This is part two of ‘time to rethink your strategy’ (read part one)

4. Establish prices when value is uncertain

Businesses face a challenge when deciding what to charge for a new offering or an experience that’s happening just once, because they have little historical data to guide them. 

You can use the following techniques to let customer demand influence pricing.

Auctions

Competing in “bidding wars” for purchases makes some consumers anxious. 

Others love the thrill. 

Auctions appeal to people who hope for a bargain if the bidding proves weak. 

This model can be especially useful for sellers who have uncertainty around the price.

For years, Warren Buffett auctioned off (for charity) the opportunity to have lunch with him. 

Before 2022, the most a bidder had paid for the experience was $4.57 million.

But when Buffett announced that 2022 would be the last lunch he’d offer, the auction generated $19 million. 

Unbelievable and amazing what scarcity can achieve!

If Buffett had set the price himself, he probably would not have chosen such a high figure, so an auction made sense and proved advantageous.

eBay is a business that grew by allowing customers to make bids for purchases that aren’t typically sold by auction. 

Other industries are trying the technique too. 

For instance, cruise ships and airlines have begun using auctions that allow customers to bid on cabin upgrades. 

Technology is one factor driving experimentation with auction pricing. 

Live, in-person auctions are cumbersome, but technology can make auctions a seamless experience. 

This pricing model also lets businesses optimise revenue by allowing customers to tell them exactly what they’re willing to spend.

Royalties and sales commissions

Because publishers don’t know how many copies of a book will sell, they traditionally deal with that uncertainty by offering authors a royalty, which is a payment based on overall sales. 

Similarly, real estate agents typically work on commission, charging their clients a percentage of the selling price of a property rather than setting a fixed price for their services.

Dynamic pricing

Since the use of technology became common in the 1980s, airlines, hotels and car hire businesses have adjusted prices minute-by-minute according to supply and demand. 

In the past decade, sports teams and musicians have started using dynamic pricing for tickets too. 

Dynamic pricing can be off-putting to customers, but they are becoming used to the model, especially since Uber introduced surge pricing.

5. Use pricing to enhance business efficiency

Most shifts in pricing models are aimed at attracting or retaining customers, and boosting revenue. 

But introducing a different pricing paradigm can also serve to change customer behaviour in advantageous ways as well. 

For instance, some industries offer terms such as 2/10 net 30, meaning that customers owe the full amount within 30 days but get a 2% discount for payment within 10 days. 

A tactic that encourages early payment, and helps reduce time spent on accounts receivable.

This approach is often very successful.

Here are three more pricing models that can help a business operate more efficiently.

Off-peak pricing

Certain types of businesses, especially those in the service sector, have capacity constraints. 

Some may benefit by setting different prices for peak and off-peak hours. 

Some restaurants do this with midweek “kids eat free” promotions. 

Hairdressers, who are especially busy on Saturdays, can even fill out their schedules by offering lower prices on weekdays. 

Some movie theatres discount their matinee shows, and some gyms offer specially priced plans that limit access during the busiest hours. 

For businesses that face predictable fluctuations in demand, it’s worth asking - what pricing model might help smooth that pattern?

Subscriptions

Although subscriptions were traditionally associated with certain kinds of businesses, such as newspapers, this model has spread over the past decade. 

Music from services like Spotify has largely displaced songs from Apple’s iTunes, while upscale consumers often subscribe to services like Peleton’s online fitness classes (which recently came to Australia). 

Consumers tend to like subscriptions because they mean low up-front costs and regular payments that make it easier to budget.

Most subscriptions work on auto renewal (no need to “close” a subsequent sale), and lead to more predictable revenue, and higher numbers for customer lifetime value.

The model is now finding success in other unexpected industries. 

Porsche offers a $3,600 monthly subscription that lets subscribers drive any of the vehicles available in its leasing fleet, switching from one car to another at will. 

An innovative idea for a plumbing business would be to charge say $19.99 a month to maintain hot water cylinders.

This subscription could cover parts and labour for repairs, or full replacement if the unit fails.

Upfront fees

One problem with the subscription model, particularly when it involves digital content, is that some customers may join for a short time, binge on consumption, and then quickly cancel. 

Gyms tend to use upfront fees to prevent people from jumping on-and-off membership. 

Any business utilising a subscription model might also consider an upfront fee. 

Although they do provide revenue, businesses typically implement them to help with the upfront costs or to create disincentives for people to cancel. 

The obvious downside of upfront fees is that they may deter the initial purchase, but for businesses experiencing high turnover among subscribers, it’s a model worth considering.

Identifying and implementing a new pricing strategy

To start looking at pricing models that might work for your business, I recommend starting with a team brainstorming session. 

Ask yourself:

• Do customers differ in their usage needs? 
• What would help people on tight budgets? 
• Will a discount plan lead to additional purchases? 
• Are customers best positioned to determine the value of an offering? 

Then consider which tactic would be best for your business.

Even if you’re selling a product or service that does not rely on a traditional sales team, it can be useful to focus on the customer objections you would expect, and then build a pricing strategy that would overcome them. 

Asking customers is always a good approach.

Also look at how various pricing options might help your business in ways other than generating more sales, such as smoothing demand or shifting some purchases away from your busiest time.

Once you’ve identified the tactics with the highest potential, do a cost-benefit analysis. 

For costs, consider the complexity, time and investment that would be required to implement the new pricing strategy. 

When thinking about complexity, don’t underestimate the challenge of communicating a complicated pricing change to consumers. 

After you’ve done a thorough assessment of costs, assign each pricing tactic a grade from A to F.

Next look at the potential benefits. 

Start by making an estimate of the boost in annual revenue, profit and number of customers that might result from each new tactic. 

Making these estimates may feel like guesswork, so I recommend using the following four methods.

1. Expert judgement

The people inside your business would tend to have significant experience working with, thinking about, and interacting with your customers about products. 

Managers with financial responsibility also would have a sense of how small pricing tweaks can affect revenue. 

Salespeople and other employees in customer facing roles should have a deep understanding of your customers’ needs and objections. 

C-level executives may have a vision of particular pricing plans the company should offer. 

Be sure to tap into the expertise of people at every level of your business.

2. General market research

Quantitative and qualitative surveys focusing on value and customer satisfaction can yield insights on pricing related roadblocks to purchase. 

Are customers nervous about not knowing the final price? 

Are they interested in making relatively small purchasing commitments? 

General market research can efficiently provide directional guidance about pricing.

3. Discrete choice surveying

This type of in-depth market research involves presenting survey respondents with a number of pricing options and seeing which they prefer. 

For example, you might ask participants if they’d rather purchase a product outright or make a partial upfront payment and subsequent instalment payments. 

Discrete choice analysis can provide insight into the percentage of customers who favour each tactic, and it can be helpful in pinpointing optimal prices. 

But be careful, as it’s usually more time consuming and expensive than other types of market research.

4. Piloting

The most promising pricing plans can be pilot tested to gauge consumer interest in real time and then quickly be modified to adapt to market response. 

When tried out on a small scale, many of the tactics I have outlined are low-cost and straightforward to implement. 

The advantage of such testing over the other three methods is that it captures consumers’ actual purchasing behaviour, and not just predictions about it.

Once you’ve determined the financial upside (or otherwise) of the pricing options you’re considering, give each a grade from A to F. 

Then focus on the one or two tactics with the highest grades for both costs and potential benefits.

When a business thinks creatively and offers customers a new pricing paradigm, the result is an expanded set of customer choices. Customers love choices!

In an ideal world, every customer has a menu of pricing options, including one that feels tailored to their needs.

If your business does not have a mix of pricing plans, I would argue that you have untapped growth potential. 

There are probably customers out there who would love your product, but they don’t like the current options for buying or renting it. 

Finding a new way to charge them requires imagination and flexibility, but it’s an exercise that can pay off in spades.

Summary

The art of designing an effective pricing strategy involves creatively mixing various tactics to serve the largest possible customer base, and designed for your business and target market.

If you want to satisfy customers with different usage needs, consider:

1. Unlimited or all-inclusive plans (eg. all-inclusive resorts; season passes at ski resorts and theme parks; all-you-can-eat restaurant buffets)
2. À la carte or unbundled pricing (eg. airline ticket add-ons to base fares; day passes to hotel facilities for nonguests)
3. Metering (eg. taxi rides; per-mile car insurance)
4. Pricing by unconventional time increments (eg. hourly car rentals; pay-by-the-month Amazon Prime memberships)
5. Split usage, leasing or renting (eg. vacation time-shares; tool rentals; party equipment rentals)

If you want to appeal to customers on a tight budget, consider:

1. Payment over time (eg. buy now, pay later programs; car loans)
2. Prepaid plans (eg. prepaid mobile cards; non refundable hotel reservations)
3. Capped or flat-rate pricing (eg. home heating contracts with fixed oil prices; flat-rate charges by moving companies)
4. Future options (eg. Hopper’s Price Freeze feature for locking the price of travel reservations before purchasing)

If you want to draw customers who love a good deal, consider:

1. Mixed bundling (eg. fast-food meal deals; season subscriptions to performing arts venues)
2. Volume discounts (eg. bulk purchases at warehouse stores)
3. Progressive pricing (eg. discounts for advance conference registration; higher prices for same day tickets)

If you want to sell a product or service of uncertain value, consider:

1. Auctions (eg. eBay purchases; room upgrades offered by cruise lines)
2. Royalties or sales commissions (eg. fast-food franchise royalties; real estate agent commissions)
3. Dynamic pricing (eg. Uber; airline tickets; concert and sporting event tickets)

If you want to improve business efficiency, consider:

1. Off-peak pricing (eg. discounted movie matinees; lower fares for travel in less busy periods)
2. Subscriptions (eg. streaming services; meal kit deliveries)
3. Upfront fees (eg. gym memberships)

Have a look at two podcasts we have done about Pricing;

In this episode, Troy interviews Per Sjofors the Founder, and CEO of Sjofors & Partners, Inc. based in Los Angeles, United States. Per has set up his business to provide predictive pricing strategies that increase revenue and growth.

In this episode, Troy interviews Christoph Petzoldt, the Managing Partner of Simon-Kucher’s Australia/New Zealand operations, who specialises in portfolio optimization, value-based pricing, pricing research, retention, and sales execution.

Also, our Business Transformation Program will walk you through everything you need to know step-by-step on devising and executing your strategic plan, and provide valuable resources along the way, including the impact of pricing.