This article revisits an earlier piece on price driven innovation which prompted a number of requests for other pricing ideas, so I have added in a few other notes, added to the ‘dozen’ series and re-posted. Price is as an essential part of your product or service as is the thing in itself. So how come it’s so often an afterthought or just thrown in out of the blue with the rest of the marketing mix. So let’s think, how do you price your product or service? What impact can your pricing model have and can it really change the nature of the product and the revenue stream it offers. While there are lots of pricing approaches let’s start by looking at ‘cost-plus.’ Many people use simple cost based or cost plus version of pricing. By that we mean they add together the direct material cost, direct labour costs and overhead costs for a product and then add to it a mark-up percentage (to create a profit margin) in order to ‘price’ the product. It may be that they have to shape this margin a little to accommodate market environments or competitor prices but that’s basically it. Sound familiar?
Let’s think about innovating around the process of pricing. What if you are in an industry where costs fluctuate regularly or have unpredictable highs and lows. Instead of constantly changing prices and worrying about will your customers accept them; instead of narrowing or losing your margin to stay in the game; can you bring your customers in closer; can you share with them your strategy and aspirations for growth.
Can you look right back to your core competence or see what is it that your customer buys? You can often be sure that what the customer is buying is not what the seller thinks they have on offer! Can you make your growth aspirations so attractive to your customer that they will sign up to your margins? Can you even agree the margin between you? Maybe they’ll need to know the confidence limits of those fluctuations but agreeing pricing margins with clients might be less mad than it first appears. It could really contribute to growth with key accounts tied in…think on, do you know a business who does this can they mentor your path.
Can you segment your customers into buying groups and cycles? For each of the groups can you work with suppliers to provide a basket of goods or services for a monthly fee, for example, a segmented membership scheme? Can you change the nature of your revenue stream?
Outcome Based Pricing Schemes are schemes where the price is based on the outcomes experienced by the customer. If the product allows these schemes can be staged, with variable pricing for different experiences and levels of product use. It can be about the numbers of the product units per se across product functionality or perhaps direct impact of product, for example data recovery and level of importance of data or in pharma, recovery of patients or life extension. If you do not have the ability to quantify the outcomes and benefits your products and services will bring to your client in enough detail, this is not an option for you.
Switching focused price strategies might be an alternative for some, fixing prices on time milestones where switching might naturally occur, tying customers into products within a certain window of opportunity or up to certain versions of product or service iteration, so it is either unattractive to change products or contracts don’t allow change until closure. It needs to be a good deal for the client or this will just build up resentment. A client can cope with lock in as a trade off, so long as the lock in has real value and isn’t directly detrimental to their interests.
There is a lesson to be taken from, for example, various attempts at Pay Your Own Price in the music industry, pushing both product and marketing and sales channel. PYOP as a promotion over a short period can lead customers into other product areas and highlight innovative new channels to market. In this case the back catalogue but in other sectors it might be possible to lead customers amongst the product garden with if not PYOP but headline grabbing strategies. The secret is in the headline grabbing, it’s important that the PR machine roles this out clearly labelling the sales channel. This is important to control the level of cannibalisation across sales channels but also to make sure that the new channels develop.
If you are a business that’s capable of turning out new products and innovations…how do you price these? Do you peg your prices to the life-cycle of the product or surface? In a process sometimes called ‘skimming,’ products and services are priced higher so that fewer sales are needed for the product to break even. You could think about this as a trade off with low sales against the higher price.
However, think of those early adopters and the Apple shop queues, high prices for the Geeks it maybe but it is the premium to be first and in the know. A new product might fly or fall on the views of the first 3-5% of purchasers who adopt the product. Its critical to understand what these early adopts call value and their sensitivity to price. Your business is therefore able to drive the Diffusion Effect.
There is also pricing for image, making things refreshingly expensive like your Gucci handbag, not that I am cheap but on more than one occasion have I been told to up my prices so a company can be seen to buy my services at the top level. Pricing for perception, however, is a whole other story; back to the life-cycle.
As the market develops you change your prices eventually dropping the price to accommodate the laggards coming at the tail end of your product or service revolution. Can you change the nature of the product as you look forwards to the end of the product life-cycle, deleting or changing features as you move towards the laggards and saturation of the product. Making sure you really use every stage of the product life-cycle to increase revenues.
If you are thinking of wading into a new product market and going up against an established incumbent competitor. Don’t go for the price jugular unless you are sure you can sustain it or do enough damage to change the market…not sure that’s a good idea. Can you really? You might compete on price initially and get your foothold, in doing this, try to appeal to a specific segment in the new market, nibble away at a product area in the incumbent’s customer base by twiddling the product and generating a pricing model, perhaps with a basket of goods and services that really hits the mark, certainly something that is so unattractive to the incumbent they won’t want to ‘me too’ you, Leastwise, don’t go all out for the incumbent's main product base in a price war…no, you’ll lose, am pretty sure.
Think earlier about price in the product's design and development phase. When you are looking at your portfolio of products and services, let ideas about price be a key factor in defining product or service strategy, not just in terms of balancing the revenue contribution but as a key feature of the relationship with customer and product. Don’t make product price an afterthought, make it a point of product innovation, make it part of the product or service.
Also in this series
• A dozen notes on leading through and towards knowledge.
• A dozen notes on risk
• A dozen notes on strategic thinking for SMEs.