P FOR PERCEPTION
Managing pricing is very much about managing your customer’s perception of your product value. One thing you should always remember is that what you are selling is not just a product. In fact, you are selling a solution to a customer’s problem, a guarantee of quality, a promise of on-time delivery, a smooth buying experience, etc. In short, it’s the values of the product that you are selling, not just the physical product itself.
Similarly, customers pay the price that they find appropriate for the value they receive. Thus, it is extremely important for you to be able to demonstrate how your business and products can bring value to your customers. If you manage to get customers to perceive your business and products as superior, such as by having a high quality product and/or excellent service, you will be able to command a higher price point than you would otherwise.
While this seems to be a no-brainer concept, many businesses tend to overlook it. They use different pricing tactics and forget the most fundamental one, which is matching the product’s price with their customers’ perceived value. As a result, they either price too high and turn away customers, or price too low and leave money on the table.
R FOR RELATIONSHIP
While the main role of pricing is to maximize profitability, do not forget that customer relationships are also an important instrument when dealing with pricing. For example, at times you would want to show gratitude to good customers by giving them special discounts. While that doesn’t seem like you are maximizing your profit, you may gain great partnerships which reward you with larger orders in the long-term. You may also design a pricing scheme to promote trial and acquire new customer. Short-term losses might be acceptable if you can guarantee greater long-term gains through lock-in contracts and gradual price increases.
According to business strategist Fred Reichheld, “companies are twice as likely to get a price premium with loyal customers as average customers, while there retention rate increases 14% and their share of wallet, 31%”.
I FOR INDIVIDUALITY
Since different peoples perception of value changes, a one-size-fits-all pricing structure won’t work for everyone. That’s why businesses have always been trying to segment customers based on similar characteristics, so that they can charge different prices for different groups and maximize each group’s profitability.
Such ability to customise pricing is pushed even further in today’s world as more and more companies adopt dynamic pricing. The idea of this strategy is that each customer is given personalised deals and offers based on various conditions at the time of buying.
By doing so, companies can capture each customer’s maximum willingness to pay without chasing other customers away. For example, according to the WSJ, Office Depot uses “customers’ browsing history and geolocation” to display different offers and products to different customers. The same thing happens in B2B where different customers are negotiated with different prices.
In the past, building a dynamic pricing system is difficult and expensive. However, as technology becomes more sophisticated and affordable, many businesses have started to employ a specialized pricing system to give them the ability to set pricing rules for each individual customer and manage prices in real-time.
C FOR CONTROL
Even the best pricing strategy would fail if it was sabotaged by a bad pricing execution. According to a research conducted by PriValEdge, “55% of companies emphasized internal price communication as a key challenge”, and there is a “55% gap between price increases decided and what was actually implemented after 12 months”. Without an accurate and timely system to properly document and manage sales process, those problems are inevitable. What’s worse is that these problems would negatively affect other departments as well, and it is difficult for managers to make corrective actions on time.
E FOR ENVIRONMENT
The last puzzle of pricing that you cannot ignore is the environmental factors surrounding your business. Every move your competitor makes, and every social issue and regulation in your market, can potentially have an impact on your product demand, which will ultimately influence your pricing strategy.
So how well did you establish a process to monitor these factors? Did you take these factors into account when determining your prices? Do you think it’s beneficial to have a system that can automatically adjust your prices when there are changes in these factors? Answering those questions may lead you to the next step of building a better pricing system.
So PRICE is our pricing framework, what is yours?