When it’s Time to Change Your Prices

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First, a fact. Too many people at too many companies see price as a constant. They believe in the “set it and forget it” mindset when it comes to pricing. Once you have settled on a price for your product or service, you lock it in and never re-evaluate it.

I hope we can all agree that this is lunacy.

Price is one of the key levers that marketers have at their disposal. And to ignore it is to settle for sub-optimal performance.

But that still begs the question, how do you know when it’s time to change your prices?

Here are a few clues to look for:

1. Yours peers have changed their prices

Any significant change in competition deserves your attention. And if competitive pricing changes – up or down – it could be a signal that the market is about to shift. While I do not believe in matching your competitor’s prices, I do believe in paying attention to when it changes.

When your competition raises prices, it could be due to an increase in demand that they are seeing. Are you seeing it to? Why not?

If they lower their prices, it could be that they are trying to steal market share, either from you or from your other competitors. How are you going to respond?

2. You are releasing an upgrade

Changes in your offering might lead to changes in your pricing. If you are increasing the value for your customers, you might consider asking them to pay more for that value. Some companies may offer multiple versions of a product – such as a premium option, which costs more – while others will simply replace their old product with a newer, better one. Regardless of your strategy, take the time to review your pricing strategy every time you come out with a product change.

3. You are rebranding

When your company is going through a brand transition, it is most probably because you are aiming to reposition yourself within the industry. A new position might require a new price.

For example, a value brand might decide that they need to reposition themselves as a luxury brand. But chances are that the market won’t buy the shift if you are still offering your products at a lower price than the competition.

You need to know who your target market is and what they can afford.

4. You are seeing a shift in buyer behavior

Demand in many categories ebbs and flows over time. Famously, New York City umbrella vendors raise their prices when it’s raising. That’s because they are smart enough to know that’s when demand spikes. To meet the rising demand, and maximize their profits, they raise their prices.

Like the umbrella vendors, your company needs to be aware of when demand rises and falls. You should be able to sustain a higher price when you see the most demand, and shift lower when demand falls.

Conclusion

Price is a variable input which will affect sales and revenue. Use it to maximize growth at your company by recognizing when it’s time to change.

What Your Discounts Say to Customers

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Discounts work. If you are a regular reader of this blog you will know that I often write about the value of special pricing, promotions, offers, and sales to drive interest and boost purchases.

However, there is an opposing view. And it would be unfair of us to ignore it entirely. Because as much as it’s true that discounts can work to increase revenue over certain time periods, over the long term they can (not always but in some cases) also have a negative impact on your business.

The following is an attempt to explain why – not to advise against the practice, but to spread awareness about the potential dangers of discounting strategies so that you know what to look for and when to change course.

Discounts and Your Brand

Use of discounts can affect your brand – that is, the impression that consumers have of your company. Some companies use discounts quite frequently. Others can afford never to offer discounted pricing.

Whether or not you use discounts does not determine what people think of your brand. However, when you use discounts often, you are signaling two things:

  1. The value your products or services provide may be less than one would assume at full price
  2. Consumers should never buy at full price because they can always wait for a bigger discount

Apple Never Discounts

When we think of consumer brands that do not discount, Apple is the first one that comes to mind. Apple has been able to build their success as more of a luxury brand. They have sustained a higher price point in the marketplace than most of their competitors.

One might argues that Apple would grow their dominance if they started offering lower prices. They might bring in more customers, and generate more revenue, with discounts and other promotions.

But Apple has made the active decision not to do this. Most likely, that is because they are afraid what that strategy might do to the brand that they have spent so long crafting. Price is not a part of the Apple value proposition. Instead, they are focused on creating quality products that are easy to use.

Walmart vs. JC Penney

Walmart and JC Penney are two brands that consumers will generally associate with low prices. Unlike Apple, these two retailers have actively chosen to compete on price. Price is a key part of each of their value proposition.

But, they each have a different strategy for offering lower prices. JC Penney uses a discount strategy, offering frequent sales to drive people into stores. Whereas Walmart offers what they call “Everyday Low Prices” – a way to distinguish themselves as offering the lowest prices, all the time.

In fact, in 2017 JC Penney’s new CEO chose to deploy a new pricing model which more resembled Walmart’s. Rather than offering frequent sales, they told their customers that they would now be offering the lowest prices available, all the time.

What happened? Consumers revolted, sales slumped, and the CEO was fired. And they have since gone back to the original, sales-driven model.

This demonstrates points #1 and 2 up top – when you use discounts to meet your sales goals, consumers will associate your brand with discounted pricing. This creates an expectation that will be difficult to break from.

Should You Offer Discounts?

To repeat, all of the above is not a reason not to offer discounts. But it is something that you have to consider when you start making discounting a part of your pricing strategy.

Discounts and other promotions can drive increased interest, traffic, and sales. But just like anything else, if you become too reliant on discounted pricing to grow your business, you run the risk of negative brand impact in the long term.

How to Judge the Results of a Price Test

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So you are running a price test? But how do you determine which price wins?

It may seem like a dumb question, but it’s not. Sometimes the obvious answer is not the right one.

First, let’s establish the goal of the price test. In most cases, your goal will be to sell more of Product X. But you don’t care about just the raw volume of products sold. You care about revenue. And you care about profitability.

However, some companies use products as loss leaders, offering low prices to get customers in the door in hopes that they spend more money down the line. In that case, you might look at raw customers or sales to judge a winner.

And when launching a new product, your goal might be to drive as much revenue as possible, without caring as much about profitability. That would also change the metrics you use to judge the results of your price test.

But assuming your goal is profitability, you are going to measuring total contribution. To do that, you will need to know your variable cost per unit sold (marketing cost + cost of goods). Your contribution margin is the difference between the revenue and the variable cost.

If you sell 20 X’s at $20 per, and the variable cost per unit is $5, then you made $300 in total contribution (20 – 5 = 15 x 20 = 300).

And if you sell 25 X’s at $18 per, with a variable cost still at $5, then you made $325 in total contribution (18 – 5 = 13 x 25 = 325).

So in that case, $18 is a better price.

Top Pricing Blog Posts

We always say it – pricing is one of the most under-appreciated, under-utilized tools in the marketer’s tool belt. If only every marketing manager and small business owner knew the power of pricing, they’d be so much better positioned to succeed.

Luckily, we have a few blog posts on the subject that can help. Today, we wanted to present our most-read blog posts on pricing from the past few years. Here they are:

  1. The 1% Theory of Pricing
  2. 3 Ways to Set Your Price (and Which Works Best)
  3. How to Successfully Charge a Higher Price
  4. Will You Match Your Competitor’s Price?
  5. What Your Price Says About Your Brand
  6. How to Make Variable Pricing Work for Your Business
  7. Low Price Wins
  8. Price Testing Explained
  9. Will You Honor an Expired Coupon?
  10. Do You Compete on Price?

3 Ways to Set Your Price (and Which Works Best)

There are three common ways to price a product or service.

  1. Cost Plus Pricing
  2. Competitor Minus Pricing
  3. Value Based Pricing

Cost Plus Pricing

Cost plus pricing is so named for the equation used to arrive at a final price. The person setting the price calculates how much it costs to create and sell the product, then sets the price above that number to afford an acceptable margin. For example, if it costs $10 to produce each good, and $5 in marketing costs to sell it, and you need a 10% margin to be profitable, then you will set your price at (10 + 5) x 1.1 = $16.50.

Competitor Minus Pricing

Competitor minus pricing gets its name the same way. In this model, all we care about is what the nearest competitor’s price is. We want to match it or beat it, so that we can use price as a way to attract new customers. If they are selling their product for $16.50, we want to sell ours for $15.99.

Value Based Pricing

Setting a price using value based pricing is more difficult than the two models above. But the principle is simple. Price your product based on the amount of value it provides the end user. Take into account the consumer’s alternatives, and their cost. Then figure out how your product is better or worse than those alternatives. For example, if a competitor offers a similar product for $15.99, but our product lasts twice as long as theirs, an appropriate price might be something closer to $29.99.

Which Works Best?

Pricing is not a one-size-fits-all decision. And no model is perfect. But of the three basic practices detailed above, value based pricing is best.

Why? Cost plus pricing and competitor minus pricing both have inherent flaws that value based pricing does not.

Cost plus pricing does not take into account the consumer’s alternatives. You are pricing based on your costs. But what if a competitor’s costs are lower. They will always be able to underprice you. In addition, cost plus pricing does nothing to maximize profitability. Perhaps you could sell it for more, but your formula prevents keeps you locked into a lower price.

Competitor minus pricing forces you into a low-price mentality that can be very difficult to succeed at. It forces you to cut corners and save money in ways that new entrants in a field can’t always do effectively. It keeps you from creating more value for your customers because price is what defines your offering.

When you use value based pricing you can take all factors into account and set a price that makes the most sense based on your specific offering, and the market you hope to win.