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This post is part of Creating a Customer-Centered organisation.Remember playing Marco Polo when you were a kid? In this swimming pool game, the person who is “it” closes his or her eyes while other players (eyes open) spread out around the pool. The goal of the “it” player is to tag another player by yelling “Marco” and locating the other players by sound when they respond “Polo.” Winning this game requires listening and responding.
The same is true for setting prices: companies need to listen and respond to consumers. One price does not fit all — creating a successful pricing strategy is much like playing Marco Polo. Companies need to listen for clues from potential customers (“Marco”) and respond with the right plans/prices (“Polo”).
In terms of their pricing needs, customers for any product or service tend to differ in three primary ways: (1) desired pricing plans (for instance, instead of outright ownership, a preference to lease), (2) product needs, and (3) willingness to pay. The following strategies can generate new profits and growth by understanding and meeting these needs.
Pick-a-Plan. Customers are often interested in a product but the pricing plan simply does not work for them. Offering a new pricing strategy can “activate” these dormant customers by meeting their pricing needs. A friend recently decided to take his entire family to the Caribbean to celebrate his 70th birthday. Inquiring about his destination, he emphasised: “I have to go to an all-inclusive resort — it would kill me to see my grandchildren drinking $5 Coca-Colas all day” (“Marco”). By offering an all-inclusive plan (“Polo”), resorts satisfy an important need of consumers who are willing to pay a premium for the freedom of not having to think about the price of every meal, drink, or activity while on vacation. Offering this pricing plan moves a resort to the top of the list for a key segment of vacationers.
Implementing a new pick-a-plan pricing strategy can create “home run” profits. Fundamental to iTunes’ success was its willingness to listen and respond to customers’ needs. When iTunes’ was introduced, the only legal way to purchase digital music was to pay a monthly fee (~$10 per month) which provided unlimited access as long as the fee was paid. In announcing iTunes’ pricing strategy, Apple CEO Steve Jobs declared, “We think subscriptions are the wrong path. We think people want to own their music.” He was right: in its first week, iTunes sold over a million songs — the amount that Apple hoped to sell in a month.
Versioning. Offering variations of your product or service to meet unique customer needs can result in higher margins as well as growth. Many gourmet restaurants offer early bird, regular, and chef’s table versions. One-hundred calorie snack sizes of consumer items are typically 20% more profitable on a margin basis compared to larger sizes, for instance. Seeking more profitable consumers, Royal Caribbean’s market research concluded that high-margin cruise customers are seeking perks such as separate places exclusively reserved for them. To meet the needs of this coveted segment, cruise lines are creating a “ship within a ship” by providing separate pool areas, private cocktail parties with the captain, and priority status to avoid waiting in lines. The result is the opportunity to attract new customers who are willing to pay premium prices. On Disney Dream cruises to the Bahamas, regular staterooms start at $439 per person while concierge level rooms targeted to higher-end cruisers run $2,159 per person.
Differential Pricing. For most products or services, some customers are willing to pay more than others. The strategy of differential pricing involves discretely offering lower prices to price sensitive customers without inducing cannibalization — the potentially profit-eroding side effect of discounting. Common differential pricing tactics require customers to credibly announce “a low price is important to me” by jumping over a “hurdle.” For example, using coupons involves several hurdles such as looking for, cutting out, organising, carrying, and then redeeming at the checkout counter. Other techniques designed to provide low prices to budget-minded customers include rebates, sales, distribution (outlets), negotiation, price match guarantees, and bundles.
Take a moment to ask your frontline workers how customers are reacting to your pricing strategy and what they are looking for. The key to pricing for profit and growth is to respond with the appropriate set of “Polos.”
Rafi Mohammed is a pricing strategy consultant and author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow (HarperBusiness).