How a Better Pricing Strategy Leads to Increased Sales
Most executives assume that the classical demand curve embodies the most substantial relationship between prices and sales to get increased sales. This straight-line "curve," called "elasticity of demand," is etched in the mind of every MBA student and illustrates the principle that increased sales volume is invariably associated with lower prices. Moreover, it reduced the complex relationship between price and everything a buyer considers when making a purchase decision into a single number - price elasticity.
Like many academic assumptions, these traditional demand curves have nothing to do with reality, and executives shoot their companies in the foot when they apply these to actual business situations. Behavioral Economics and several Nobel Prize winner have developed a considerably more detailed and accurate understanding of buyers' motivations and introduce questions, subtleties, and considerations to the most critical question your business faces: what will buyers pay for your products and services?
Consider that the traditional demand curves above describe buyer behavior only when all the following conditions are true:
Products or services are identical, with no meaningful differentiation between buyers' choices.
There are no essential structural differences in the circumstances of payment.
Every buyer makes their purchase decision under identical circumstances.
Buyers are perfectly rational, always trading price against overall monetary value.
Buyers have perfect knowledge of the range of choices available to them.
Access to funds is equal for all buyers.
As you consider your marketplace, ask yourself and your team whether any of these conditions – let alone all of them – are true in your marketplace. And even if they are, are they valid for every single product? The much more common scenario is that none of these conditions are true. For example, products can be identical in a retail environment when two retailers offer the same model Sony speaker or Audi automobile. Likewise, they may be identical in a commodity marketplace, where two vendors offer fungible grain or meat products. But even on these rare occasions, there will be differences in how the retailer describes the product, the retailer's market position, and the associations the buyer has with different retailers.
But in most business-to-business sales and a large portion of consumer sales, differences in product offerings are important to consumers. These differences help them pursue their vision of satisfaction, decide how to satisfy their wants and needs, and determine what they are willing to pay.
Innovative payment circumstances have upended entire industries. For example, "Power by the hour"- invented by Rolls Royce- revolutionized how airlines purchased jet engines meaning that airlines only pay for usage. The manufacturer takes care of all the maintenance and replacement.
Costco created a retail behemoth by selling its products at a cost + a small fixed margin and making all its profits from a small membership fee. Amazon adopted a similar model.
Successfully aligning your price structures and your price levels with the value perceptions of your buyers often has the twin results of improving price performance and raising sales levels. When your price reflects buyers' value drivers, it becomes easier for them to identify you as their preferred vendor and justify your higher prices. The primary exemplar of this dynamic in today's economy is Apple. The company famously has about 14% of the global smartphone marketplace, but it earns more than 75% of the profits in the industry. Apple offers a range of prices for its products, but it never competes on price. Instead, the company has identified a segment of the marketplace for its products and works relentlessly to serve them better and better. The resulting profits are unarguable.
Any company can adopt a similar strategy. First, identify what your differentiators are. Why do customers buy from you? What segments are willing to pay "more" for your differentiators? What are their essential value drivers and purchase drivers? Which of your offerings' attributes coincide with those drivers? How can you structure your prices to capture the value of your offering? Bottom line - what is the right price for your product or service? And for your identified most desirable buyers, there is only one right price. All this is discovered in comprehensive willingness-to-pay research. If you measure what your customers are willing to pay for the particular value you provide, then you can be sure you have the right price.
But changing how a company perceives price and its values is not easy. Companies wanting to excel in their business performance and advance from "good enough" to "excellent" will be fighting corporate inertia, rules of thumb already in place, personal pride, and "we've always done it this way." Willingness-to-pay research will provide the complex information companies need to elevate the organization to the next level and earn superior profits and shareholder value. But, unfortunately, believing what salespeople hear when they try to close a deal ain't going to cut it. Stories, anecdotes, and right-out lies from prospects do not generate the solid data foundation to plan and push through the needed changes.
But the strategy you can employ is to take just one product or service, conduct willingness-to-pay research, understand what drives buyers to buy in detail, understand the genuine relationship between price and sales volume and revenue, and understand how your company can influence buyers to buy more at higher, more profitable, prices at the same time as customer satisfaction and retention increases. Then, use that as your beachhead to, step by step, convince the company that pricking right will have profound effects on increased sales volume, revenues, and profits.
Download our Guide to the 7 Easy Steps To Successfully Increase Prices.
Contact a pricing consultant to fix your pricing issue today.
