One of the most difficult variables to define in your marketing strategy is the price. At what price should you sell your products or services? Should you define your prices on your costs? On what the competition is selling? Reduce your prices to get market share? Should you reduce your prices, is it easy to go back up later? What impact does my payment options have on my costs? Do I charge all at once or in several stages?
Here are some of the questions for which we will provide answers during this training.
In this course you will learn:
- Classical pricing models;
- How to position yourself in the market with a winning pricing strategy;
- How to structure your pricing if you sell large amounts;
- What are the payment options?
- If there is an advantage to having a quick payment, and can you offer incentive to promote it?
- If you collect payment before rendering the service.
Professionals, self-employed and small business owners.
In this module we will focus on cost-based pricing. In its simplest form, cost-based pricing establishes prices based on cost and a predetermined profit margin. This is one of the most common techniques used, however, it does have some shortcomings - one of which is the fact that it uses elements over which we have little control, so it is prone to error. It can also underestimate the perceived value that the consumer places on the product or service. This technique may result in your company "leaving money on the table", meaning that your target customers may have been interested in paying more for your product or service. On the other hand, this technique is particularly effective when your product or service is an innovation; you offer something that does not exist or for which there is little or no comparable offering on the market. This also holds true for companies that operate at a high volume.
What are the elements that must be included in calculating cost-based pricing? For a large company, here are some points to consider:
For the self-employed or professional, how do all these translate into reality?
Market pricing is one of the simplest pricing strategies to use; in a given market, what are the prices of people or business doing the same or similar things as you. However, there is more to this. Why? Because not everyone is really the same.
For example, let’s take corporate accounting services. In one of your markets, there are five options;
You want to position yourself in this market. You are self-employed, you have 10 years of experience and you are starting your business (with experience gained in a professional firm). How much should you charge?
An important aspect in the market pricing strategy is the notion of what the market is willing to pay. In our example, the market seems to be able to support a wide range of prices. So this aspect of the analysis is done for us by the players that are already in place and enjoying success with their respective strategies (though it is important to validate the concept of success for each). In our example, according to what the market supports, you would be between $45 and $75 an hour. But where exactly?
Here are other factors to consider:
Let's go a little further in our analysis.
You’re starting out and you want to build your customer base? A lower price is one way to "steal" market share. So unless you're well known in the market, the price variable can be used as a differentiation factor between you and the other options. But be careful, you have to stay within a certain limit. In our example, you shouldn’t fall below $45 an hour because you would void the "value" of your certification with your professional order.
What is the level of sales necessary to achieve your break-even point? Here, the cost-based pricing elements should be considered to answer that question. You need too many sales to break even? Your costs are too high compared to those of your competitors? You might have to consider another market with a higher price range or review your costs.
If you have the funds to allow you to be more patient, than you can set your prices more toward the high end of the price range. Good customers will soon be coming through the door as long as your communication strategy is sound and well executed.
Finally, the ability to differentiate yourself from your competitors is also essential. The actions that need to be taken here fall into the personal branding concept. In Economics, there is an important maxim that says, all things being equal, the thing that will influence the purchasing decision of the consumers will be the price. To get out of this, it is essential that you are able to highlight your competitive edge and market yourself accordingly.
This module deals with pricing as a positioning tool. Pricing as a positioning tool is a lot more common than one might think. Take, for example, the Dollaramas of this world, where everything is 1$. With this strategy, they want you to think that shopping there is an economical process. Another example: ÉconoFitness gyms where you only pay $10 per month (the price is going up!). Sure, they have other options but they sure are positioning themselves on the market as the cheapest price out there.
On the other end of the spectrum, we have the luxury market, which may be heavily focused on advertising, branding and quality, but also features a price premium that presides over the costs of these other elements. Some examples that come to mind: Rolex watches or Luis Vuitton handbags. Without a doubt, the craftsmanship of these products commands a higher price. But part of the premium is to build in a “cost of ownership” that grants an elite status to the owner - and some consumers definitely want to be in that club.
A third option is the loss leader pricing strategy. This is a widely used strategy that was made famous by the computer printer industry; sell the printers at a very low price and get a captive market for the cartridges. Supermarkets also use this strategy. They understand what goes into a typical family grocery cart and discounts many of these products. This gives the appearance that they are the cheaper option when in fact other products in that same basket actually compensate for this price drop.
So how can you use these three strategies for you or your business?
Firstly, let’s look at establishing your price either above or lower than the one found on the market. Here are some elements to consider:
What is your operational capacity? If it is low, than having low prices to capture market share might not be a good option as it may very well strain your business by demanding a larger local, more employees, more inventories, etc. All of these elements will negatively impact your bottom line and if you lower your price on top of these added expenses, the net profit might very well not be worth it.
But if your operational capacity is able to take on more clients without much impact on your operating costs, then lowering your prices might be a good strategy to position yourself in a given market. You become more well-known, you establish a client base, you generate a positive cash flow, and then you can review your pricing strategy to gradually increase your prices or offer complementary products/services at a premium (increasing the average transaction amount). Another way to view this strategy is that you are using your main pricing as a “loss leader”.
On the opposite end of the spectrum, you might want to consider positioning yourself towards the higher end of the market. However, as in the examples we used before, a certain justification is necessary. If you are a professional, this justification can come from your track record, your results, your client type, your response time, your waiting line, the uniqueness of your expertise, your studies, etc. All are differentiation factors that can justify why you should be more expensive than your competitors. Another advantage of this strategy is that your profit margin per transaction is higher, hence you do not need to have such a high transaction volume and still net a nice profit. So why is this strategy not more widespread? Because it is not that simple to get a differential factor that can justify the price increase. It is one thing that you got a nice degree with a lot of effort and sacrifice on your part, but if the market does not perceive the value of it, then none of this effort can be converted to a higher price. Ultimately, the deciding factor of the value of an attribute is the market. And sometimes, there is a disconnect between effort and perceived value.
Our last strategy is that of loss leader. We touched upon it with our “lower than market pricing” strategy, but we can push things a little further. For example, if you are a consultant and are looking to build your client base, a good strategy to use would be to organize meetings or training at no or low costs to the participants. In doing so, you would attract potential clients that are interested in what you have to offer. Obviously, a certain amount of participants will not turn out to be clients, but if a few do, this strategy could be a good one for you as you will have clients that have learned who you are and how you work, and you will have established a relationship of trust with them. For some, offering a loss leader might be a very good strategy indeed.
What is demand based pricing? It is a strategy that takes into account known periods of high demand and establishes prices accordingly to maximize sales over a given period.
It is perhaps easier to explain this commonly used strategy with examples.
For the first example, lets take the airline industry. A ticket from Montreal to Miami purchased in August will not be the same price as one bought in January. Why? The aircraft consumes the same amount of fuel, there are the same number of employees on board (pilots and flight attendants) and airports costs are comparable (the aircraft must be de-iced in Winter, but how much does that cost impact the ticket price?). In addition, a flight in August to Miami is much more likely to be partially filled than in January. If the cost based pricing strategy was used, then ticket prices in January should be lower (costs are split over a larger number of travelers). But the opposite is true. Why? Because of the demand. As a very large amount of people are limited with their vacation dates and that Miami is a vacation destination of choice, this creates more demands for the tickets hence the prices go up.
Another industry using the same pricing strategy and for the same reasons is the hotel industry. A room rented for the weekend will be more expensive than the same room rented during the week. A room rented last minute can be more expensive than one rented a few weeks in advance. Finally, if the hotel is in a tourist area, a rented room for Christmas/New Year will be more expensive than the same room for a week in let’s say October.
This is the same phenomenon that goes on when homeowners put up their house for sale on a sellers' market; the final selling price can often exceed the asking price because of overbidding. But here we are talking about the consequence of a favorable market, not a pricing strategy used by sellers.
Airlines and hotels industries are not the only ones using this strategy. What about the seasonal clothing industry? Shorts sold in spring will not be the same price as the same shorts sold at the end of summer. This is the same phenomenon at work; relying on supply and demand. There are more people who need shorts for the summer than people who will buy the same shorts at the end of the season. There is another element that is to be taken into account here: inventory management. It is more profitable for retail companies to give a discount and move an inventory stock that has not been sold than to keep it and occupy the space of the garment that will be sold at a high price in the next season. Of course consumers who understand this strategy, and have some flexibility, will buy the shorts at the end of the season at a discounted price for the up and coming season. Retail companies have less control over periods of high demand than the airline industry. That being said, they are trying to create this demand by offering seasonal "trends" that change from year to year. So if the shorts you buy off season are pastel and next year’s colors are bright, you may find yourself somewhat out of phase. Unless you are not too worried about fashion trends.
One last example: the products sold to your farmers’ market. If you get there early in the morning and the farmer is getting his goods out to start the day, the price will be a different price than in the evening when he must put the unsold products in his truck. Of course in the morning you have the choice of the finest products. But if you take tomatoes, the effect of supply and demand plays a bigger role in price variation than the appearance of the tomato.
The industries using this strategy are multiple. But for it to work, there must be a supply and demand effect and a certain resistance to competition. Depending on your niche, it is a pricing strategy that can be considered.
This pricing approach is not part of the traditional ways of determining an hourly rate, but in my career I have seen this approach so many times that I feel I need to talk about it here.
I have met several people in the service industry who determined their hourly rate based on a perception of their value. For example people who had friends or colleagues, doing something similar and who earned a particular hourly rate, were influenced in their thinking when the time came to establish their price. Their level of education also weighed in the analysis. Same thing regarding past experiences (I met several trainers with university experience who wanted to have the same hourly rate in the private sector).
It is a way of evaluating your price; which, even if it brings some useful elements, remains highly emotive and relies only in part on an analysis of other aspects to establish the price. What will weigh the most in the balance will be a system of social value based on the hourly rate: I am a professional with 10 years of experience, I must charge $ 150 an hour for example. Or my friend who works in a major company earns $ 150,000 / year, to do the same job that I am doing, I should earn at least the same amount.
There are elements that are valid in this comparison, but the whole situation must be analyzed, not just the elements that suit us. For example, a professional who is in a reputable office with several associates and support staff, charges $ 150 an hour for the same number of years of experience you have. You are self-employed, work from home with the help of an assistant, and you do not yet have the high-profile customers. Then your hourly rate could be lowered. Unless you would rather have fewer customers. The same applies to university lecturers. Of course the hourly rate is high, but it usually does not cover hours spent doing homework and grading exams as well as allowing time for questions. If a private company offers you a mandate that does not involve grading and additional periods, some flexibility may be required.
Another important factor is the impact that a change in the hourly rate can have on your business volume. You're starting out, being stubborn and charging $ 35 an hour which could give you 15 hours of work per week ($ 525) is less profitable than charging $ 25 an hour and being able to get 30 hours of work per week ($ 750). Over a week, it is a $ 225 difference, but over a year we are looking at a difference of more than $ 10,000.
If your choice is to work less, then asking for a high hourly rate is quite valid. But if your goal is to start your business, having an hourly rate that brings in business is more important for the short and medium term. In the long term you can always adjust your pricing when your waiting list is full.
Drip pricing is a strategy that is used in certain industries that are very much price driven. It is a strategy that consists of revealing the whole price gradually, to draw people into the buying process and make their option seem cheaper than the competition.
It is a strategy that is found to a wider degree with online purchasing but not exclusively. The advertised price gets the consumer interested in the product and as he/she continues with the purchase, all sorts of fees get added to the price: handling, baggage fees, processing fees, printing fees, withdrawal fees, parking fees, etc. It may also be used with elements that are essential to the use of the product/service.
It is a strategy that has come under a lot of pressure from governments and other regulatory bodies as it is ethically suspicious. Some airline companies use this technique and strip the price of a seat to its minimum and gradually charge for other features (checked bag, aisle seat, priority boarding, insurance for your trip/luggage’s, onboard meal, etc…). This technique is also used by car rental companies (Avis and Budget had a recent case go against them) and the hotel industry (AirBnB for example with their service fees not included in the initial price) amongst others.
But for online businesses selling to an international customer base it is almost impossible not to drip as some of the “added” costs cannot be anticipated (shipping and duty taxes for example). Having an all-inclusive price would prove to be very risky and there would be huge variations from region to region mainly due to regional taxes, highly variable shipping prices and local policies.
So try to use this technique only for costs that cannot be controlled by your business such as shipping and taxes/duties. Other reasons for using this strategy should be avoided as it can frustrate your customers who find out the “real” price of what they are buying only after having spent a good amount of time in the buying process.
For many companies, this part seems quite simple: you offer a product or service that is relatively affordable and when the consumer wants it at a specific point in time they pay for it. There! But even in these simple cases, the payment method must be considered. For example, one of my clients offered payment by check or cash. For 98 percent of customers, this was satisfactory. But for the other 2 percent, it was a problem. So he decided to offer payments by credit card to all his customers. Result: 60 percent of customers opted for credit card payment. This means that in 60 percent of cases, his profit margin was reduced by the expenses attributable to payments by credit card. In some markets, a 2-4 percent fee wouldn’t be problematic, but in others with very low margins, this is a significant cost.
The “how to charge” dimension becomes even more important when the products or services are expensive and they are paid over a period of time.
Let's take the hypothetical case of a computer consultant firm that has the mandate to develop a customized application. The cost is $25,000. This large sum is treated differently than an appointment with your dentist for $120. A common reflex (and it is a valid one) is to request a 50% deposit before work begins and the rest upon delivery of the product. This reduces business risk associated with non-payment. In addition, a portion of the collected money is used to cover the costs associated with development. That said, for some companies, paying $12,500 without guarantees or previous history can be problematic. Another alternative is to suggest a payment plan with specific deliverables at specific dates. In our case, we could imagine 6 deliverables spread over a six month period, which could mean that you could ask for a deposit of $3,571 to start and then for each deliverable, a further $3,571 would be charged. As a result, the net amount is still the same, but each payment is lower, you build a relationship of trust, money comes in more frequently, your business risk is lower and you do not finance operations until the second large payment comes in. For the same amount, you end up more profitable.
This is a valid strategy when your relationship is long-term. In the event that a customer misses a payment on a deliverable, you can stop the production, in accordance with the terms of your sales contract. Therefore, your risk of losing money is greatly diminished.
But what happens when the amounts are significant and that the customer leaves with the entire product upon purchase? Home appliances and furniture stores would fall into this category. The need for an external financing entity offering some guarantee is paramount. The best option would be credit cards (some larger institutions offer their own financing service, but our emphasis is on small business). You will also need to validate what is offered on the market in your specific niche to compete and negotiate accordingly with your financial institution. For example, within the furniture industry one can find; singular payment, 12 equal payments, 12 months with no payments and pay later in equal payments, 12 payments without interest, and so on. In certain markets, payment methods and pricing are used as differentiating factors.
Another element to consider is the "on time" payment policy. It is not uncommon to see - especially in the B2B market - companies stretching payments; the more time the money stays with them, the more it can bear fruit. But would it be better to have it in your bank account instead? In the export field for example, it is common to see a 2 percent discount if paid in 10 days or less, net invoice if paid in 30 days. If something like this is presented in the right manner, you provide an incentive for your customer to pay the invoice faster. The percentage discount and the amount of days can be determined according to your market, what your competitors offer, and your profit margins. What is important to note here is the fact that a discount may be offered for quick payment and the discount should obviously be included in the calculation of your price.
There are several forms of financing that a company can offer to its customers. Is that a good idea? It depends on several factors. Here are some of the questions you need to ask yourself to find out if offering financing is right for you: Do you sell high priced items? Do you have a low or high profit margin? Does the customer leave with the product/service before paying the full amount?
Depending on the answers to these questions, here are a few options that you can offer:
- Credit card payments. This is a convenient form of financing that many companies offer without asking a few questions first. Who wants to pay cash? Your clients have to make a detour to the bank to make a withdrawal. But there is a cost associated with offering this convenience to your clients. Depending on the fees offered by banks and other payment services, this service can cost you between 1.5-4% per transaction. If you can afford it; go ahead, your customers will be happy. If your margins are low, debit card payment is an alternative. There are still costs, but they are more modest. To see the debit card pricing in Canada, click here: http://www.interac.ca/en/current-fees.html
- If you are selling high priced items and the customer leaves with the product/service before having paid the entirety of the purchase, then financing is essential. A few examples of industries that may use this payment option are: furniture or appliance stores, recreational vehicle dealers, renovation project contractors. Doing business with a company that is specialized in this kind of transaction is very important. There will be fees. But if you are not in the financing world, you will avoid mistakes, expenses, and reduce the risk associated with mismanagement of financing purchases.
Here are three types of financing that companies can offer themselves: 30 days’ net payments, splitting a project into milestone/payments and a layaway plan.
Net 30 days financing is often associated with a discount for immediate payment. In my experience what I see most often is a 2% reduction for immediate payment. This kind of financing/rebate is offered to encourage quick payment and thus avoid the costs associated with reduced cash flow. If your customer pays you quickly, you have a larger cashflow which can be used to maximize your profits.
The other “financing” option is rather a different way of doing things that limits the risks associated with a large project involving a single payment. The idea is to split the project into intermediate milestones and corresponding payments. Thus you reduce the risk associated with non-payment and you can make the decision whether to continue with the project if a payment does not come on time. Computer companies, renovation project companies, and similar operations, are excellent candidates for this kind of approach. Of course this does not eliminate all the risks, but it reduces the impact that a non-payment might have on your overall operation.
The last option we will see here is the layaway plan. Strictly speaking it is not a form of financing, but this option helps the client to obtain goods/services that he/she would not be able to obtain otherwise. The strategy is for a customer to be able to reserve a good or service by making a deposit, followed by a series of payments until the full amount has been paid. As a retailer, you reduce your risk because the product does not leave your store until the full amount has been paid. But your policies must be clear; eg how long can the buyer make payments? What happens to the product if only partial payments have been made? Would you charge storage fees? Etc... Several retail operations offer this way of doing things.
Should you offer financing or not? The decision is yours, but at least with this article you have a basis for asking yourself the right questions.
You want to promote yourself and to do so, you want to offer rebates? How should you offer a discount? How often should you do it? Take the time to think about your strategy because a discount can certainly help to make things happen, but the frequency and amount may create a change of behavior in your consumers and also provide information that you may not want to share.
Why should you consider offering a rebate? There are several reasons such as moving overstock, reaching new customers, making room for new seasonal products, getting yourself known, promoting sales in a low period, etc... Another reason that is becoming more and more popular is to increase your customer database. When you use a rebate, you can gather information: names, addresses, telephones and emails. All this information can help with your email marketing or help you target geographic regions that bring in clients. You could become better known in these regions by using leaflets / flyers or by placing ads in local newspapers.
When establishing your rebate strategy, one important factor is the frequency. If you make promotional discounts too often (eg: monthly), your customers or potential customers can see the promotional price as the new regular price and wait for the next discount to buy rather than doing so at the full price. A discount may be seasonal or biannual, but with greater frequency, you might change your consumer’s behavior.
The other factor to be careful about is the amount. Have you noticed the rebates for new cars? Rather than encourage us to buy, these rebates of hundreds or even thousands of dollars make us doubt the accuracy of the regular price. With regular discount of this magnitude, who wants to pay the full price? Combined with a high frequency, a discount can set a new regular price in your customers' eyes and it will certainly not be the highest price. Once this is established, getting back to the regular price might prove to be difficult. The same can be said for percentage discounts. Thinking about offering a 50% discount? You just announced your profit margin. It is far better to offer a lower discount or something for free that is accessory to the service/product provided. For example, a dentist could promote that for every dental cleaning done during a given month, a toothbrush, toothpaste and dental floss will be given. The amount of the treatment is not discounted and there is added value offered to the customers.
Also, when offering a rebate to new clients, do not forget about your current clients. Internet providers and telephone vendors often use this strategy; offering a promotion to new clients. As a customer, I always feel frustrated when these promotions are going on as I may end up paying more than the new client and I am a loyal customer !!! Think about doing something that would be equivalent for your customer base to eliminate this feeling. Doing so would stop old clients cancelling their service and registering again as new customers to take advantage of this promotion. Companies often stop customers from leaving by having contracts or having them as a registered client in the system which does not allow them to get this discount. Complaining becomes the only option. Not the best way to treat your loyal customers.
Another aspect to consider is making access to rebates easy. You offer your discounts online? What happens to those who have not printed the coupon? You send your rebate in a flyer? What happens to those who did not bring their copies? Grocery stores have found a solution to this problem: a good amount of flyers are found next to cashier / teller, and when they notice that you have forgotten your coupon, they get it out for you. Also think about the time it takes to get the rebate. If you are the only one handling the rebate, then this should be easy. But if you are doing this in conjunction with a manufacturer, a delay might come into play. It is important to clearly inform you clients of this procedure and be as transparent as possible.
An alternative to using rebates could be to give something away. For example, if you are a dentist, you may do a promotion to get more clients and instead of offering a rebate, you could offer a toothbrush, a tooth past and dental floss to all your clients making appointment for a given month for example. This has the benefit of not playing with your prices and everyone, old and new clients can get that promotion if the appointment is made during a given month.
Finally, do you want to use discounts? Check with your regulating bodies for the rules governing these types of promotions such as price displaying, discount procedure, impact on sales taxes and other aspects that may be involved.
Offering rebate is a great strategy, but as it is often the case for most activities, you have to plan it well.
This section looks into what is a loss leader.
In order for this strategy to work, the company must have two very important things:
- the company must have a range of products/services. This strategy cannot work with a single product/service company.
- one or more of the products/services are known and have some value for the buyers.
What is unique here is the fact that the pricing strategy is considered as a whole, rather than individually. In our previous articles, we looked at some of the strategies to set a price for an individual product/service. Here we look at a group set of products/services and how to use certain components to maximize the total sales for the company.
We should define what a loss leader is. A loss leader is a product/service that is known to your customers and that holds value for them. The strategy is to offer a discount on this product/service to attract consumers to buy not only this item but the rest of the products/services that are needed with it, or needed to complete the loss leader. Let us look at some examples, because this strategy is widely used.
Printer manufacturers may be one of the best examples for this. The price of printers is very low to facilitate the purchase (the printer is the loss leader). On the other hand, the price of ink cartridges is comparatively expensive. The strategy is therefore to get the consumers to buy the printer, which will create a captive market (captivity is relative since some alternatives exist), and sell goods that are essential to the functioning of the item (the ink cartridges). Bingo!
Here is another example of loss leader usage: supermarkets. What we have here are distributors, not manufacturers, which should contrast with our previous example. The way this strategy is used here is to take key commodities from the consumer’s basket and offer them at a lower price than the competition to attract customers. The aim is to ensure that customers do not buy exclusively the items on sale, but all of their other needs too. The supermarket will have an opportunity to get back its discounted prices with items that are either at regular price or even a little more expensive than the competition.
A final example is the service industry. I get regular calls from portfolio manager representatives who offer me an analysis of my assets to see if there aren’t a few things they could do better. The analysis itself takes time and costs money to the company, but it is offered to me for free. This is the loss leader. Once you know whether you are well-equipped or not, you have entered the sales process of the company.
How can this strategy be used in your business? The best way is to analyze all your products/services and find out if you have an element that could be discounted, which would trigger the purchase of other products/services. One of the techniques used to identify this is to draw a schematic chart of your client's transformation process. The loss leader could be located at the beginning of this process. Having identified this product/service, you will attract your customer and you will be able to recuperate your discount with the purchase of other products/services.
Are you familiar with the strategy of charging $ 19.99 instead of $ 20.00 or $ 99.99 instead of $ 100.00? According to study by MIT and the University of Chicago done in 2003, prices with a "9" ending make people buy more. For example if you had to choose between $ 55, $ 59 or $ 63, the majority of people would choose $ 59 even though it is more expensive than the same item priced at $ 55.
This technique is widely used and can help you define the selling price of your products/services in a wide range of industries. But it is not to be used for the luxury industry. Instead of encouraging people to buy, a lower price would take away from the brand image. Indeed, luxury products use the price as a positioning tool (read the article on this), and having a low price is counterproductive in this strategy. In the luxury industry, the price you pay is important. Having a discount item is not perceived as an advantage by the people targeted by this strategy. For many, having a "reduced" price is the beginning of the popularization of the brand. Be aware.
Another pricing strategy that is used is to offer at least three options with different prices. For example, have an "economic" option, a "standard" option and a "premium" option. Of course, the "packaging" of the product/service must be done accordingly. But generally buyers will opt for the "standard" option. Of course, the benefits must be real. Here are some examples to illustrate this strategy:
If you can offer options to your consumers, remember to structure them well and keep in mind that the best seller will be the one in the middle.
There are several occasions where an increase in price can be justified. Here are some examples.
If you are in the service industry, and do not want to increase your operational capacity, or if your waiting list is two to three weeks long, you can use the price function to modulate the demand for your services. You might also want to focus on certain types of high margin customers, and limit customers who come for quick tips that take time but do not bring much in terms of profitability.
Another situation, always in the service industry, is when a professional receives a certain certification, an academic achievement, or simply has a certain longevity (10th anniversary for example), there may be a price adjustment for those landmarks. Another justification may be moving into a bigger, better adapted place, etc ...
In terms of products; you may receive an exclusive good, in limited quantity. So the price can be adjusted accordingly. This situation is rare and can lead to a bidding war if the product is valued. You can use demand based pricing which is explained in the appropriate section of this course.
There is a general economic upturn in your market and the finances of your customers are doing better; this is another opportunity to increase prices.
A factor to consider is when none of the possibilities listed above apply to your company, and that your prices have stagnated for years. Without an increase in price, if you are in an inflationary market, then your margins will go down. What can you do? One way to get around this is to re-package your products and services so that an increase is concealed in a new way of billing. An example is if you have a training company. Initially, you can charge per group, then you can move to individual billing. This change may include an increase in your prices. You can also move from -charging for your product- to a subscription model (Adobe software made this change by making software available in the "Cloud").
Another way to increase prices/revenue is to revise your customer's transformation process (or the value creation chain for the customer). It is important to understand this process and to see the added value you bring to it. An excellent example is your dentist. When you go for an annual check up, this includes a cleaning. At the beginning, the assistant will help you fill in the necessary information. The cleaning part is done by a dental hygienist, who charges a lower hourly rate for the services offered, and once the cleaning is done and the X-rays taken, the dentist can come to check the work and make the recommendations based on the observations he/she has made. In an appointment of roughly 45 minutes, about 10 minutes are spent with the dentist and the rest are spent with the assistant and the hygienist. When understanding this, your appointments can be programmed accordingly and your prices can remain constant for the customer, but your profitability will increase because of better management of your added value in the process, and a maximization of your time. Lawyers and accountants work in similar fashion.
Although there are several reasons to increase your prices, some are not valid. One of these is when you want to increase your prices because that is what your competitors charge, or that is what you believe you should be earning because of your studies or background, etc… In these circumstances, a simple price increase can have a negative impact on your sales pipeline. If your competitors charge more, you have to understand why. Have they been there longer than you? Do they have more associates than you? Do they have more experience than you? Do they offer products/services that are different from yours (presentation, financing, accessibility, etc ...)? Are they really in your geographic market? In short, several questions must be answered before announcing a simple price increase. There is surely a justification for the difference in price and if you do not understand and address it, you risk seeing customers go to your competitors.
There are many ways to lower your prices: a promotion, a discount, a loss leader. We have modules on rebates and loss leaders so if you want more information on these topics, you can view them.
We will concentrate here on more permanent price reduction rather than using a discount or a promotion. In general, lowering prices can help for several things:
However, once the price is reduced it is difficult to go back to the "normal" price, because the normal price is now re-determined by the discounted price. An example of this is Internet service providers offering special prices for 6 to 12 months and sometimes even longer. With a promotion of this duration, who will want to pay the full price? Customers will move from promotion to promotion to keep paying a lower price.
A risk often associated with these "new customers" promotions is the fact that you can create dissatisfaction with your existing customers who pay the full price for the product/service. It makes sense, when organizing a promotion for new customers, to also think about your regular customers. Give them something so they will not be penalized.
Another point to take into consideration is the fact that depending on the importance of your price reduction, you will attract customers who are able to pay the promotional price but not necessarily the full price. An example of this behavior is restaurants that offer discount coupons on various promotional platforms. Although these promotions bring new customers, the few restaurateurs with whom I spoke told me that the customers who came did it almost exclusively when there were promotions. Very few returned without the coupons.
A price decrease can also bring about a change in your business model. If you are a value-added company, a price decrease could transform your company into a bigger company. You must understand this and want this transformation and above all, you must have the resources in place to properly respond to this increase in demand in a way that benefits the company.
Price reduction can also lead to a price war. If you want to capture market share from your competitors, depending on the risk you pose in the marketplace and your company image, a price war can be triggered. The winner will be the customer without question, but surely not you.
When the price decrease is on foreign markets, the "anti-dumping" agreement comes into play and regulates everything. There are many ways to lower the price of sales on a given market. For more information, read the article at the bottom of this page.
Finally the safest price reductions are often those made to liquidate an obsolete inventory. Why are they safer? Because they disappear when the product/service is liquidated. Therefore the promotional price does not (or hardly) affect new products and helps to attract new customers without affecting regular customers (regular customers can also buy promotional merchandise).
So if you want to do a price decrease, pay attention to all the points above. And above all, do not forget your loyal customers.
Are you ready to export your products or services? Do your transactions take time? Is there a delay between sales and payments? Does the exchange rate between your currency and the country of your client(s) vary greatly? Is your profit margin thin? Does your customer insist to be billed in the currency of his country? You’d better protect yourself.
I must confess that I'm not as familiar as I would like to be with this topic, mainly because I have never used this instrument before. So I do not know how this works exactly, but I think it's important that you are aware that it exists. I found out about these protections thanks to one of my export clients, who was buying them to protect himself against the currency risk involved in trade between Mexico and Canada. The transactions between the two countries were in US dollars. So the protection was for the variation in the exchange rate between the Canadian and US dollars, even if the customer was Mexican.
To put this in perspective, imagine that you sell a product to a customer in a given country and that this customer pays you according to your agreement some 30-60 days later. In addition, exchange rate fluctuations between both your countries are strong. So if the selling price on day 1 is X in the buyer's currency (which is often the case) the price will remain constant. But if the buyer's currency goes up in relation to your own, the money you will receive will be less than what you charged in the beginning.
The best way to protect yourself would be to invoice in your own currency. That means that the currency risk will be bared only by the buyer. But not all customers want to go that route, either because you are in a very competitive environment and the buyer has many options to chose from, either because there are no protection instruments in the buyer’s country, or because the transactions are made in an internationally recognized currency (as in the example of my client who used US dollars to make the transaction even if the customer was Mexican), or for any other reason. Under these circumstances, know that there are instruments that can protect you.
According to my quick research, financial institutions offer protections revolving around 3 options:
Although these are advantageous tools to counter the risks associated with exchange rates, there are complex tax and accounting treatments for each of them. Ask your accountant about the impact on your business when using these instruments.
Stéphane Elmaleh Riel is a born entrepreneur. During his 25 years of work experience, he was self-employed for 18 of them.
He holds an MBA in marketing and business strategy from HEC-Montreal and a B.Ed from McGill University. Since he began his career he has worked in marketing.
In an ever-changing world, he has over 18 years experience in e-marketing. As early as 1998 he was managing a transactional website which generated more than 80% of new sales.
When he started he worked for Kodiak, one of the better-known trademarks in Canada. At that time, the company was extending its brand. Partnerships were established with prominent companies for the use of the Kodiak name on their apparels. Sub-brands were also created to protect the brand’s value and, at the same time, the discount stores were given the brand notoriety that they were looking for.
Subsequently he was involved in the launch of more than 15 businesses or divisions for himself or as a business consultant. These ventures included a regional retail chain in Mexico.
It is this experience and more that he brings with him as a trainer.