Essential tips on pricing - Strategy http://www.qed-consultancy.co.uk Copyright Jeremy Thorn QED www.qed-consultancy.co.uk en-us Try a price-matching, 'me-too' strategy, by charging the same as everyone else. But if you want people to beat a path to your door, you had better have something else up your sleeve, whether it is a better product or service, greater availability, or better market contact, to be really successful. Engineering Adventures Ltd 2007-03-25 Check what the current market price is and either charge a little bit more, or a little bit less But be careful - maybe you could charge a lot more, or even a lot less? Engineering Adventures Ltd 2007-03-25 Consider a market skimming strategy, with a high, premium price This may require a new and innovative, high quality product or service, and possibly heavy promotion, branding and support, which will emphasise the value rather than the cost to buyer. It can be an excellent strategy if your product or service is special enough. But note two downsides. It may attract competition and new entrants to the market, and naturally it will discourage some buyers who are more price-sensitive. Engineering Adventures Ltd 2007-03-25 Tap into successive layers of demand, as an alternative Start with the highest price possible, to attract only the most discerning customers, then offer phased reductions in price as time goes by to attract more. Video camcorders, mobile telephones and lap-top computers were all good examples of this in their time. This is a market skimming strategy, where the price is designed to attract the highest price possible from each type of customer, but the product or service remains a realistic aspiration for those who will wait until the price falls. Engineering Adventures Ltd 2007-03-25 Choose a more competitive strategy of market penetration with very low prices, to secure bulk sales in fast-growing markets where low price is key Many suppliers who choose this strategy establish the price required and work back to the costs needed to make a profit. Its dangers are that it may offer only a very slow pay-back of investment capital and it can degrade the available market's profit potential. It is also a strategy with little room for error or flexibility. But it can freeze out new potential entrants very effectively. Be warned, however, this strategy may require substantial funds. Engineering Adventures Ltd 2007-03-25 Find a way of delivering your product or service at less cost than anyone else Perhaps you have lower over-heads or can cut out a middle-man between you and the eventual end-user. Telephone banking and insurance, and internet book and music sales, have been examples of this. But note: you need to find a way of locking in customers, or else new competitors might easily copy you and steal any long term advantage you might hope for. Engineering Adventures Ltd 2007-03-25 Go for a more gentle market penetration strategy as an alternative, to capture and hold market share, through low(ish) prices and other benefits which are valued These might be superior service or greater ease of making the purchase. This is a widely used strategy as it can offer excellent profits while still being less likely to attract new competitors. The secret is to 'break the mould' of past business practice, by offering something special which others do not. Engineering Adventures Ltd 2007-03-25 Use a down-market, low price strategy, where there is little product distinction and customers are very price sensitive It is essential to have high volume sales to drive down unit costs to achieve this successfully, and you need to make sure that your product is likely to be attractive for a long time, so that customers will continue to buy from you. Really low prices have the benefit of discouraging new competitors, although the business emphasis will need to be more on cost rather than value. It is a high-risk strategy and may need high investment, which means it is most appropriate for commodity markets and very large suppliers. For smaller or under-capitalised suppliers, it will often be a flawed strategy. Engineering Adventures Ltd 2007-03-25 Be aggressive and use a 'floor-price strategy' to reduce or eliminate other competitors, by pricing as low as possible and passing on volume-related savings This needs very tight cost-control and a competitive production advantage through sheer volume. It is therefore most usually found in markets with high price-sensitivity and low overheads. Suppliers will most usually apply this to selective products only, where there is spare capacity for example. It offers the customer minimal service, and the supplier long payback terms and very high risk, but it is an option to consider. Engineering Adventures Ltd 2007-03-25 Sell your surplus capacity at less than full cost, but more than marginal cost, where your base (fixed cost) overheads are covered by sales elsewhere This is usually adopted for non-differentiated, volume-sensitive commodities that are highly capital-intensive, in times of low demand, where penalties of low volume are high. (Typical examples might include steel, aluminium, paper and basic chemicals.) It is not a strategy to be recommended in other circumstances. Engineering Adventures Ltd 2007-03-25 Make an introductory, promotional offer, to launch a new product or service at an initially low price to tempt new customers But be careful, make sure you specify a time-limit to this offer. Otherwise, your customers may resist your attempts to raise the price later - and feel cheated if you do. Engineering Adventures Ltd 2007-03-25 Consider a 'special offer', to stimulate demand This could be a direct price reduction, a bulk 'three for the price of two' type of proposal, perhaps free delivery, a special gift with purchase, extended payment terms or a longer guarantee. But be sure that you are not just pulling forward the demand you might have enjoyed anyway without the special offer! Engineering Adventures Ltd 2007-03-25 Find out how much your prospective customers can afford, or are allowed to spend, and package your product so it falls just inside their buying limit This is a tactic widely used in business-to-business selling, where it can often be much more attractive to sell to a more junior buyer rather than wait for a Board Meeting to make a decision, which you might feel could be much harder to influence. Engineering Adventures Ltd 2007-03-25 Use 'loss-leaders' to bring new customers to you, by pricing some popular items low, but perhaps the rest high Many shops make an art of this to win new business, or at least new prospective customers and browsers. Engineering Adventures Ltd 2007-03-25 Charge according to what people will pay, but determine what your customer might actually get according to the price they pay This would clearly be dishonest if it is not clear to the customer what he/she might actually get for their money, but it is a tactic widely adopted in especially price-sensitive markets. Engineering Adventures Ltd 2007-03-25 Negotiate a retrospective rebate to encourage regular buyers to stay with you The attraction to them is the promise of a lower price if they spend enough with you. The attraction to you is that you only need give the rebate if they buy the volume you both agreed. Engineering Adventures Ltd 2007-03-25 Entice customers to buy an unusually large volume from you, or other products in your range, or to pay you early, by offering a price discount up-front in exchange But if you do offer a discount, make sure you get some benefit from it! Other reasons for giving a discount might be to encourage customer loyalty, to sell spare capacity, to sell surplus or redundant stock or to sell defective stock. Be wary of the last reason, because such a strategy can easily back-fire if it suggests to your customers that you are desperate, or possibly going out of business. Engineering Adventures Ltd 2007-03-25 Charge a price according to the results your product or service achieves, to markets where your customers may not believe you have something superior to offer While this may take time to prove, it offers less risk to the customers whom you may have difficulty in attracting otherwise. Engineering Adventures Ltd 2007-03-25 Try flexible pricing, according to market conditions, especially if you are not dependent upon keeping loyal customers (who will otherwise hate it!) Typical examples of people who use this tactic are ice-cream vendors in public places on a hot day. But doesn't it annoy you? If so, you might be wary of using it on others! Engineering Adventures Ltd 2007-03-25 Use more open, cost-variable pricing, as a variant of flexible pricing When you can tie your price into some objective and measurable variable cost that customers understand you have to bear. It would be usual to agree a formula for how your price should change in advance. Agreed cost variables could include exchange rates, basic raw-material commodity costs, labour or interest charges. Engineering Adventures Ltd 2007-03-25 Segment your markets carefully and charge a different price for the same product or service to different types of customers This may seem dishonest, but richer customers may not value your product if you sell it too cheaply, and poorer customers may feel they cannot afford it if it seems too expensive. This, after-all, is the principle behind 'own-branding'. (If you want the more heavily-promoted branded product, you expect to pay more, even though it may be exactly the same as a more anonymous but cheaper product sold under an 'own-brand' label. But it remains your choice.) Engineering Adventures Ltd 2007-03-25 Re-package or re-brand your product if you are going to charge different prices to different customers Try to make sure that there is no cross-over between the different types of buyer. Otherwise, premium-price buyers will rightfully feel they have been fooled and buy elsewhere. Engineering Adventures Ltd 2007-03-25 Open up new layers of your potential market by selectively reducing your usual price, perhaps by selling in bulk or without all the add-ons Open up new layers of your potential market by selectively reducing your usual price, perhaps by selling in bulk or without all the add-ons. Be careful though that this does not cannibalise your premium markets, where people are happy to pay higher prices. Engineering Adventures Ltd 2007-03-25 Use psychological price points if you think they are important to your customers eg 7.99, not 8.00. Some businesses find that the number 7 is a psychological price point. If this applies to your markets, try pricing at 7.97, or even 7.77, rather than at 8.00. Engineering Adventures Ltd 2007-03-25 Find a business partner to make or deliver your bright idea and charge them a royalty or franchise fee for thinking of it This might be especially appropriate where you have an excellent business proposition but not the funds to support it. If this is attractive to you, commit the other side to a minimum volume of sales and agreed quality standards. And agree a limited period if the deal offers them any exclusivity. Engineering Adventures Ltd 2007-03-25 Disguise your true price, if your business-values allow you to, by not revealing the total purchase cost, such as the cost of spares, essential services or consumables A historic example used to be the photocopier market, where the machines might be sold (or leased) cheaply, but other essential components (eg paper) were very expensive. You may feel this is a dishonest tactic, but many businesses seem to retain loyal customers by using it, though perhaps not willingly. Engineering Adventures Ltd 2007-03-25 Offer a 'special offer' exit price, to retain volume in declining market, or to sell off old stock, when you want to withdraw a product from the market The volume car market does this frequently. But if you find that sales then increase, this may tell you that you have been charging too little for all these years! Engineering Adventures Ltd 2007-03-25 Consider premium pricing by charging a high price to sustain the prestige, image and quality of your product And to maintain product/service differentiation from your competitors. Perfume and exotic clothes might be a good example of this. Engineering Adventures Ltd 2007-03-25 Use 'umbrella pricing', if you are a market leader, to encourage smaller competitors to shelter below your price levels, while still keeping prices high In a market where smaller suppliers are frightened of the market leader, this might work well. But it be warned, it might also attract new suppliers who are less disciplined! Engineering Adventures Ltd 2007-03-25 Consider pre-emptive pricing to discourage new entrants, by charging very low prices Be warned though, that in ordered economies, you may be accused of distorting trade, and in international markets you might be accused of dumping, both of which are illegal if proven. Engineering Adventures Ltd 2007-03-25 Try predatory pricing, if you wish, to close down your competitors, but note that this is illegal in many countries We suggest it is more important that you know this is illegal than you know that this is a possible, if dubious, pricing option! Engineering Adventures Ltd 2007-03-25 Use contract-pricing tactics, where the deal may be as much dependent upon issues such as payment terms, delivery, performance, guarantees or post-contract variations, as the up-front product, service and price This is most typically used in closed, competitive tenders, where the customer will aim to specify every possible variable they can think of, and the supplier will try to seek a competitive advantage by being low priced, but still able to negotiate post-contract benefits down-stream. If this is how business is done in your sector, you may well be advised to get a good lawyer on board! Engineering Adventures Ltd 2007-03-25 Package your price when you have a range of items to sell in a bundle, in order to obscure individual component prices This tactic is widely used in markets for complex systems, such as computers. (But if you are a buyer, insist in having the price broken down for each item!) Engineering Adventures Ltd 2007-03-25 Copyright Jeremy Thorn QED www.qed-consultancy.co.uk Jeremy Thorn is a prize-winning author and Chairman of Quantum Enterprise Development (QED), a multi-functional management consultancy and development company based in Doncaster, England, dedicated to making good businesses better, encouraging customers to be more loyal and to helping employees and suppliers be more effective. Engineering Adventures Ltd 2007-03-25