How to Make Variable Pricing Work for Your Business

Pricing is one of the most under-discussed, under-utilized tool in marketing. Though it is one of the Four Ps we all learn about in Marketing 101, we too often take for granted that the price is the price and there’s nothing we can do about it.

But price is a lever we can use to improve returns in a multitude of ways. One popular strategy is the introduction of variable pricing to your product line.

Variable pricing, in the broadest sense, means offering different prices for the same products at different times, locations, or to different audiences. There are many different ways to do it, as the large number of companies that execute these strategies successfully have proven.

Below are a number of the most common forms of variable pricing, which you can apply to your business in order to get more mileage out of your existing marketing efforts:

  1. Amazon famously got caught showing different prices to different users for the exact same products. Amazon, and other technology-intensive companies, are in a constant state of price testing. By showing different prices for the same products over millions of different site interactions, they can use variable pricing to find the price point that provides the maximum profit for each product.
     
  2. Uber is widely derided for their “surge pricing” model, which follows the basic law of supply and demand. When more people are using the service, prices go up. You can use a similar strategy to increase profits during times of increased demand.
     
  3. Ebay made the auction pricing system popular, where customers compete on price so that sellers are able to maximize their earnings for each product. Auctions work when supply is limited by gaming demand.
     
  4. Time based pricing is common with hotels and airlines. Similar to Uber’s surge pricing model, their prices go up and down during specific times of year, days of the week, or time of day based on the likelihood that people will be travelling.
     
  5. Many physical retailers will use variable pricing based on location. They might offer a product for one price in New York City and a different price in suburban Pennsylvania.
     
  6. Discounting is a form of variable pricing many companies use. Offering discounts at specific times or to specific categories of customers helps drive sales where they otherwise might be low or non-existent.
     
  7. Pricing based on benefits allows companies to suit a product to each individual customer’s needs. Car dealers and many B2B sales use negotiation to match a variable set of “options” to the needs of the customer, where the pricing will depend on the final product.

As with any pricing strategy, your goal is to maximize profits. Use variable pricing if it allows you to find a more effective balance of sales and profit margin per sale.

Ethical Questions for Marketers – Part 5

Welcome to the newest installment of our weekly blog series, Ethical Questions for Marketers. Each week we plan to introduce a new topic and explore it in detail, preparing marketers for the day when they face such a problem at their organization.

Last week’s topic was Competitor Spying.

This week’s topic: Price Consistency

Pricing is an important topic for marketers to learn more about, made even more important due to the fact that is commonly overlooked as a lever we have at our disposal. But pricing decisions do not come without ethical considerations.

Under the subject of pricing consistency, one can run into several ethical problems. Many of us think that if we offer a product, that product has a price. It’s simple. That product costs X.

But that’s not always how it works. Many companies practice some degree of variable pricing.

There are legal issues in variable pricing. For example, it was quite common in the past for companies to charge black people more than whites. That’s illegal. And before the Affordable Care Act outlawed this practice, it was common for health insurers to charge sick people more than healthy people.

Then there are variable pricing strategies which are still perfectly legal. Amazon made headlines early in their rise to dominance in the ecommerce space when it was discovered that the pricing users see on their website doesn’t always match what other users see. That’s because Amazon uses pricing algorithms to determine what price they can charge you as an individual in order to get you to purchase a product. The goal is to charge as much as possible, so that they can maximize their profit.

Many B2B companies and auto dealerships offer customized pricing models, where the price someone pays depends on features and negotiating skills. And B2C companies regularly uses special offers and discounts that are available to only a select audience (for example, email subscribers or loyalty program members).

So where do we draw the line? As long as what you’re doing is legal, it is up to each company to set their own rules around pricing consistency.

To help you, determine how you would explain your pricing strategy to a customer who feels ripped off. If you can’t do it in a way that would make sense to them, you’re probably outside of your ethical comfort zone.

Stay tuned next week for another installment of our Ethical Questions for Marketers series. If you have an ethical topic you’d like to see addressed, write us.

Will You Honor an Expired Coupon?

If you are a B2C company that runs any type of special offers, this is a common question that many businesses will hear from prospective customers-

“Will you honor an expired coupon?”

Or some version thereof. “The deadline was yesterday, can I still take advantage?” Or “I found this old offer code and it’s not working, is there a new one I can use?”

As a marketer or small business owner, you are likely to have a quick gut reaction to these kinds of questions. And based on a number of conversations I have had, it will be either one of two responses.

#1 - No way. You missed the deadline. You pay full price. What’s the point of having deadlines if we don’t stick to them? If I make an exception for you, I’d have to make an exception for everyone. Otherwise it’s not fair. Sorry.

OR…

#2 - Absolutely. That coupon will still work, or we’ll give you a current one. Because that means a surefire sale for us. Whereas saying no might lose us a customer. So why wouldn’t we honor it?

For the longest time, I was firmly in the first group. For whatever reason, I felt strongly that giving away discounts that were not “earned” was not fair. But I see now that I was wrong.

So what if customers take advantage of you and get discounts that they would not normally be awarded? If they ask, give it to them. Because that gets you a sale you might otherwise lose.

Customers that ask for a discount are price-conscious. They will represent a small percentage of your overall customer base, who will continue to shop you as usual and “follow the rules” when it comes to offers and discounts.

If your response was closer to #2 above, good for you. If it was #1, you need to train your mind to think through this question differently.

Will You Match Your Competitor’s Price?

When it comes to pricing, there are countless strategies that companies rely on. Schools of thought vary on how to price for success, and entire books can and have been written on the subject.

But the question for this post is a very basic one: Will you match your competitor’s price?

This is a question you should answer internally now, before it comes up. And it is likely to come up. Whether it’s a customer who makes the request: “I really like your product and would rather do business with you, but company X is offering theirs for 10% less.”

Or it comes from your boss: “Company X just lowered their prices. Do you think we should lower ours too?”

Being the price leader in your market is a legitimate strategy. And if that is your strategy, and a competitor undercuts you, you must respond.

But for most companies, the answer is more difficult. Matching a competitor’s price is not a strategy in and of itself. It might be a part of a special promotion, like we have seen recently from companies like Walmart and Best Buy have used as a way to compete with online retailers. Research is mixed on whether this kind of promotion can work.

The hard truth is that unless you are pursuing a lowest-price strategy, you should be able to offer a higher price than your competitor and still succeed. That’s because you should be pursuing other areas of competitive advantage.

It’s best to understand what you do better than your competitor. When they lower their prices, you don’t lower yours in response automatically. Instead you continue to outdo them in those other areas.

If you don’t have any competitive advantage, and indeed your competitor offers the exact same thing as you, then you are in a commodity business, and price is all that matters. So prepare for a long and brutal price war.

What Your Price Says About Your Brand

When you think of some of the most popular/trusted/like consumer brands in the US today, you might think of Budweiser, Coke, Amazon, Apple, Walmart, etc.

Some brands are closely linked to price, rather intentionally. To illustrate two of the extremes, let’s use Walmart on the low end and Apple on the high end.

People who know Walmart know they stand for everyday low prices. Their brand is identified with low prices. And for them, that’s a good thing, because it is a part of what makes them so successful. Customers shop at Walmart because they can afford to (in addition to it being convenient).

At the other end of the spectrum we have Apple, who has always taken special care of their brand’s reputation. They offer high-quality, good looking, intuitive technology products. And because of their brand, and the loyalty of most customers, they can command a higher price.

Unlike Walmart, Apple will never specifically tout their higher prices as a part of the marketing. But consumers know that the higher prices they charge are worth it because the brand is so powerful.

Price and brand will always be linked in the minds of consumers. Which makes it hard for companies to change prices or offer new product lines outside of their traditional markets.

It would be difficult for Walmart to suddenly try a higher-price, higher-value strategy. Likewise it wouldn’t make sense for Apple to start slashing prices and try to compete with Dell in the computer market.

Savvy marketers must learn how the pricing strategy they employ sets the stage for how consumers view their brand.