Most industries have traditional ways of pricing goods and services.
But some businesses have begun to rethink these paradigms in ways that can benefit existing customers, while simultaneously attracting new ones - thus boosting revenue and profit margins.
Rethinking a pricing paradigm requires creative thinking.
At many small businesses, discussions around pricing focus on simple price-setting - whether to charge $27.99 or $29.99 for a restaurant entrée, for example.
Those decisions depend largely on costs, customer demand and value relative to other options.
Some small businesses do adopt a more sophisticated approach, such as good-better-best (G-B-B) pricing.
That involves bundling product elements or services into distinct pricing tiers (typically three) and encouraging customers to decide which set of offerings makes sense for them.
I have seen some restaurants offer early bird, regular, and chef’s table options, which is an example of G-B-B pricing.
This also allows for price ‘anchoring’.
Price anchoring is a psychological technique used in marketing and sales where an initial price point is set in order to anchor the subsequent prices offered to the customer, in relation to the first price.
This first price sets a reference point that influences the customer's perception of value, and affects their willingness to pay for the product or service being offered.
The goal of price anchoring is to make the customer perceive the subsequent prices as being more reasonable and acceptable, compared to if the prices were presented without an initial anchor price.
Now is a great time to investigate other, more inventive pricing strategies.
Recent record inflation and fear of a recession have forced businesses to scrutinise their pricing in order to preserve margins, so make sure you explore all options.
At the same time, many consumers are examining their household budgets and spending more cautiously.
In this economic environment, offering a new pricing structure can be an attractive alternative to simply adjusting prices.
Furthermore, technologies that are now commonplace (eg. smartphone apps, predictive analytics and artificial intelligence), make it easier than ever to design and use new pricing models.
Changing your pricing strategy can also help you target different demographic groups.
For instance, research shows that Millennials and Gen Zers are especially open to no-haggle pricing, and to renting or leasing as an alternative to owning.
How to review and improve your pricing strategy in six small steps
Following are various pricing models that companies might consider, with the trick being the identification and implementation of the right ones.
It is all about ‘horses for courses’.
By adding one or more of these as an option alongside existing price plans, small businesses can better serve their current customers and win over new ones.
When it comes to pricing, innovation often consists of borrowing ideas that are already proven to work in other industries.
For example, vacation timeshares have existed since the 1960s - more recently, entrepreneurs have appropriated this split-ownership model for private jets and yachts.
The pricing tactics that follow are grouped into five categories based on the objectives they help businesses accomplish.
Those objectives are not mutually exclusive, with many of the tactics delivering multiple benefits and could be listed in more than one category.
1. Accommodate different usage levels and preferences
Customers have unique needs in terms of how much they use a product.
At the simplest level, this is why coffee chains offer small, medium and large sizes.
Consider these other approaches that marketers can use to price goods and services to please people who want a high or low quantity, and certainty over what they’ll be charged:
Unlimited or all-inclusive plans
These deals appeal to people who seek to avoid extra charges or enjoy consuming heavily for a fixed price.
All-inclusive vacations are an example - travellers know they can partake of all the food, beverage and activity options available, and they won’t receive a surprise bill at the end of the trip.
À la carte or unbundled pricing
This is the opposite of unlimited, and it appeals to consumers who prefer to pick-and-choose to avoid paying for things they don’t want.
Over the past decade, much of the airline industry has shifted to an à la carte pricing model, charging travellers lower base fares and then add-on fees for checked baggage, early boarding, in-flight meals and so forth.
There are now some car insurance underwriters who charge for each kilometre travelled, which is an example of metering.
So is the software-as-a-service model (SaaS).
Metering has similarities to unbundling, but it typically involves transparently tying charges to small incremental increases in usage - the way the metre in a taxi charges passengers.
Pricing by unconventional time increments
Uber Carshare rents cars by the hour and is one of many businesses now that have upended the customary practice of renting by the day or the week.
Changing the traditional time increment of pricing can be a powerful tool to activate customers for whom a higher price is prohibitive.
When Amazon introduced its Prime membership service in 2005, it charged an annual fee of $79 (the price is now $139).
When it began offering Prime as a pay-by-the-month option (currently $14.99), membership surged.
Split usage, leasing and rentals
These pricing models appeal to customers who cannot afford or don’t want to own a product.
Split usage works well for high-priced assets that the typical owner doesn’t use often.
Some examples include:
- Second homes
- Private planes, and
This usually involves selling fractional ownership interest in the asset - vacation timeshares are the classic example of split usage.
Leases and rentals are well-understood pricing models for houses and cars, but they can be applied to other types of products.
For instance, many places around-the-world now offer bike rentals by the hour.
This is an innovation that combines renting, altering the standard time increment (from by the day, to by the hour), and using technology that allows bikes to be unlocked from unstaffed kiosks (requiring no employees) located all around a city.
2. Appeal to customers on a tight budget
Even before inflation escalated, consumers were starting to struggle to afford stuff.
Businesses that offer financing alternatives - which are a form of pricing - can help people afford goods and services within their cash flow constraints.
Here are some ways you can make pricing more attractive via financing:
Payment over time
Both brick-and-mortar and online retailers have expanded the options for paying over time - which includes Buy Now, Pay Later (BNPL) programs, such as Afterpay.
Payment plans appeal to consumers who don’t trust (or can’t get approved by) credit card companies.
They also tout transparency, offer fixed interest rates and generally avoid late-payment charges - which are advantages over traditional credit cards.
Mobile phone companies introduced the use of prepaid plans to serve customers who wouldn’t pass a credit check.
For businesses, prepaid plans reduce the costs of delinquencies, bad debt and billing.
Car rental businesses and hotels are other businesses that use prepayment as a common pricing tactic, offering nonrefundable, prepaid reservations.
If a recession further reduces a consumers’ creditworthiness, look for prepaid options to increase.
Capped or flat rates
These pricing plans appeal to customers who prefer certainty to surprises.
Part of the appeal of the ride-sharing services like Uber, is that they quote a flat rate for a trip at the time of booking - avoiding the uncertainty created by a metered taxi service.
Flat rate shipping boxes provide not only price certainty but convenience, by eliminating the need to weigh packages.
Investors have long had the ability to buy an option, which gives them the right to buy or sell a security at a fixed price sometime in the future.
Options are also common in commodity markets.
Airlines typically use options to reduce their exposure to fuel price fluctuations.
Now predictive analytics can allow some businesses to offer consumers pricing models that function like options.
Hopper, the fintech travel company, has a Price Freeze product that guarantees the price of an airline fare, a car rental or a hotel room for a fixed time.
Nearly 20% of hotel bookings on Hopper are frozen before being purchased.
For products or services subject to price swings, offering customers a way to guarantee a future price could prove attractive.
3. Provide price break opportunities
Some consumers take particular pleasure in snagging bargains and getting discounts.
The following three models appeal to those customers, often by showing them exactly how much they’re saving off the regular price.
This strategy combines different products into a package at a single price.
A common example is fast food meal deals.
Mixed bundles work best when many customers are likely to be interested in all the included components.
Trying to combine services that appeal to different kinds of people can prove less effective.
In 2020, Apple launched its Apple One bundles, which combines TV streaming, music, video games and iCloud storage in a single subscription (with news and fitness services as optional additions).
But for me, including Apple Arcade in all the packages renders them unattractive - as I don’t play video games.
I am way too old for that!
This strategy encourages customers to purchase more than they otherwise might.
Volume discounts can be especially compelling to businesses when the marginal cost of a product is negligible.
Warehouse clubs, such as Costco, have built entire businesses catering to consumers who enjoy the discounts that come from buying in large quantities.
Events and conferences often use this model, in which prices start out at one rate and increase at set intervals prior to the event day.
The three reasons for employing progressive prices are:
- to reward loyal customers who purchase early
- create a sense of urgency, and
- incentivise commitment.
This strategy also provides an excuse to reach out to customers repeatedly (often by email or social media), under the guise of saving them money before the price increases.
At the same time, event organisers gain insight from the pace of sales - if many customers buy early, demand may be stronger than the business expected.
In my home town of Hobart in Tasmania, we recently held a Triathlon which used this method.
The sooner you enter, the lower the price.
And if you pull out, the closer to the event, the lesser the refund.
We have split this blog into two so next week we will provide you with part two.
Unfortunately many small business owners do not understand the importance of pricing and the leverage pricing can provide for their business.
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.