Tuesday, September 10, 2013

How to Grow Your Pricing Capabilities as Your Grow Your Business

Any business owner that has come into contract with a marketing book, consultant, or has attended some sort of marketing course, will probably have been introduced to the concept of the “product life cycle”.

Over time, products move through various stages: firstly, there is development and launch. Assuming that stage is successful, the next period is one of growth, which is then followed by maturity and finally (but hopefully not), decline.  

In many industries, these product life cycles are getting shorter and shorter. Pricing strategies that maximize revenue, profit and the business owners’ return on investment across all stages of the lifecycle are therefore critical.

In this article, I’m going to discuss six pricing tips to help your business during this growth phase, a period during which, as customers become more familiar with your products and services, their price sensitivity tends to increase as well.

1.    Analytics
Not only is good data (converted to analytical and informative information) vital for several of the tips that follow, there is also another reason that it cannot be ignored.

It is fair to say you can’t believe anything that customers tell you, about half of what you see them do, but almost everything your sales data says they’ve done.

In industry after industry, the days of across-the-board price increases are disappearing or long gone. Today, business owners need to be firing laser-guided missiles, rather than carpet bombs, and good quality data and analytics is the key to finding hidden pricing opportunities.

2.    Segment your customers and your products
The range of products offered by companies tends to expand during the growth phase, and so too does the number and variety of customers.

Now that you’ve got a good grip on your data (See Tip 1), you are now in a position to segment your customers, not into “warm and fuzzy” general descriptions, but into actionable segments of customers who share similar demographic, firm-o-graphic and price sensitivity characteristics.

But don’t just stop with segmenting your customers: smart companies today, especially those with a broad product portfolio are also segmenting their products. Zara, one of the most innovative and devastating retailers in the world (according to LVMH), segments its products into one of three categories, ‘Classics’, ‘Fashions’ and ‘Trends’, each with their own respective pricing strategies.

3.    Use Gamification & Behavioural Economics
Fast fashion is not the only industry that has witnessed an explosion of choices in recent years. Walk down any supermarket aisle and look at how many different types of toothpaste, hair care or bakery products there are today. At any one time, there are thought to be over 1,000 mobile phone calling plans available in Australia.

By offering choices, the decision for the customer changes from “do I buy from this vendor?” to “which one do I purchase?”

Strategies drawn from Gamification and Behavioural Economics, where you ‘nudge’ customers towards your most popular product, or the product best suited to the customer, can help you “move more product”. For an extreme example of Gamification strategies, check out the website HumbleBundle.com

4.    Challenge Industry Norms and Conventions
Businesses in growth mode shouldn’t be afraid to challenge industry norms and conventions, particularly when it comes to Pricing. One such convention existed in the pharmaceuticals industry, where the norm was that a fledgling drug should be priced 10% below that of an incumbent.

When GlaxoSmithKline launched its ulcer medication drug Zantac several years ago, it did so at a 50% price premium over the incumbent. The company realised the new drug provided more value to customers than the alternative (smaller dosages, fewer side effects), and a price premium was warranted (and successfully obtained).

5.    Offer a Choice of Pricing Models too.
There is no rule that says you should only have one pricing model. By offering your product(s) under two (or more) pricing models, you can significantly expand you customer base.

Many software packages can be sold using a traditional licence pricing model, as well as on a pay-for-performance basis. Aircraft jet engines manufactured by the likes of Rolls Royce and GE can be sold to airlines, but are more commonly rented to them today on “power by the hour” contracts.

6.    Focus on Value and Outputs, not Costs and Inputs
One of the attractions of “power by the hour” contracts is that they are focused on the outputs and the value the customer receives, rather than costs and inputs associated with you manufacturing a good or providing a service. Look at it from the airlines perspective: they are only charged for the engine when the aircraft is in the air and earning the airline revenue.

The development of such Value-Based Pricing models during the growth phase will help sustain your business during the maturity phase of the product life cycle. It doesn’t matter what industry you are in, from professional services to manufacturing, your customers don’t care about what “it” costs you. They care about the value they get from your product or service.

The growth phase is an exciting period for business owners, and one where optimal pricing strategies can set your business up for long term success. The key is to think of your prices, not as a cost or an expense to your customers, but an investment in the creation of value in their business. 

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