June 30, 2009
It doesn’t pay to have one price for all
Package product to meet a variety of clients’ needs
Rick Spence, Financial Post
Published: Tuesday, June 30, 2009
Remember the days when everyone paid the same airfare to Winnipeg, no matter which airline you flew? Today it’s a 30,000-foot free-for-all, with nobody but the booking computer knowing whether you paid US$90 for your flight or US$900. (Either way, you may still have to pay for a pillow.)
Dynamic pricing, which is based on when you buy, your customer history or the leg room you need, has long since taken over the friendly skies. In most industries, however, dynamic pricing is still awaiting takeoff. Sure, some restaurants offer lower prices at noon than at dinnertime, but by and large Canada remains the land of fixed prices founded by Timothy Eaton, whose 19th-century brand promise was, “in selling goods, to have only one price.”
That’s why Augustin Manchon of Toronto-based Manchon Consulting contends dynamic pricing provides an opportunity to grow your business, as well as to distance yourself from less adroit competitors.
He says dynamic pricing is just starting to catch on: “A lot more businesses are looking at pricing as a flexible and creative business tool,” he says. “Interest in pricing is growing, even in small business.”
A former managing partner in Accenture’s marketing sciences practice, Manchon still seems to lament Coca-Cola’s reluctance a few years ago to establish temperature-based pricing in its vending machines that would have customers pay more on hot days. Understanding why that idea failed, however, is key to understanding dynamic pricing. “People felt gouged, because everyone knows the price of a Coke,” Manchon says.
In small business, you don’t have that problem: “People don’t know for sure what the prices are.”
Dynamic pricing stems from knowing your customers. It’s about understanding the maximum value of your product or service, and your own marginal costs, so you can offer the best possible value to different customer segments.
The simplest example of price agility is to take your typical product or service, make sure it’s priced appropriately for your prime customer, and then break it down into secondary products that offer fewer features or benefits at a lower price.
“You can have your baseline product or service, and then create other products on two or three levels for different market segments,” Manchon says. “Products that just a small portion of your customers will gravitate toward.”
A consulting company, for instance, might offer mini-reports, based on less-intensive research effort, just as local courier companies charge less for next-day delivery. “You have lowered the price, but not the margin,” Manchon says.
Another tack is to identify higher-value services customers will pay a premium for, and charge for the extra quality, convenience or security. For instance, a Web designer might offer to build complete Web sites, as a convenience for well-heeled clients.
“Add value in a modular way,” Manchon recommends. “But price it so if they buy all the bundles, they pay more.” Voila! You have raised your prices without disaffecting your core customer.
Be creative. Consider a downtown printing firm that posts its prices for all to see. Those rates are based on average overall costs, plus markup. If an order comes in late in the day and requires overtime work, the company may not be recovering those costs. One solution would be to charge more for jobs late in the day, but Manchon urges business owners to think bigger.
Why not offer a package for good customers? You might dangle a 5% discount to a client that consolidates its business with you. But higher-cost items (say, rush orders, or orders placed on weekends) wouldn’t be included in the bundle. That way you benefit from increased customer loyalty, but don’t have to include low-margin services.
A few more pricing tips from Manchon:
* If clients question your prices, be prepared to explain why they’re appropriate. If customers still insist on a discount, request a quid pro quo. Example: ask the customer to commit to buy bigger quantities, or to buy a second product they have not purchased from you before.
* Transfer costs to the customer. Swedish retailer Ikea makes you assemble your own furniture, while Ticketmaster and the airlines promote printing out your own tickers as a convenience.
* To maintain your margins, drill down on your products and services to make sure you understand all the costs involved in producing them. Include costs such as selling, customer support and inventory. Weed out low-margin moochers: “Every business has unprofitable customers and unprofitable deals.”
* If you’re a retailer offering promotional flyers, coupons and specials, don’t make them available in-store. Why encourage bargain-hunting customers any more than you have to?
* If you get a chance, advise your competitors to hire a pricing coach. He’s being only slightly self-serving. “Once people adopt agile pricing, there’s less pressure to use low price to build sale. It’s a better environment for everyone.”
Rick Spence is a writer, consultant and speaker specializing in entrepreneurship. His column appears weekly in the Financial Post. He can be reached at firstname.lastname@example.org
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