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.

How to Compete

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You are likely to find that most businesspeople are competitive. Especially in marketing, people want to win.

Business has always been competitive. That’s one of the expectations of a free market system. Businesses compete with one another for customers.

And despite most typical assumptions, there are a number of different ways to compete. Most people only really think about two ways to compete:

  1. Quality
  2. Price

But there are many more, often obvious, ways to compete. So let’s review those here.

Compete on Quality

Everyone knows you can compete on quality. If you have a better product or service than your nearest competitor, you are likely to take market share from them.

Choosing to compete on quality means three things. First, you believe that you can consistently outperform when it comes to the quality of your product or service. If you didn’t, you would find another way to compete.

Second, it means that you believe there is a demonstrated desire by consumers for this higher quality. And third, you believe in your ability to communicate your higher quality to those consumers.

The key is, if you compete on quality, you must always be one step ahead of your competitors, those that already exist and any potential newcomers.

Compete on Price

There are always companies in every industry that will compete on price. It is the oldest form of competition. If I think that I can offer the same thing that you offer, but for a lower price, I will. I know that all other things equal, the lower price will always win.

But as successful as many companies have been focusing on price, this form of competition comes with high risk. Why?

What happens if your competitor lowers their price? What happens if a new competitor figures out a way to market an even lower price? Price wars are never fun and often lead companies out of the market entirely.

If you decide to compete on price, you must make sure that you can always offer a lower price than your competition.

Compete on Audience

To compete on audience means that your target market is going to be different in some way from that of your competitors. Perhaps you have recognized that there is an under-represented part of the market, one that is not currently being addressed by your nearest competitor. Or perhaps there is an alternate use for your product that you think will appeal to a new group of consumers.

Competing on audience requires you to focus your efforts, designing your marketing and product for a specific subset of the larger market. If you can serve them better than your competitor, you might either steal market share or create a new slice of the pie that is yours and yours alone.

Compete on Brand

Branding is a way to establish your company in the market – a way of connecting with customers beyond just your products or prices. Large companies love to compete on brand, and we’re seeing it more and more for well-funded startups.

Competing on brand is an attempt to register your company’s name in the mind of prospective customers, so that when they have a specific need, they think of you. If you are successful, it can lead to success even when your price isn’t the lowest, or your quality isn’t the best.

The problem is that this strategy is often very expensive, and only rarely does it succeed. If you can’t compete on one or more of the other options listed here, attempting to out-brand your competition is incredibly risky.

Compete on Service

Sometimes people just want to do business with a company that is going to treat them well. When your price is not the best, and when the quality of your product is not discernibly better than your competition, you can compete on service.

Companies that compete on service focus on being a pleasure to do business with. This means they make it easier to get support, going out of their way to make their customers’ lives simpler.

Companies that successfully compete on service have grown in recent years, focusing on customer loyalty through a more personal touch.

Compete on Location

We often think of competition on a national, or global scale. But companies can and do compete locally. And you don’t have to have a physical presence to do so.

Using any of the above criteria, you can focus your efforts in one market or another that gives you the best chance to win. This is just like an alternative version of the Compete on Audience concept, except that in this case the distinct criteria about your target market is where they live or work.

Conclusion

To sum it all up, it is important that marketers and business managers of all stripes are aware of the many different ways to compete and succeed in the marketplace. You don’t always have to be the best, or the cheapest, to win business. Your company can succeed if you know what you do well, and focus on making that your competitive advantage.

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.