Please share this Christmas gift with your e-mail list. Happy Holidays!
On the third day of Christmas, Mesmerizzzed! gives to you - three pricing
strategies, two engineered products and a focused target market.
How much should you charge for your products and services?
Well ... it depends!
If you are Wal-Mart, and you can squeeze every last penny of profit out of
your suppliers, you can be the "everyday low price" leader. If your name isn't
Walton, then that pricing strategy probably isn't the best strategy for you and
your business.
Let's start with pricing strategy number one - survival-based pricing. What's
your price when you are in survival mode? It's whatever price you can get for
your widget or your time.
How do we get stuck in survival-based pricing? First, we don't really
understand our own costs. Second, we look at our competition and "assume" they
know what they are doing, so we set our prices just a little bit below their
prices.
After a few months of this, we realize we're not making any money. We scratch
our head wondering how our competition makes money at that price, so we try to
raise our prices to finally make money, or lower our prices to get more sales.
The irony is your competition probably isn't making a profit either, so all you
have done is confuse the market by reinforcing that the price was right.
Survival-based pricing isn't where you want to be - so get out of that space
now!
The second pricing strategy is revenue maximization pricing. In this case,
you do know your costs. You do know more about your competition. You are clear
on your objective - gain market share. So, you consciously (rather than
unconsciously in survival-based pricing) set your prices to beat the
competition.
You may be losing a nickel on every sale, but you are confident you can make
it up in volume!
There is a time and a place for revenue maximization pricing, but it is a
short-run strategy at best. There is a high price to pay in the long-run for
maximization - as you can see when you drive by furniture and clothing stores
with "going out of business sale" or restaurants with "under new management"
signs!
Revenue maximization pricing sounds pretty good, but you are probably buying
fools gold for your business.
The third pricing strategy is value-based pricing. You know your costs. You
know your competition. You know your market. Most importantly, you understand
the value of your products and services and can translate that value into
benefits desired by your focused target market.
One of our favorite clients runs an upscale services business. The
competition for this service runs from $40 per service to as much as $200 per
service. What's our price point? $125. Why?
We know our costs - cold! We know our competition, on both ends of the
spectrum. We also know exactly who lives in our target market - and we're not
interested in $40 clientele and we don't need $200 clientele. We will attract
the $125 clients who come back over and over and over. How? By translating the
value of the services provided into the benefits desired by our target market.
What's the impact of value-based pricing? Profit optimization - where we
achieve the highest level of profitability from both a percentage of revenue and
a total dollars perspective.
When will you start optimizing your profits?
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