Peter Krišťák, 18.09.2015

The Second Most Important Pricing Question? No, Still Not “For How Much?”

I am going to disappoint all optimisation fans convinced that the most important issue in pricing is to measure correctly the demand curve and to hit the dreamed-of “sweet spot”. A considerable bigger “gold pot”, however, lies hidden elsewhere.

Even a well-defined target customer segment is in reality always very heterogenous; e.g. among the rich as well as among the poor there are also individuals who, when it comes to price, essentially feel like bargaining for the last cent - and vice versa. If we exclude lunatics who just love bargaining or unlimited donating, we are left with the majority who simply attach the offer various value. This stems from their diverse living conditions, lifestyles, information, beliefs, hobbies, or interests. That is why every individual customer looks at the value offered by you from an actually different perspective and, as a result, their willingness to pay also varies.

You say to yourself “Oh, yes! I see …” But it is not that simple: In every market with a hypothetical linear demand curve it is true that if you managed to hit the price right according to every individual customer´s willingness to pay instead of setting a single price, you will double your profit!

Unfortunately, however, this is almost never cost-efficient, in accordance with legislation, or possible at all. At the same time it is true that before the customers possibly start considering your offer at all, they need credible information about its financial advantage. How can this financial advantage be communicated to the customers in advance if we intend to offer each of them a different price according to his/her willingness to pay? Can willingness to pay be determined in advance?

Cheap Is Expensive at the Same Time

To provide you with a nice practical example, let me go back to the phenomenal Ford Mustang again. After launching its sale in 1965, the cheapest Mustang model started at 2,368 dollars but Lee Iacocca did not forget the proven rule of generating a profit: “upsell as hell”. He came up with an unprecedentedly wide range of optional equipment and later also of engines. So the price of the Mustang with most expensive equipment considerably exceeded 4,000 dollars. But the most important thing was that already from the very beginning its average selling price was ranging at around 2,800 dollars – i.e. the level which, in the end, was very close to the price of the models directly competing with it. This higher final price, however, did not disturb the customers at all because thanks to its basic starting price the Mustang had already long been a very affordable car for them. And “they have chosen those pieces of that practical and very advantageous optional equipment” voluntarily, haven´t they? ;o)

I can easily make a bet with anyone that thanks to this strategy – a combination of the correct selection of a target segment, good timing, an attractive design (not necessarily advanced = expensive technology) as well as a wisely considered upsell tactic - the first Mustang models became one of the most profit-making car models of all times in absolute terms in constant prices.                                                                                                   

Packaging the Value

Determining the willingness to pay in advance, accurately, and for every potential customer is impossible. So in order to meet, both practically and cost efficiently, our customers´ varied willingness to pay we simply have to prepare a wider offer of products. We have to create several value “packages” for the customers with the different willingness to pay.

Among other things, every product is composed of a core value – the core part of our product´s value – further reduction of which either destroys the value, does not make any sense, or is impossible. Then the core part is joined by additional value parts of the product. In order to set a very attractive price that can´t-be-missed, the product has to be axed to the minimum acceptable for at least a few people (the minimum viable product). If things are not going well, the value can be further reduced also artificially e.g. by making the customer perform complicated operations. This way such a nasty alternative will be bought only by a handful of potential customers.

Afterwards, you should add further pieces of the value in sensible and the most natural alternatives and increase the price significantly. Do not hesitate to offer also extremely valuable alternatives at absurdly high prices. It is important that these expensive alternatives confirm the correctness of the choice of the mid-alternatives for the market mainstream.

Don't Forget the Endgame!

Yet, even a well-designed product offer does not still guarantee the final victory. It is necessary to create an awareness of the overall financial advantage and subsequently also the traffic. At the same time a clever sale process is needed which will maximize the probability that the final price of every transaction will be close to the real willingness of every individual customer to pay. Meeting the challenges of both these requirements is science and art at the same time and to seek advice of an experienced specialist when coping with them will not hurt.

Warning: Do not lie! Permanent traffic can be built only if the cheapest alternatives in your offer are as real as they promise. Take the fact that a part of the market will simply buy the cheapest product and better include it in the total result. It is substantially better than misleading practices, which will finally scare off all customers.

The Verdict: So What Is the Second Most Important Pricing Question Then?

The second most important pricing question is “How to create a clever offer?” A significantly bigger “gold pot” is hidden in entrepreneur´s capacity to persuade the market sincerely about his/her financial advantage so that he/she can secure the traffic – and then in the cleverness of the offer and the efficiency of the sale process persuading the customers naturally to spend maximum of their money at his/her business. This does not mean that a very special offer has to be prepared for every customer in advance. Including a second appropriate alternative in the offer alone can increase an average profit by substantial 30% - including the third one even by incredible 50%!

Peter Krišťák

Author is partner and founder of Pricewise

He specialises in pricing and revenue management

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