also is doing it across product lines.
bundled packages are another way. you can get the bronze, gold or platinum service or product line. also being done is expanding the size of the packages. instead of a six-pack many places are now offering 10-packs. the unit price might even be greater for a larger size, but the appearance is that a bargain is being provided and so is convenience. the airlines offer first class, business class, coach and now coach plus and no-frills coach. the toothpaste tubes i use weigh less and less, but the box size doesn’t change. the same for my soap and some other products i regularly use. those are stealth increases.
convenience pricing disregards the actual product and prices the availability. this is common at train stations, airports or sports stadiums for bottles of water. the same for a small coffee that is labeled “tall” at coffee shops that let you sit for as long as you want. are you buying the coffee or a way of life or self-image?
in some cases, a higher price signifies quality or a snobbishness that appeals to some people. some companies create a less expensive product line. almost every product at “outlet” malls is lesser quality with similar but slightly different logos. it is also common for a logo to be posted on many of the clothes we wear – shirts, jackets, pants, socks and sneakers with each placement making a statement.
every item purchased is done so for the value it confers and conveys. sellers try to capture as much of that value as possible with their branding, packaging, merchandising and pricing. we are in a world of instant information, big data and algorithms. profits and sustainability and predictability of cash flow start with up to date and meaningful pricing strategies.
how pricing strategies are changing business models
cost or competitors pricing is a usual starting point for outmoded pricing models. the starting point should be the value the customer gets. value is not the issue. it is likely many business model changes are being led by pricing.
customers are more knowledgeable in what things cost and where the bargains and lower prices are. this works well for products that are indistinguishable, but a good marketer should create a sizzle that separates them from the pack.
for example, in february 2009 during the depths of the recession i was in a shopping mall where almost every store was virtually empty except two – and they had lines of people waiting to get in or get served. these were the apple store and starbucks.
the lesson here is that people will buy and pay premium prices for things they want, value, that have reliability or that confer a feel-good benefit. i believe apple and starbucks did that and still do. my question is, do you?
apple sells a smartphone that, in 2009, was the hot new thing, but still seems to be that today and remains an image enhancer. it also has added features that extended its value beyond the cell phone era.
regarding starbucks, let’s be realistic, starbucks sells coffee. nothing glamorous about that. but it is packaged as part of a lifestyle and image garnish.
basically, people are paying for one or more of three things:
- a product – what you sell
- a service – setting it up, making sure it works, training and how to get maximum value
- an intangible – assurance that what was bought will work the way it needs to
or consider how one product may be differentiated (in the mid of the customer) from another, along these lines:
- brand
- taste (quality)
- consistency
- always available
- “investment” by customer – sunk cost
- possible emotional attachment
- costs more (or less)
question: what are you selling and what role does pricing play?
i contend that to be successful you either need to sell very large quantities of a low-cost product at low prices or a smaller number at higher prices.
in the long run it is easier to sell smaller numbers, but you need to create a reason why it should be or needs to be acquired. you need a usp (unique selling proposition) to stand out and create demand at the price points that will yield maximum profits.
effort needs to be put into pricing as it should be for every aspect of what you do.
so, the issue is how can it be done and sold at a price that optimizes sales and profits?
illustrations: seven examples of pricing strategies
- medical services have become commoditized with urgent care centers springing up everywhere. if you want a personal, on-call doctor, you might have to sign up for a concierge service from the family doctor you are used to seeing.the models have changed and so has the pricing. the availability of low-cost capable but impersonal service for a large percentage of needs is a new model that caused an outgrowth of a higher priced model providing the accessibility and convenience of your “personal” doctor when needed. pricing is a factor in both new models.
- amazon prime and netflix have changed the way television series and movies are viewed. these are additional products at additional prices and do not seem to have displaced any other forms of viewing. i also believe the blockbuster store model was extinct before netflix got its foothold into critical mass. in both cases the prices are low enough to make this a must-have item while all the competing services are still being purchased.
- amazon’s free shipping model has been emulated elsewhere and is quickly becoming an industry standard. the same with same-day shipments from warehouses. pricing strategies drove the volume and business model changes.
- quicker and more reliable shipping has enabled the customers of many manufacturers and distributors to keep smaller inventories. this added dependence, an increased willingness (albeit slight) to pay increased prices. and it allowed suppliers and customers to work closer together to project needs. pricing drives this.
- publishing magazines and newspapers has shifted to online versions, greatly reducing costs and news and information delivery. newspaper articles for the “morning” paper are routinely posted the night before as written and edited. many book and textbook manufacturers are moving to instantly downloadable versions, and print-on-demand hard copies that reduce costs, inventory maintenance and excessive inventory. all these reduced costs are being passed on (with some holdbacks providing added profits) to consumers. lower prices created a shift in reading patterns.
- uber and lyft are upheaving the taxi industry with lower prices, using dynamic pricing at higher demand times. the same with airbnb for the hotel industry.
- the venerable “old-fashioned” post office is changing its pricing with forever stamps and flat-rate packages, and they have seen an uptick in revenue and profits.they also offer free pickups and still provide saturday home deliveries that the major courier services change extra for. while the saturday deliveries are not guaranteed except for a higher fee, the regular delivery service has improved significantly and with coordinated timing of dropoffs at the post office, users can take advantage of schedules that can save a day in the delivery process with significant cost savings.
there are many other illustrations. in all the above, pricing played a significant role in driving the model. all the above also reflect different and quicker ways of delivering services and products to the ultimate consumer.
things are changing. in many respects pricing is the leader. to maintain competitiveness in tomorrow’s marketplace you need to develop the uniqueness that will command higher prices or higher volume and critical mass. we started out discussing pricing models and we’re concluding with changing business models. they are related.
think about your next step!
important: when setting a price, you must consider the value conferred to the customer.
myriad ways to set prices
retail
- set a “list” price and then offer discounts.
- people like to think they get bargains, e.g., cars, books, restaurants gift cards.
- set lowball prices to get critical mass or people to come into the store.
- then jack up price, substitute products or trade up.
consumer and business services
- monthly service and deliveries (wine of the month club), magazines, lawn service, accounting services, dentist, chiropractor, pain management, psychiatrist, dermatologist
- charge membership fees.
- establishes exclusivity.
- develop a club such as costco, bjs or sam’s.
- credit unions
- the original geico (“government employee insurance co.”)
- blockbuster ruined smaller stores and then themselves because they did not understand dynamics of the market. when immediate rush subsided and demand ebbed, they were left with expensive inventory.
- offer free memberships.
- airline clubs
- department store clubs with either points or instant discounts
- liquor store clubs with lower prices for members.
cross-brand
- honda cars, motorcycles and machines
- weber grills has a chain of steak restaurants in chicago.
dynamic pricing
- algorithms continuously change prices – based on time of day, scarcity/demand.
- examples: amazon.com, some retail stores, and airlines
- cars at beginning of new model year vs. last week of the year or a month, or the month before the new model comes out
charge back to vendors
- some machine parts and chemical manufacturers routinely charge their customers for downtime because of defective products.
- this passes some of the customer’s quality control back to the vendor, increasing their costs.
bundled packages
- offer a bronze, gold, platinum service.
- example: airlines offer first class, business class, coach – now coach plus, also coach bargain with no assigned seats.
supersize the packages
- package bundles of 10 cans instead of six. a six-pack instead of one at a time.
- warehouse clubs – larger size packages – higher revenue and price per unit not necessarily lower – check a three-pack in supermarket against three single-unit purchases also, larger size boxes vs. smaller sizes.
- sell the basic product and include a “special” for ancillary product they will eventually need – lawn cutting and fall cleanup, air conditioner unit and annual filter delivery or vent checkup; home water filtration system with six months’ supply of filters; or books with a pre-order special price for a sequel or related book.
sell service contracts
starting prices
- start high and get sticker shock out of way.
- however, with some products or services dropping the price indicates a willingness to bargain, risking the loss of integrity of your word.
- with some product lines dropping the starting price is expected.
pricing psychology
- the first price frames the value or worth and puts it in buyer’s mind.
- price signals quality and market tier, and possibly prestige levels.
- need to distinguish between fixed and variable costs and seasonality when pricing.
price or cost of convenience
- water is free except when you want a bottle of water at a train or bus station or ballpark.
- offer lower-cost substitutes.
- instead of a plastic bottle (made from oil) use a cardboard box.
- create cheaper brand (with same product).
- or a slightly different product such as what outlet stores have done.
- what’s the significant difference between walmart and sam’s for the products sam’s sells?
offer different ways to shop
- personal shopper service vs. does it yourself
- target, macy’s vs. brooks brothers and other specialty stores
- different venues
- underwear, dress shirts and socks are now sold in supermarkets.
- supersize stores
- staples and office depot, home depot and lowe’s, dsw and famous footwear, build a bear in malls, dick’s sporting goods and now topgolf
branding that creates company value
- macy’s 4th of july fireworks and thanksgiving parade
- warren buffett – stockholders’ meeting has kiosks selling the products of the private companies berkshire hathaway owns
branding commodities
- gasoline is a commodity.
- so are many drugs – prescription and generic.
- so is water and coffee.
- and most food items.
- yet, many branded items sell for higher prices than non-branded or generically packaged products.
cross-product pollination to the same customer
- barnes & noble sells books as well as toys, and coffee and muffins in a lounging area.
- starbucks also sells take-home packages.
- amazon started out selling books and now they sell toys, snow blowers and lawn mowers and most everything else, host other “stores” and even produce movies, streaming, sell kindles and provide free deliveries.
- many banks now sell financial and insurance products and investment services.
- h&r block prepares tax returns and makes mortgages and sells investment products.
availability
- there is a value of product availability.
- gasoline, milk, ice cream, fish and meat
- what about your lawyer or accountant, or plumber or electrician, or exterminator?