DEVELOPING A PRICING STRATEGY
Over the Easter weekend I spent time at the Blackcaps vs England Test match at Christchurch’s Hagley Oval and saw a clear example of a lack of a strategy behind the pricing and the negative effects it has on businesses.
As it was a public holiday, one hospitality outlet set up at the grounds decided to enforce the additional public holiday surcharge of 15% onto all its products, however, they were the only one at the ground to do so. This coffee stand wouldn’t have had the increased visibility or the crowd to sell to if it wasn’t for the cricket match, particularly on Friday and Sunday when they would otherwise have had to close, and as a result, many potential customers wandered to the other side of the ground where they could purchase the same product without the surcharge.
Hospitality outlets that charge extra are taking a risk.
Successful cafes and restaurants rely on a core of regulars and the gold standard relationship is when regulars think of them as a second home. Public holiday surcharge signs risk bringing that cosy relationship into the real world. They prick the spending nerve and suggest, "guess what, it was about the money all along". Some customers will understand and not mind a little more added to the coffee and slice. But others do mind. They will see other businesses operating without surcharges and wonder why. Many cafes and restaurants have already reached the same conclusion. They protect the relationship and the charges stay the same. The rest should go that way too. They should spread the load over the whole year. Put up prices the tiniest bit over 357 days of the year so the surcharge can be skipped on the eight public holidays.
Understanding how to develop a pricing strategy is not only one of the important parts of creating a successful business, it’s quite possibly the most important. Pricing strategy has the clearest direct impact on revenue and it’s the ultimate reflection of the value your company offers through its products and customer service.
You’ve put all your time, creativity and energy into developing a great product and a beautiful website, but nothing communicates those efforts to your potential customers quite as succinctly as your prices.
Every aspect of your business works to justify them, but from a numbers perspective, pricing has a huge impact: a 1% improvement in pricing equates to an average boost of 11% in profit. It’s that huge to revenue maximization and growth.
So let’s look at the first five steps to developing and executing a value based pricing strategy that pushes your revenue in the right direction.
1) UNDERSTAND YOUR BUYER’S CHARACTERISTICS:
These represent your ideal customers. They help you refine your marketing activities and lead to an understanding of your customers’ willingness to buy at a given price. In terms of pricing and packaging, understanding them helps you to customise and develop your product for the valuations of those customers and price accordingly.
Understanding these personas ensures you’re capitalising on those customers willing to pay more and appealing to those who are more price sensitive. The big thing here is that it’s all about your customers. Understand them, align your offerings to them, and you can’t lose.
2) SURVEY AND TALK WITH YOUR CUSTOMERS:
Once we’ve identified our buyer characteristics and understand them how do we figure out how much they’re willing to spend? The key to creating optimised prices and measuring the value you’re providing is to survey the customer base and collect hard data. You already should be talking to your customers about everything else, there’s no reason pricing should be an exception. You’ll find customers truly appreciate the conversation, because it’s directly related to providing them the right amount of value for how much they’re paying.
You can ask them point blank how much they’d be willing to pay, but you’ll find it’s hard for customers (and the human brain, quite frankly) to cognitively come up with a number. Instead, asking the customer value-based questions in ranges (“at what point is this way too expensive or at what point is this so cheap you question the quality?”) will generate data that can take most of the guesswork out of pricing your product and with that data you’ll be able to price your products for affluent clients who want all the bells and whistles as well as sparing ones who don’t need every feature.
3) ANALYSE THE DATA AND PICK YOUR PRICES AND PACKAGES:
Now that you’ve collected some quantitative and qualitative data, you can analyse it and create value-based pricing that appeals to the target markets. Pricing is a process, and while looking for one perfect price is like trying to find a needle in a haystack, the data will generate an optimal price range that narrows it down significantly as you’ll see patterns emerge.
You’ll also need to compare the data to your costs and competitors before making a final decision (although that data shouldn’t be the driving force behind your analysis). Essentially, you need to make sure there’s an option for every one of your customer characters, in addition to ensuring that when a customer visits your pricing page they know exactly what bucket they fall into across your offerings.
4) COMMUNICATE VALUE TO YOUR CUSTOMERS:
Prices and value are only as good as how you communicate them. Fortunately, collecting price data not only determines a more accurate price for your product, it also allows you to provide great customer service. You’re further developing that customer relationship and assuring customers that you’re providing the value you claim in your prices.
Once you have those prices though, you need to make sure you communicate the value, pricing model and purchase process clearly. If you publish your prices, make sure it’s clear what features are available for each tier at the given price so that customers know exactly what they’re paying for when they put down their credit card or invoice number. Make it as easy as possible for customers to predict their costs and see the value they’re receiving.
5) CREATE THE RIGHT, PROFIT FOCUSED CULTURE:
While it’s definitely imperative that you communicate the value of your product to the consumer, it’s equally as important to accurately convey that value to everyone on your team. The individuals on your team, from the sales team to developers, have just as much power over your profitability as your customers. If the company culture isn’t unified around the value and pricing of your products, then none of the effort put into generating data, conducting a thorough analysis or choosing your price points will maximise revenue or help your business grow.
To create a culture that reinforces your pricing strategy it’s important that your company’s costs, pricing, and profit margins are clearly visible to the team. This transparency guarantees their buy in, and you’ll realise that the collective will do a better job at figuring out how to market and sell different versions of your product to the right customer segments.
If you decide to run promotions or offer discounts, make sure the team knows the limits so you don’t lose out on margins. Discounts need to be discreet, used sparingly and executed consistently.
A little strategy behind your pricing can go a long way, and you’re on the right web page to begin that journey. It is just one more click away.
We have spent years working with organisations and teams, assisting in creating strategic plans and aligning everything in the business alongside it, particularly the all-important pricing structure. Yours could be next.
We can help you grow or consolidate and look into the future for what could be achieved and assist you in developing your own journey to success. The best part is that we are employee centred and we will get everyone in your organisation heading in the same direction.
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