Last week’s FEA webinar on the subject of ‘Pricing in a crisis’ featured some stark advice from presenter Mark Peacock, The Pricing Coach.
He advised attendees: “Think carefully about your pricing, you don’t want to assume that your previous approach is still going to work, because there are lots of bear traps out there which can catch you out.”
While he analysed that during a downturn, many companies may be tempted to discount, he recommended: “We assume that the only way to maintain sales volume is to reduce our prices, but this can be a short-sighted approach that can damage your company’s profitability, strategic direction and long term survival.
“Also, if you’re not careful it can end in a race to the bottom if your competitors all start following each other and cutting prices. Nobody ever wins a price war.”
He added: “The idea of letting volume go to protect prices seems counter-intuitive but it’s far better to maintain your price levels and accept a short term reduction in volume.”
Peacock gave a theoretical example of a company lowering prices by 10%, but having to increase sales volume by a massive 33% to return to its previous net profit total.
Instead he encouraged companies to provide alternative options, such as pricing in tiers. “Customers can then have a range of choice at different price points,” he said.
Detailing various pricing strategies, he argued that one of the strongest is tiered pricing: offering good, better and best options. “In the low bucket, customers are very price sensitive and not willing to pay much, whereas in the high willingness to pay bracket customers are willing to pay more because they value things other than price – quality, convenience and service.
“Businesses often assume that all customers are in the low willingness to pay price bracket, but they can miss out on capturing revenue from those customers who would have paid more, if only we’d known if we’d given them the choice.”
Peacock further explained that when businesses present customers with three price points, the middle option is always the most likely to be chosen. “The key is to make sure there is a bigger price gap between your premium product and standard product than between the standard and the entry level. Set a high price anchor with your premium product – most of the time people won’t pay this but it doesn’t matter, because the job of the premium product is to influence choice over the other two products,” he advised.
The webinar also covered decoy pricing, where the decoy is a product and price package that offers worse value than a premium option to encourage more people to choose premium price. According to Peacock: “The key is the ratio between price and value. You need the value in the eyes of the customer to be at least the same as your price or preferably more so the customer feels they are getting a good deal.”
He explained that a product’s price signals quality and can have a strong influence on customer’s perception of quality. “You need to think a bit more creatively about how you present your prices and packages,” he urged.
“Do everything that you can when you are presenting your price options to your customers to include a high price point for your premium products. If you charge more for a premium service than a standard service, and the customer can make a clear choice based on their needs and willingness to pay.”
And if competitors are selling a similar product cheaper? “Only sell the difference in price,” he advised. “Justify why the product is more expensive and be clear what your key differentials are.”
At the other end of the scale, Peacock explained a tactic called de-bundling: “Can you de-bundle your core product so you are offering a cheaper version by reducing the specification? Then if the client wants the additional bits they can buy the original version.”
He further questioned: “Instead of discounting, what can you do to add more value to the product and keep it at its original price? You can offer increased warranty, additional insurance, maintenance or support or reduce delivery time, so that when we come out of the Covid crisis you haven’t dropped your prices.”
Though he acknowledged that if businesses feel compelled to discount, they can use special offers, framing any price reduction as temporary, but showing the original price on the invoice to remind this to customers.
He added: “If clients are pressing you for a discount, ask for better payment terms such as a proportion of the cost upfront, or if they are saying standard terms are 60 days, give a 10% reduction if they pay within 30 days. It’s a win-win.”
Peacock concluded: “Do whatever you can to reinforce your brand price premium, such as webinars, thought leadership articles, giving advice and information to your customers and your market, and make it free so that it’s not just about the product, you’re giving free training. Find other ways to differentiate and add value to what you do other than price.”