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FEATURENew profits, fast growth: tips for better pricingPricing remains one of the most powerful — yet underutilized —strategies currently available for businesses.By Rafi MohammedMcKinsey & Company’s study ofthe Global 1,200 found that ifcompanies increased prices byjust one percent, and demand remainedconstant, on average operating profitswould increase by 11 percent. Using aone percent increase in price, some companieswould see even more growth inpercentage of profit: Sears, 155 percent;McKesson, 100 percent, Tyson, 81 percent,Land O’Lakes, 58 percent,Whirlpool, 35 percent. Just as important,price is a key attribute that consumersconsider before making a purchase.The following 10 pricing tips can reaphigher profits, generate growth, and betterserve customers by providing options.Stop marking up costs. The mostcommon mistake in pricing involves settingprices by marking up costs (“I need a30 percent margin”). While easy toimplement, these “cost-plus” prices bearabsolutely no relation to the amount thatconsumers are willing to pay. As a result,profits are left on the table daily.Set prices that capture value.Manhattan street vendors understand theprinciple of value-based pricing. Themoment that it looks like it will rain, theyraise their umbrella prices. This hike hasnothing to do with costs; it’s all aboutcapturing the increased value that customersplace on a safe haven from rain.The right way to set prices involves capturingthe value that customers place on aproduct by “thinking like a customer.”Customers evaluate a product and itsnext best alternative(s) and then askthemselves, “Are the extra bells andwhistles worth the price premium (organicvs. regular) or does the discountstripped down model make sense (privatelabel vs. brand name). They choose theproduct that provides the best deal (pricevs. attributes).Create a value statement. Every companyshould have a value statement thatclearly articulates why customers shouldpurchase their product over competitors’offerings. Be specific in listing reasons -this is not a time to be modest. This statementwill boost the confidence of yourfrontline so they can look customerssquarely in the eye and say “I know thatyou have options, but here are the reasonswhy you should buy our product.”Reinforce to employees that it isokay to earn high profits. I’ve foundthat many employees are uncomfortablesetting prices above what they consider tobe “fair” and are quick to offer unnecessarydiscounts. It is fair to charge “whatthe market will bear” prices to compensatefor the hard work and financial risknecessary to bring products to market. Itis also important to reinforce the truismthat most customers are not loyal — if anew product offers a better value (moreattributes and/or cheaper price), manywill defect.Realize that a discount today doesn’tguarantee a premium tomorrow. Manypeople believe that offering a discount asan incentive to try a product will lead tofuture full price purchases. In my experience,this rarely works out. Offering periodicdiscounts serves price sensitive customers(which is a great strategy) butoften devalues a product in customers’minds. This devaluation can impedefuture full price purchases.Understand that customers have differentpricing needs. In virtually everyfacet of business (product development,marketing, distribution), companiesdevelop strategies based on the truismthat customers differ from each other.However, when it comes to pricing, manycompanies behave as though their customersare identical by setting just oneprice for each product. The key to developinga comprehensive pricing strategyinvolves embracing (and profiting from)the fact that customers’ pricing needs differin three primary ways: pricing plans,product preferences, and product valuations.Pick-a-plan, versioning, and differentialpricing tactics serve these diverseneeds.Provide pick-a-plan options.Customers are often interested in a productbut refrain from purchasing simplybecause the pricing plan does not workfor them. While some want to purchaseoutright, others may prefer a selling strategysuch as rent, lease, prepay, or all-youcan-eat.A pick-a-plan strategy activatesthese dormant customers. New pricingplans attract customers by providingownership options, mitigating uncertainvalue, offering price assurance, and overcomingfinancial constraints.Offer product versions. One of the easiestways to enhance profits and betterserve customers is to offer good, better,and best versions. These options allowcustomers to choose how much to pay fora product. Many gourmet restaurantsoffer early bird, regular, and chef’s tableoptions. Price sensitive gourmands comefor the early-bird specials while wellheeleddiners willingly pay an extra $50to sit at the chef’s table.Implement differential pricing. Forany product, some customers are willingto pay more than others. Differentialpricing involves offering tactics thatidentify and offer discounts to price sensitivecustomers by using hurdles, customercharacteristics, selling characteristics,and selling strategy tactics. Forexample, customers who look out for, cutout, organize, carry, and then redeemcoupons are demonstrating (jumping ahurdle) that low prices are important tothem.Use pricing tactics to complete yourcustomer puzzle. Companies shouldthink of their potential customer base as agiant jigsaw puzzle. Each new pricing tacticadds another customer segment pieceto the puzzle. Normal Normans buy at fullprice (value-based price), NoncommittalNancys come for leases (pricing plans),High-end Harrys buy the top-of-the-line(versions), and Discount Davids are addedby offering 10 percent off on Tuesday promotions(differential pricing). Startingwith a value-based price, employing picka-plan,versioning, and differential pricingtactics adds the pricing related segmentsnecessary to complete a company’s potentialcustomer puzzle. Offering consumerspricing choices generates growth andincreases profits.Since pricing is an underutilized strategy,it is fertile ground for new profits. Thebeauty of focusing on pricing is that manyconcepts are straightforward to implementand can start producing profits almostimmediately.What better pricing windfall can yourcompany start reaping tomorrow morning?Rafi Mohammed, Ph.D, has been workingon pricing issues for the last 20 years.He is author of “The 1% Windfall: HowSuccessful Companies Use Price to Profitand Grow.” Mohammed is the Founder ofCulture of Profit LLC, a Cambridge,Massachusetts-based company that consultswith businesses to help develop andimprove their pricing strategy. 12 JUNE 2010 WWW.ODWYERPR.COM