Drive Profits and Growth with Smart Pricing

Posted March 6, 2013

Pricing is one of the most important decisions you’ll make when introducing a new product or service. Whether you are selling mobile phone contracts, flying people from city to city, shipping packages, or selling a manufactured product, strategic pricing can make a tremendous difference in the success of your business.

In any pricing decision, you need to look at how much value is being created for the customer, who your competitors are, and to what degree, and how, your offering is differentiated from competitors.

However, as important as the “dollar amount” is how you price. The way that you structure your prices can make a tremendous difference in the success of your business.

You might ask:

VALUE: Can the price be directly linked to customer value? For example, packaging services charge more for faster delivery, and airlines charge higher prices for first class service.
COST: What method of pricing will tend to reduce your cost? For example, charging lower prices to customers who are willing to live with flexible delivery times may allow you to reduce your production or logistics cost.
BUNDLING: Will you price a la carte or on a bundled basis? Both can be effective: All-inclusive vacations such as Club Med appeal to some vacationers, while others prefer a pay-as-you-go experience.
UNITS: What “unit” will your price be based on? For example, a conference center might price by the hour, the square foot, or the number of guests. Rental car companies may offer a flat daily rate, or price based on mileage.
RELATIVE PRICE POSITION: Do you want to price “high” or “low” relative to your customer’s other options? Will you offer several price points – for example, Platinum, Gold and Silver? How might your price change over time? For example, should you initially price “low” to penetrate the market or “high” to increase the perception of value? Each of these options has pros and cons.
CONTROL: Who in your organization will have a hand in setting prices? For example, will sales people have leeway to set higher prices for customers for whom you create more value, or who have greater ability to pay?
TIMING: When will payment be made? The timing of payments can make a big difference in the amount of cash needed to grow your business, and can also change the customer perception of value delivered. In services, some companies charge monthly fees, some charge on a pay-as-you-go basis, some require payment up front, and others do not. In making this decision, assess when the customer is most “ready to buy,” and assess the cash flow and marketing-cost impact.
DIFFERENTIATION: Finally, avoiding direct price comparisons is hugely valuable for avoiding price competition and keeping margins healthy. Ask how your competitors would answer the questions above, then think about what you can do to structure your prices in a different way – just be sure you communicate your pricing effectively, and that it “makes sense” to customers.

Thinking through these eight issues when deciding how to price your new product or service can help you appeal to customers, avoid head-to-head competition, and assure long-term profitability.

Amanda Setili is founder and managing partner of Setili & Associates, a firm that works with Fortune 500 companies to improve business performance. Her clients include The Home Depot, Delta Air Lines, Wachovia and The Coca-Cola Company, as well as growth companies. As an experienced thought partner, Setili & Associates helps clients leverage their distinct assets and capabilities to produce lasting competitive advantage, zeroing in on key actions that will improve profit, performance and growth.