Hi!
My research on pricing taught me that 69.6% of respondents wanted to know more about pricing strategies.
You ask.
You receive.
I was putting together a lecture for Ken Troupe’s Sports Revenue Class and as part of the lecture, I jotted down a few pricing strategies.
Let me share them with you this morning.
Cost Plus Pricing:
Maybe the simplest and if it is the only one you use, you are likely ahead of a lot of people.
Cost plus pricing means you take the cost of the goods or service and you add a little for profit.
The upside: it is pretty easy.
The downside: you usually don’t get all of the costs in there. You aren’t paying attention to what the market might be willing to pay, meaning you likely leave money on the table.
Competitor-Based Pricing:
Again, sort of simple. You look at what you think your competition is and price according to what they are doing.
The upside: simplicity.
The downsides are many. Usually beginning with not knowing your market because what you consider the alternative or the competition often isn’t.
You also likely leave money on the table or miss sales because you don’t know your market well enough.
Penetration Pricing:
This is where you set a low price to win customers over to a new product or offering.
It doesn’t really work because you have really just sold people something at a false price. The expectation is that this is what the price is and I value it accordingly.
I’m sure it has worked somewhere, but a good example is in the way that Uber won tons of market share when rides were subsidized by private equity. Once Uber became public and needed to show quarterly results and didn’t subside rides…people weren’t as apt to take Uber as they were previously.
That’s the challenge of Penetration Pricing.
It sounds great. It might work.
But turning it into a sustainable, profitable business often doesn’t.
Price Skimming:
This is a bit like Penetration Pricing, but working the other way.
You start high and as the market evolves and changes the price drops.
I don’t know mind cutting prices. I do mind discounts.
The challenge that most people need to understand with price skimming is that it is much harder to raise prices after you’ve cut them.
Dynamic Pricing:
In theory, it is a better balance of managing pricing with supply and demand. There are tons of case studies that show how much better it is at helping businesses capture more of the value of their product or service.
The only problem is that it isn’t a perfect system by any stretch because customers often feel like their relationship with the business is transactional and when you’ve built a strong brand that’s an issue.
Dynamic Pricing works best where the brand is weak or not as strong as it could be and there isn’t as much emphasis on customer lifetime value. Because customers do take issue with dynamic pricing in a lot of cases.
Value-Based Pricing:
My favorite.
It can be tricky.
Value-Based pricing means you work to charge the client based on the value that will be created.
This works really well in professional services firms like mine.
You can charge certain businesses more than others because they are getting more value.
The challenge comes in being able to quantify what the value is.
What I have found is that it helps with underpricing which is often the biggest challenge folks are dealing with.
Look at these, think through them, and let me know which one you find most useful.
Dave
PS: In the survey, someone asked about the pricing of electricity in different territories. I’m still working on coming up with some good ideas there.