Enjoying some Kirin Special Lager and
Pilsner Urquel (a Czech beer), I recently joined @sportsgeek (aka @seancallanan), @joshrowe, @shortbatch (aka @scottkilmartin), and later @mrjamesnoble, to record an episode
of Beers, Blokes & Business on the topic of pricing.
Like any good pricing discussion, the
recording only touched the surface of this huge topic. So the blokes asked me
to pull together a summary of the key lessons and take-always from the podcast.
Here goes...
1. All Value is Subjective
This may come as a surprise to some, but
the value a customer gets from a product or service is not determined by you.
Value is subjective and is determined by the customer. Take private health
insurance as an example (a product dear to the heart of @joshrowe). The features of a
private health insurance policy can include optometry, dental, physiotherapy
and the like. The benefits may include $800 of coverage or claims. Both
features and benefits are determined by the private health insurance provider.
But ask consumers what they value in a
private health insurance policy, and you'll get answers such as "piece
if mind", "I get out of the public health system" or
"I can get back to work or normal life quicker". What one
customer values can differ from what another values, and this will be reflected
in what they are prepared to pay for a product or service.
2. All Pricing is Contextual
The good news is that you can help shape
that value because all pricing is contextual. Take a look at the YouTube video for the Wicked
Sick Project above.
A couple of guys buy a BMX bike on eBay
for $27.50. They do nothing at all to the bike, other than put it back on eBay
with a much better description, and the bike ends up selling for $134.50. All
they did was change the context, and they got a higher price.
3. Offer Customers Three Choices
You should always offer customers three
choices (think "Small, Medium, Large" or "Good,
Better, Best". Here's why: If you offer customers one option, they
either buy or they don't. You have a 50:50 chance of closing the sale. If you
offer customers two choices, you are putting them in a position when they are
making a price-based decision.
But if you offer them three choices, you
are forcing them to make a value-based decision. In fact, customer often think
to themselves "which one do I buy from this vendor?", rather than
"do I buy from this vendor at all?"
4. WTF (in laymans terms) is Price
Elasticity?
Scott McNealy, former CEO at Sun
Microsystems, once famously said "Pricing [is] confusing to us too. In
the whole history of Sun, we have never known what demand is, what elasticities
are, or what the right prices are for our equipment".
Put simply, price elasticity is the ratio
of the percentage change in sales volume as a result of a percentage change in
price. Sounds simple enough, but for many companies the complications arise
from factors such as not having data at a product level, or at a customer
level, quantifying non-price impacts (e.g., did an advertising campaign affect
sales volumes), and given that these calculations will be performed on
historical data, do the calculations yield long term or short term elasticities
and will they apply to future sales. These are just some of the reasons why
price elasticity is like the abominable snowman: no one's really sure if
they've seen it or not.
We also received a couple of questions on
Twitter which we didn't have time to address during the recording. One of the
other blokes, @jimboot, asked "when
should you raise prices?" Most companies, because they tend to adopt
cost-plus pricing, think the answer is when your costs increase. The problem is,
customers don't care about your costs. They care about the value you receive.
That means changing prices when you add more
value to what you sell, when there is a change in the competitive landscape (eg
a new entrant, a merger or acquisition), when there is a major technological
break-through in your industry, when a key business process is outsourced and
even when a recall or safety warning in launched.
@DarrylvanRooy
though a more interesting question is not when to raise prices, but how? My
recommendation is to be honest and open with customers. Look at what Netflix is
doing in the US at the moment. They've told the press they are looking at their
pricing, and it's got so much media coverage, that you'd think they had already
implemented the price increase. The market is certainly conditioned for the
price increase...when it eventually comes
As I'm sure you'll discover when you
listen to the recording, there's more to pricing than just setting a price,
crossing your fingers and hoping someone pays. Feel free to contact me if you'd
like to discuss any other aspect of pricing not raised in the podcast.
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