In this article, Barry Horwitz offers valuable insight into pricing.
Pricing. It’s one of the most important elements of any business value proposition. And yet, it’s a topic that many struggle with. That’s because setting the right price is about much more than simply setting price higher than costs or mimicking the actions of competitors.
Some things to consider…
Pricing sends signals.
While economists have long developed theories based on the assumption that we all act as rational beings (i.e., as customers, we do the math and figure out the optimal action), an entire field of behavioral economics has suggested otherwise.
For example, my tennis club has a simple, annual membership fee, avoiding the complexity of charging for court time by the hour. Like most exercise facilities, the frequent users are therefore subsidized by those who come less often. And, thanks to the “use it as much as you like” experience, the club feels more like home in comparison to those clubs that charge by the transaction.
Effort does not necessarily equal value.
In my own consulting work, I price based on the project, avoiding hourly charges or the old “time and materials” approach. After all, my clients are hiring me for an outcome — often a strategic plan — not simply time spent working on their project.
Project pricing removes “bad” incentives for me (e.g., working slowly, doing more research than necessary), while rewarding me for my existing knowledge. Most important, it provides simplicity and predictability for my clients while aligning price with value delivered.
Lower prices can reduce demand.
Some companies assume that when business is slower than anticipated, the best thing to do is lower prices… but that might not always be the case. One company in this position surveyed its customers, only to find that price was the third most important consideration, behind quality and the ability to make customized requests. Concluding that lowering price might suggest that those two factors would be reduced in the future, they raised their prices — and their business improved.
Likewise, a concern about charging too much can cause organizations to leave money on the table. As the pandemic was getting underway, a nonprofit client of mine had to quickly convert a convention to completely virtual. Their instinct was to lower the price, thinking that the value offered would not be perceived as being as high as their in-person offering. But when you consider that the real cost of attending an out-of-state conference can be many times higher than the virtual ticket alone, a discount may not have been necessary.
Key points include:
- Influencing customer behavior
- The potential for creativity
- How lower prices can reduce demand
Read the full article, The Price is (Sometimes) Right, on HorwitzandCo.com.
Ian Tidswell provides insight into the psychology of pricing.
Why are we often less than completely rational? Delving into psychology, one can think of the brain as having two types of circuits: system 1 and system 2 (Kahneman) or elephant and rider (Haidt).
The elephant (system 1) acts quickly and seemingly automatically, following a set of pre-programmed rules. It’s in control when you react to seeing a family member, catch a ball thrown at you, answer simple questions like 2+2 and make associations like “bread and b….”. Practice and experience “trains” the elephant and results in situations like driving home from work and not quite knowing how you did it.
The rider (system 2) is our “executive thinking”. It’s logical, deliberate and slow, taking concentration and effort. It’s in control when you are engrossed in a movie, look for someone in a crowd, solve a problem, or do almost anything for the first time. When the rider is active you may lose track of what’s going on around you, letting the elephant get on with mundane activities. However, the rider is lazy: if it thinks the elephant has things under control, it will go with the flow.
Key points include:
- What pricing elephants are
- How to get better pricing outcomes
- Building a strong foundation for pricing decisions
Read the full article, Getting the Elephant to Smile, on EenConsulting.com.
Mark Hess shares a valuable article that explains how to increase profitability.
With the economy slowing, many companies will shift their focus to improving their profitability. Is your management team prepared to take a fresh look at how to grow profit margins? In our work with mid-market companies over the last decade, we have helped uncover many different ways to improve profits. Here are our Top 5 approaches to improving your profitability, with two bonus tips for good measure.
1) Do you really understand the economics of your business?
It’s vital that the right metrics are used to measure profitability. An example: when working with one client that sold direct to customers and also sold through distributors, we realized the way our client defined their profit margin led to an incorrect view of the economics of direct vs distributor customers. Because this client defined profit margin from net revenue (after large customer discounts) instead of gross revenue, the discounts didn’t factor into the calculation—so this client fooled themselves into believing that the customers who purchased through the distributor were more profitable than they really were. Defining financial metrics so that they are meaningful and lead to good business decisions is critical for making decisions that can improve the bottom line.
Realizing the true economics of a business—by using the correct, properly defined metrics—thoroughly changed this client’s understanding of what a “good customer” looks like and, in turn, helped maximize profits going forward. In effect, this client doubled sales when they shifted their focus to selling direct when possible.
This particular client’s experience shows how vital it is to have a clear understanding of each individual component of the bottom line. Without a clear view of each component, it’s difficult to make decisions on how to move forward.
2) When was the last time you reviewed the structure of your pricing?
Be sure to review and refine your pricing strategies every couple of years. Not regularly refreshing your view of pricing leads to not charging appropriately. What happens all too often is that a particular situation leads to offering a price adjustment, then that adjustment becomes the norm. This results in a pattern of not looking at all customers in the same way and then offering customers discounts that are not warranted.
Key points include:
- Legacy IT systems
- Internal benchmarking
- Procurement processes review
Read the full article, 5 Approaches to Profitability, on Maven-Associates.com.
Stephen Wunker has published an article on costovation and how it is creating an agricultural revolution in Africa.
In Africa, there is a product which smallholder farms urgently need, yet which few understand or think they can afford: insurance. Droughts, pests, floods, and other natural maladies can devastate a crop for the year and put farmers – as well as whole communities – at great risk of extreme hardship.
Yet, with few exceptions, the idea of paying a premium seems like wasted expense for populations unfamiliar with insurance. Worse, the cost of selling low-value policies, servicing them, managing claims, and combating potential fraud are prohibitive for an industry that has to keep costs super-low to make its offerings affordable for these target customers. Therefore, although Africa boasts 17% of the world’s arable land, it represents under 1% of worldwide agricultural insurance.
This is a prime opportunity to illustrate the principles of Costovation – the application of innovation tools to achieve dramatically lower costs while still meeting customer needs. The story of Pula Advisors, a Swiss firm that recently closed a $6 million Series A investment, shows how to reconceive a market in ways that radically shrink costs while simultaneously benefiting customers:
First, Pula sought to Achieve Breakthrough Perspective. Pula’s founders had deep experience in the economics as well as attitudes of African agriculture. Many firms before them had endeavored to educate farmers about the virtues of insurance, but it was a costly, uphill task that still left many problems remaining. When customers did see the value, they often held back on purchasing a policy until they could see weather or other risks starting to materialize, which is precisely when an insurer doesn’t want customers to seek its products.
Key points include:
- Microinsurance innovations
- Cost drivers and strategies
- The business model
Read the full article, How Costovation Through Insurance Is Creating An Agricultural Revolution, on the newmarketsadvisors.com.