You invest time and money to create value for your customers. You add features, improve support, and become more responsive to customer needs — all of which increase costs and workload. But how much value are you getting from your customers in exchange? Judson Rollins, Managing Partner of Propel Revenue, shares seven steps to grow profit with customer-centric pricing.
Business competition is brutal. Too many companies fight lower-priced rivals by cutting prices, which destroys profit margins, or by surrendering market share, which leads to market irrelevance. Few invest time or money into understanding their customers and how their products should be priced against alternatives.
“Race to the bottom” price cuts are common because most businesses develop their pricing around the product, not the buyer. Products are often priced according to their visible attributes – size, features, and functions – and the business’ target profit margin. While others position pricing relative to other products they sell, or consider competitors' offerings.
But this approach can disconnect a business from its customers when it comes to a products' perceived value. A gap that leads to lost profit from underpricing or lost sales due to overpricing.
Customers' willingness to pay for products or services varies. Each one perceives a different value in the features and benefits you offer. By tapping into these personal preferences you can customize your offerings and prices to capture value more in line with how much a customer is willing to pay.
By aligning prices with customers you can achieve greater spend from those who can pay more and increase volume from customers with smaller budgets. It’s what we call “customer-centric pricing".
Step 1: Know your customers
Ask yourself — or, even better, ask your customers — how they use your products, what they like and dislike, and why they choose to buy from you instead of another seller. Find out everything you can about their buyer persona: who they are (demographics), when and why they buy, how often, what products they buy together, and how they pay.
It’s important to note that “when they buy” isn’t just a date or time stamp on a receipt. Though that’s helpful too. When they buy is knowing on which occasions they buy, and how long before they use or consume your product.
Step 2: Break out your customers into groups
What you learn about your customers should help you categorize them into groups or segments. Each segment should have unique and clearly identifiable buying behaviors. It’s possible that an individual customer may behave differently once in a while, but the majority of their purchases should make it obvious to which segment they belong.
For instance, segment A might comprise mostly younger buyers who purchase your products one at a time, often spontaneously. Based on conversations with a few of them, you learn they’re mostly focused on convenience, cheap price, and immediate use.
Meanwhile, segment B might be middle-aged buyers with families, who usually buy your products in bulk but not frequently. Quality matters as much as the price to these customers because they don’t want to return broken items for replacement.
And segment C is mostly well-heeled professionals who spend their money with intention. They want high quality, a full range of features, and top-notch support — and will happily stay with the provider who delivers all of these.
Step 3: Evaluate each segment’s value perception — their willingness to pay
How a specific customer values your product may vary depending on their alternatives and circumstances. Factors involved in their purchase decision include the tangible attributes of your product and competing options. And intangible factors such as convenience, urgency, reputation for quality, brand loyalty, and prestige.
Imagine a traveling sales executive who needs a hotel. She prefers to stay close to her client’s office and, because she’s paying with a company card, she isn’t too concerned about price.
On the other hand, if she’s on holiday with her family and spending personal money, she’s likely to be more price-sensitive and flexible about the hotel’s location. But if she has elite status in a hotel chain’s loyalty program, she might prefer one of its properties even if that option isn’t the cheapest, because she’ll receive additional perks like a room upgrade or free breakfast.
To understand your customers' value point, you need to spend time getting to know them. If you can’t talk with your customers in person, consider a post-purchase survey. This can be as simple as setting up a Google Form with a monthly prize to incentivize participation!
Step 4: Identify product attributes and value them
Price increases that recognize a customer’s preference for your brand can add significant profitability as extra revenue drops directly to the bottom line if sales volume remains constant.
Similarly, targeted discounts can drive incremental sales among those who have only a casual need for your product or who are indifferent to brands.
For example, a theatre might have a revenue shortfall but be reluctant to implement across-the-board price increases. Instead, they evaluate each seat on customer experience. What they discover are significant differences even within a single section, like orchestra or mezzanine level. Seats on the sides of the back two rows are quite different from the middle of the fifth row.
Also, while weekend performances are consistently sold out, weekdays are frequently well below capacity. Charging more for a better experience extracts more entertainment spend from wealthy patrons, while lower prices for less-preferred seats and performances can attract new, lower-budget guests.
Which of your products are easy to sell? Raise the prices of products with the same attributes. Which products are less preferred by customers? First, try improving them by reducing the attributes they dislike.
You can also improve profit margins by eliminating features that increase your costs but customers aren't willing to pay more for. (Obviously, don’t eliminate basics such as safety.) Only after taking these steps should you reduce price to stimulate demand.
Step 5: Provide a unique offering and price to each segment
Now that you know who your customers are and what they value, think about how to target your products to them. How would you create a basic, low-end product with limited functionality? What new features could you add to create a more valuable offering? What optional value-added services could you deliver – for an additional price – related to the products you sell?
Think about the new iPhone. Apple makes four versions: the iPhone 12 Mini, iPhone 12, iPhone 12 Pro, and iPhone 12 Pro Max. The Mini is intended to convert budget Android users who want the prestige of carrying an iPhone, while the iPhone 12 is aimed at lower-income iPhone users upgrading from an older model. But the Pro and Pro Max are more likely to attract long-time iPhone fans who can pay for a high-end unit with all the bells and whistles.
To accompany your new iPhone, you can purchase AppleCare+ for an additional fee. This includes two years of priority technical support and accidental damage coverage, which extracts more revenue from consumers who value the convenience of knowing they can get help if something goes wrong.
Step 6: Lather, rinse, repeat
Give your new pricing time to work. For eCommerce businesses, this might be a matter of weeks — or even days, if your transaction volume is high enough. But it’s likely to take a few months for a service provider or brick-and-mortar retailer because seasonality will play a part — and you’ll need to evaluate the year-over-year effect of your changes accordingly.
Did your profitability increase? Great! Try adding new upsells and cross-sells between products to tease out even more of customers’ willingness to spend. And look for ways to break your segments into even smaller sub-groups. Customer segmentation shouldn’t be a one-time change — it should be an ongoing exercise as market conditions change.
If you don’t have time to study your customers, or you aren’t seeing the results you want, consider getting some help.
Step 7: Engage a pricing and customer segmentation expert
Are customers hard to identify? Unsure what questions to ask? Don’t know how to bundle your products and services? Consider bringing in an expert who will take a deep dive into your buyers, their behavior, and what they value.
Look for a consultant who asks lots of questions, knows best practices from companies like yours, and offers advice tailored to your business and customers. And make sure their fees are less than the value they can deliver. Client-focused providers will offer an option to work with you for a percentage of the value created, rather than a traditional hourly or daily rate. This means their success is tied to yours.
Propel Revenue Solutions has helped retailers and service providers grow their bottom line by attracting spend from high-budget customers and profitably increasing volume from low-budget ones. Visit us today at propelrev.com to see what we can do for your business!