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Do you look at the competition and price the same as they do? Undercut them a little? What happens if you do undercut them, then the customer still demands further discounts? Pricing can be difficult to get right. We dont know exactly how much the other party is prepared to pay, but we need customers in order to sustain and grow our businesses. So how do we ensure money is not left on the table, yet we still make the sale? This guide looks at a few fundamental pricing techniques, ideas and strategies. We'll look at how to avoid getting caught in the race to the bottom scenario of endless price cutting.
Market Price
Many people believe that when the buyer and seller agree on a price, then the market has arrived at the optimal price. This is not strictly true. What it means is the buyer and seller agreed on a price at a point in time. The seller might be desperate to land the next deal simply to make payroll for one more month. He almost feels sick when he accepted such a low offer, but hell worry about the fact hes running into the red next month. Things will be better by then. Hopefully. Meanwhile, the buyer now has an expectation she can always get discounts if she pushes hard enough. She makes a note to go even harder on price next month. After all, she got the distinct impression the seller had even more room to move. Getting pricing right is about more than two parties agreeing on a price at a point in time. Pricing is also strategic. Pricing is about the long-term sustainability of a company. But ultimately, pricing is about value.
commodity tools packaged together in a stylish box becomes a toolbox gift idea). Perhaps they didnt want to buy a handbag at all, they just wanted to rent one (bagborroworsteal.com). The aim of value based pricing is to shift the focus from price to questions of value.
Commodity
But what if youre selling th e same stuff as everyone else? The internet can be a hostile place for commodity sellers as price comparisons are only a click away. This type of environment works well for big players who can compete on price when selling commodity items, yet still make money off thin margins and fat volume. Low-volume competitors would be wise to consider a shift of focus to value-added services, such as higher service levels, if they cant compete on price.
People do if its a DODOcase. DODOcase demonstrate what goes into producing their cases. Theyre selling the experience and craft values as much as they are selling the product itself, so this is also a way to differentiate the product. Their customers value the idea of supporting artisan crafts, which is part of the value theyre paying for, but this wouldnt be obvious if their customers were comparing one case against another on price alone. DodoCase have shifted the debate away from price and made it about value. Well, values. So, customers like to see what goes into the product. It helps them determine value. Transparency is a big part of pricing, particularly high-end pricing. To be credible and survive scrutiny, high end pricing has to to be accountable and make sense. Knowing what price to set is knowing what the customer values, or can be made to see value where previously they saw none. Always ask questions and refine your offer based on the answers. Do you need to change how you present your existing offers in order to demonstrate value? Do you need to change your offerings to meet the market?
Pricing Strategies
Lets look at three of the most common pricing strategies.
Skim Pricing
Skim pricing is when you set a higher price than your competitors. In order to set pricing in this way, your customers need to perceive that your offer provides them with greater benefits than they will find elsewhere. Apple use skim pricing. Customers perceive that Apple products are superior to the competitors, so it is therefore worth paying a premium. Whether this is objectively true or not is irrelevant - so long as the customers perceive that value, then it exists. This justifies the higher price. It could be argued the customer also gains social value by paying a high price, as they have something exclusive. In order to skim price, you need to offer something the customer cant easily get elsewhere. The customer must place a high value upon your service. Consultants with proven reputations can use skim pricing, although maintaining a reputation over and above everyone else in crowded, maturing markets can be difficult. Where there are high margins, competitors will soon enter the space offering similar value. The benefit of skim pricing is that you get to pick off the price-insensitive top-of-the-market clients. Who wouldnt want this situation? The downside is that other competitors can move into the price gap, slightly beneath the skim level, then bump up the value they offer in order to challenge the skim price competitor. They may create greater efficiencies, which means their profit margins are the same, if not higher. The value proposition to the customer remains strong, yet they undercut the leader on price. It is only so long before the leader is forced to drop prices, refine their value proposition, or collapse. Skim market pricing can lead to a rapid erosion of market share if the leader does not stay well ahead of the market in terms of providing value. This happened to Apple in the 1980s, and we might be seeing this again on tablet devices.
Analysts expressed concerns that Apple risked losing ground to Nokia smartphones in China, while failing to keep pace with Google in the tablets market.....Traders were also spooked by a report from research firm IDC forecasting that Apples share of the tablet market will slip to 53.8pc this year from 56.3pc in 2011, while Googles s hare will increase to 42.7pc from 39.8pc. It added that Apples tablet share will slip below 50pc by 2016, as total global tablet sales more than double to nearly 283m units in four years as consumers increasingly opt for them rather than personal computers Apple could skim price when they were early to market with a product no one else had i.e. iphones and iPads. However, as competitors catch up, and make similar products at lower prices, then Apples current pricing strategy may hit problems. Apple get ar ound this, to some extent, by using versioning.
Neutral Pricing
Neutral pricing is when you set your pricing at a comparable level to your competitors. Youd use this pricing method if you want customers to consider other aspects, besides price, when they contemplate a purchase i.e. they can get SEO software tools from company X, but compay Y offers the same tools but with extra support. Neither company wants to engage in a price war, so they will keep layering on more value in order to make their offer more compelling. If these companies started cutting prices in order to compete, then theyve got a race to the bottom problem. If customers dont want to pay for the services they provide, thats fine, but the customer is unlikely to get them somewhere else, so long as these services cost a certain amount to provide. In so doing, this market sector retains value for all players, so long as they deliver genuine value to customers. This is an especially good pricing model to use if you want your customers to focus on the features of the offer. If you offer more features for the same price, you will likely win.
Penetration Pricing
Penetration pricing is when you set a relatively low initial entry price, hoping people will switch from a higher priced vendor. Companies looking to gain market share tend to use penetration pricing. Penetration pricing has been a popular pricing model for internet companies, reasoning if they build the audience, theyll figure out how to make money later. So long as customers place some value on the service, then the company should build their customer base quickly. There are obvious problems with acquiring customers on a low-price basis. The customers you land are price-sensitive and will likely become non-customers the minute someone else lowers their price, or you increase your price. Youre still vulnerable to competitors who offer something better, who are more efficient, or have more venture capital to blow through. Even if you set a low price, they can still undercut you.
most buyers are actually value oriented, and will choose higher value services, so long as they perceive genuine value, or can be shown that by using you then profitability will be increased.
Once a customer is on board at the low-value level, then they may wish to add extras later, once value has been demonstrated. Many software-as-a-service companies use this pricing strategy. The core product, if it is commodity, is often free. This hooks you into using it, but doesnt cost the company much to deliver. Its a loss leader sales -tool. If you want to use it more - say, add more people or use advanced features - then you move up the scale to higher price points. Its very difficult for competitors to compete with this strategy, because the core offering is free and the switching cost, whilst possibly not high, still exists. In order to compete, competitors must offer better services or more features, and probably lower prices. This is also the reason the first-mover needs to constantly innovate i.e. add and enhance services in order to stay ahead of the game. One way to make the middle tier offering even more compelling is to load it with features vs the entry-price option. The low price offering provides the core product and nothing else. The mid-priced offering, however, is packed full of features. The buyer may not even use many of the features, but they reason that there appears to be a lot more value at that level than the entry level, so opt for the higher price. This is most effective when the low-price option and mid-price option are reasonably close. You often see this approach used with but wait, theres more! offers. They keep loading on the features, so the buyer perceives more and more value.
Negotiating
It can be pretty difficult to stick to your guns, especially if you really need the business. However, pricing is really a question of value. So long as youre certain you provide the customer with value they cant get elsewhere, then youre in a strong negotiating positio n. Know what the customer values. If the customer values the same things from another competitor, and you can provide no added value, then you are vulnerable on price. However, if you can identify something you have the buyer values over the others, then that is your trump card.
You demonstrate your value to the customer. If the customer still refuses to see it, and still screws you down on price, then you can play your trump card. Sure, they can have the lower price, but they cant have the high value aspects of your service. They can have the basic core service. You could still make the sale, but you should remove valuable features. For example, service level agreements tend to be structured at various levels and price points. If the customer wants imm ediate attention 24/7, then they pay top dollar. If they dont care about receiving immediate attention, thats fine - they pay the lower price. Give the customer options, demarcated by obvious value, and they can decide for themselves. If you know they really need high value service X, and cant get it from somewhere else, then youll force them to buy on value and drop their low price demand. As customers, we value sellers differently, unless were buying pure commodity. Yet your customers might try to convey the idea that sellers are all the same to them, its only about price. It seldom is. Find out what they value most.
Be Flexible
If your primary purpose is to gain exposure in a market, it will be useful to acquire customers who can help spread your message. I know of one SEO service provider who started out by providing five large companies free search marketing services for a year simply so the SEO service provider could be associated with those companies, thereby gaining credibility in the market as a leading supplier. They then skim priced for 2 -nd tier companies, which were their real targets. The twist here is that the seller places a value on the buyer. Pricing changes can depend on where in the product life-cycle you are, and what your competitors are doing. If you are the market leader, and using skim pricing, but you competitors overtake you, and offer more value, then it might be time to rethink your pricing. A shift to neutral pricing might be in order, as well as a revision of the offer to match competitors. If new entrants move into the market and offer low prices, then adopting a penetration strategy might be useful in order to get rid of them i.e. make part of your offering low cost or free. This is a strategy that has been used by airlines facing threats from low-cost competitors. They start up their own subsidiaries and use these to starve the competitors out of the market as a rear-guard pricing strategy.
or weaker. Anything high value and differentiated can likely be skim priced, anything similar can be neutrally priced, and anything low consider penetration pricing, or dropping. Review your margins. Is it even worth offering low priced services? Should you be focusing on delivering more features at a higher pricing level? Should you be moving to a highly differentiated offering? Only you know the answer to these questions, but it's a quick strategi c pricing assessment well worth doing. But what, after all is said and done, the customer still wants a lower price?
Fire Customers
But what if the customer still wants to pay the lowest price, even after youve made certain they value what you provide? Some customers simply arent profitable. What is worse, they take up your time, meaning youve got less time to dedicate to your profitable customers. So cut them loose. There is a rule called the 20-255 rule. Its a revision of the 80 -20 rule, and it goes like this: In an article published in the Harvard Business Review, Cooper and Kaplan reported the astonishing case of a heating wire company which analyzed its customer profitability and discovered that the famous 20 - 80 rule, which would suggest that 80% of profits came from 20% of customers, had to be revised: "A 20 - 225 rule was actually operating: 20% of customers were generating 225% of profits. The middle 70% of customers were hovering around the breakeven point, and 10% of customers were losing 125% of profits