Recent changes in prices and inflation have caused several new pricing opportunities. First, it is important to recognize the differences in issues like supply chain and inflationary changes and short term versus long term changes. For example, lower wage jobs are experiencing increases that reflect both shortages and some long-term stabilization. Office rentals especially in key cities are probably facing long term declines. In contrast many commodities like eggs and lumber seem to be experiencing higher volatility based on special events and the changes in supply and demand.
It is critical that you recognize these differences in order to capitalize on the opportunities. Suppliers seem to just manage commodity price changes like eggs and Georgia peaches that come and go. Entertainment prices seem to increase even more than the costs to provide increased growth. Concert and sporting evets seem to have no price limits. Increased tipping pressures are starting to reach backlash. Many grocery chains are adding prepared foods to capture some of the eat-in market and high prices of restaurants.
Amazon continues to be the elephant in room. It used to compete primarily on price. However, selection, service and delivery are becoming critical components. For example, one day shipping can be a game changer compared to visiting a store with low inventory, poor service, and inadequate staff. Many traditional retailers are reducing offerings and services and increasing margins which makes Amazon even more attractive.
How Do I Know I Have the Right Price? Pricing products or services used to be simple and straightforward. Production and distribution techniques have changed dramatically and become more efficient.nbsp; This has resulted in great value and pricing opportunities for huge retailers like Costco and Amazon. Online store price changes occur instantaneously, with immediate visibility and accessibility to consumers.nbsp; There is more diversity in consumer pricing behavior today.nbsp; The high-end consumer buys $1,000 shoes in better department stores and visits merchants like T.J. Maxx and Amazon to shop for unbranded commodities at a 20-40% discount.
Analyze bundling and unbundling. To coin a phrase, “Do you sell it your way or our way?”nbsp;Bundling and or unbundling need to be considered. Bundling can both improve a product offering and satisfy the customer, such as selling complete meals or LEGO sets.nbsp;Bundling can also be a way to increase profit by adding elements such as high margin warranties to low margin items like electronics. Bundling can also enhance sales and value, such as offering extra services in places like fitness centers or nail salons.nbsp;
Unbundling also has numerous benefits for customers who only want the basics or are primarily price driven. Spirit Airlines offers no-frills fares and charges for every service to maintain perceived low prices. Generic brands represent another form of unbundling by charging lower prices in exchange for lesser branding. Costco is still one of my favorite retailers.
Pricing psychology can also dramatically affect your image. After you have worked long and hard to develop a rational pricing strategy consumer can react strongly to psychological presentations. These can include practices such as: pricing at “$9.95” (instead of $10.00), eliminating the actual dollar sign, unmonitored purchase limits, offering some items for free, selling two for $9.95, or changing colors and font sizes. Competitive and pricing of special items can also affect perceptions. For example, over pricing specialty items like cookies can really cause a turn off.
Varying Prices can increase volume and Increase Profits. One of the most successful efforts by sports teams and airlines is variable pricing. The simplest thing is they have ranges in seat prices by location, game or time. The biggest change is in varying prices by time, seasonality, or holiday, to develop revenue in off peak periods. While these examples can utilize sophisticated and expensive computer models, the most noted models are very simple. Specifically, the early bird special in Florida and Happy Hour have been around as long as I can remember.
“Free” is not a dirty word. The concept of “Freemium” is more than a business model. It’s also a pricing strategy. Offer a free product or service, then offer ‘pay-to-upgrade’ features, and you have a Freemium strategy. Remember that companies like Google and Facebook were built on free offerings for entry, followed by a host of upgrades and “for pay” services. Ancillary aspects of the Freemium strategy include samples, blogs, demonstrations, contributions to charities, etc. — these can all create awareness and build long term volume at little or no initial cost. An older variation is to basically “give away razors and printers” to sell the “blades and ink.”
Consumers Love Promotions. Contrary to some popular opinion, “promotion” is not a dirty word and the use of promotions is not synonymous with diluting the value of your brand. You have many opportunities to find new ways to increase volume today, including pop up shops, selling through Amazon or Wal-Mart marketplace, seasonal programs, and bundling.
Consider Service and Quality After the Sale. I trust my service station, grocery store, cleaners and doctor including their reminders. Many customers will opt to stay with a company in large part because of the quality and service after the sale. Some other factors that can affect price decisions are quality, availability, selection, return polices, and guarantees. When you have a small business, you have the flexibility to look your customer in the eye and take that extra step to make sure your customer is happy. A key example is that restaurants and retail stores can suffer major declines if customers have to wait too long.
Use efficiencies of logistics, sourcing and distribution. Another aspect of pricing strategy that can provide major competitive advantages has to do with logistics, sourcing and distribution efficiencies. These may be used to reduce costs for you and prices for your customers. For example, Amazon is able to employ such efficiencies to operate on a 15-20 percent margin while traditional retailers have to work on 40-50 percent margins. Similarly, shipping times, delivery methods, using direct shipping, etc., can affect pricing and profits.
Entrepreneurs who recognize that traditional pricing models no longer apply in today’s world of business will be better able to price their goods and services appropriately in this “Brave New World.” Pricing strategies vary widely depending upon the factors we have discussed. The most important suggestion from this blog is to consider alternative pricing tactics and consider the entire pricing package. You must aggressively manage and innovate your entire pricing package rather than simply reacting to short-term changes in the market or competitive pressures.