Tag Archives: pricing

If first impressions count, then what are you telling your customers?

Have there ever been more options for pricing than there are today: one day deal sites, online pricing, freemium, optimised pricing, auction sites are just a few of the possibilities for setting a price, and an impression. So if first impressions count, then what are you telling your customers?

But of the four P’s of marketing, price usually receives far less thought than the other three. Not only does the price of your product or service say so much about what you are offering but it’s so important to your business’s survival.

If you have a new brand getting the price right is often very difficult. And while there is some room and time to fine tune things the longer the price remains unchanged the harder it will be to adjust customer’s perceptions.

Your business may suit being involved in an auction site where people bid for seasonal products e.g. Buystand. Alternatively you may have a more perishable product in which case there’s a real benefit in selling each days ‘stock’ for the best overall profit you can. That’s where price optimisation can help. One company who work in this area are Pricetech.  Their tagline appeals to me and gives you an indication of what to expect: revenue management and profit optimisation.

One thing’s for sure is that there will always be people willing to pay for the best, or even just willing to pay the most. This applies to houses, equally as it does for hotels, services, food, electronics … you name it. So depending on your product I’d always suggest seeing if you can get the highest price in the market. If your market share ambitions, brand, and the other elements of your marketing mix allow could you have a sustainable business by pricing as the most expensive? If not what’s involved to get there and how feasible is it?

But actually, you don’t have to have the highest price to get people wanting your brand. The point is that matching your price with the rest of your marketing mix will ensure satisfied customers even if customers pay very little for what they buy from you.

What about giving your product away? In the software game it’s called ‘Freemium’. One of the best articles about Freemium why and how comes from Techcrunch. On a similar vein I share thoughts in an earlier blog about Goupon type offers.

Go 2 Market principle: create the right impression with your customers by ensuring your price matches the rest of your marketing mix. You’ll create a positive impression with your customers and your bottom line.

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Airlines do it best, but you too can increase profits

Fries with your burger? Internet with your room? What are the add on sales you can make to enhance your customer’s experience?

Did you know that airlines worldwide will net US$36 billion in fees and upsells? That’s a lot of money! Their growth area is targeting the most lucrative customers with new products. Who are your most lucrative customers? And what are your add on sales?

Airlines seem to be flying highest (pardon the pun) with added sales. They are always searching for new opportunities to make more money. For example, paid apps are mostly not as successful yet major budget airline, Ryan Air’s £3 booking app is top of the iTunes chart!

So how can you go about gaining add on sales? I’d suggest you start by breaking down your product/service offer into as many pieces as you can. I’d encourage you to also have one or two comparisons from other industries to help you see what’s possible. For example, when booking airline travel who would have thought there could be so many choices and add ons. Certainly ten years ago there wasn’t!

Now think about the differentials you can offer, and charge for:

  • different opening hours for select customers
  • a unique product, or a standard product
  • special delivery
  • higher level of service
  • different payment methods and terms
  • complimentary products or services
  • faster service
  • additional service e.g. personalised, pickup or in home service
  • automated repeat order at a set date
  • early order discount, or higher cost for last stock item.

There are many options to differentiate your product or service, and therefore opportunities to increase demand for your offer. The outcome will appeal to different customers with offers that better match their needs e.g. travellers with or without bags, or travellers who like/dislike airline food, or taller travellers wanting more leg room. Here’s another example, where an e-reader service is letting readers pay per page!

By breaking down your offer you can then isolate pricing and also costs. As a result you should be more likely to make each cost pay for itself, and be able to renegotiate better prices from your suppliers. But at a minimum you’ll have a better understanding of which are the most important elements of your customer offer and where you make the most money.

Go 2 Market principle: what all business operators should want is a way to satisfy customer needs. By breaking down your offer into multiple parts you can differentiate your offer and better satisfy their needs plus your own to make a healthy return.

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Can’t do without one of these

A while ago I was asked by a friend to help her develop a pricing model for a product she was importing. My friend knew how valuable a cost to retail spreadsheet could be, so I happily obliged. If you’re an importer or selling locally feel free to access the spreadsheet and make your own cost/profit/markup/retail scenarios.

A spreadsheet like this allows you to create multiple scenarios depending on what you enter as the costs and/or the retail price. For example, you can change the assumptions to get the cost you need based on the desired retail to make the revenue (price x quantity) you’ll need to open/stay in business.

Use the spreadsheet to see the impact on profit:

  • for new products
  • of changing supply chain costs (either proactively or reactively)
  • of different exchange rates
  • of changing the wholesale price e.g special pricing.

It’s also good to cross reference the spreadsheet with the actual average margin you’re making to see if the actual costs are in line with budget. And of course it’ll be useful should GST change again.

Most times your costs won’t change too much unless you’re dealing in different currencies. If you are dealing in foreign exchange it pays to use a conservative rate. By doing so your product should be viable even if the exchange rate drops.

The spreadsheet will also allow you to plan the pricing, revenue and margin over a product’s lifecycle. The introductory pricing will probably start higher, then for the next tranche of buyers some added value may be required, and then a lower price as it reaches maturity or even a run out price. By planning your pricing ahead of time the resulting product profitability at the end of the lifecycle won’t be a nasty surprise.

Go 2 Market principle: product profitability needs to be managed. A cost to retail spreadsheet is a must.

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Discount wisely or discontinue

Small businesses need to know the destructive power of discounting. A discount comes straight off the bottom line i.e your profit. So making a decision to discount should not be taken lightly. You will expect to increase sales, but the increase in the volume of sales required surprises many.

Here’s the sums. In this example if you have a product or service with:

  • $100 sales price
  • $60 cost of sales (cost to provide the product
    or service excluding your costs of doing business)
  • $10 wages and overheads

Your net profit (margin) is $30 (or 30%)

Sales are okay at 10 per week ($300 total net profit per week), but then cash starts to get tight so you consider discounting to generate more cash. To make the same total net profit after a modest 20% discount will require a doubling of sales to 20 per week. Yes, you have to sell twice the current volume. This assumes that the cost of sales stays the same (quite likely) and that wages and overheads also remain the same (doubling sales may require some extra advertising, more commission to sales people, extra hours for staff and overheads).

So unless you are prepared to accept less total net profit our sales will need to double (and no increase in costs). Is that realistic? How easy is it to sell twice what you normally sell? Makes you think doesn’t it. Sure there might be times when you need to increase sales e.g. end of product life, but also beware that by discounting you are setting a new price benchmark for your product or service.

Here’s another way to think about the problem. If your goal is to increase cash from the current $300 per week, could you sell seven (three less than currently) for 20% more ($120) than the current price? If you can sell 30% less but at a 20% higher price you can make get 16% more profit! And by selling 30% less you might be able to reduce your cost of goods or wages and overheads which would mean even more profit. Wouldn’t that be great?! Or you could use the likely lower cost of goods, wages and overheads to increase the value of what you provide e.g. calling the customer to ensure they are happy, free delivery, easier returns policy, loyalty rebate for repeat business.

I wanted to keep this blog focussed on the impact of discounting on margin so will write separately about enhancing (maintaining) net profit by up selling and cross selling.

If this has made you think and you want to try this for yourself, calculate now is a useful website that keeps thing very simple but illustrates the danger of discounting.

Go 2 Market principle: make sure you understand your margin. Carefully consider the financial result of lowering (versus holding or raising) prices. There’s a lot of temptation to discount but there are alternatives.

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