Pricing is an art. And many companies don’t get it right.
There are three basic principles to good pricing: differentiating your customers, figuring out what they value, and understanding what they are willing to pay.
Too many companies take a shortcut. They price by figuring out their costs and then assigning a fixed percentage markup. But customers don’t care what your product costs you to make. They only care about how well it meets their needs.
This is something that every street vendor knows. When storm clouds gather, they raise their umbrella prices. Their costs haven’t changed. But people value staying dry and are willing to pay a high price when rain starts to fall.
The reason so many companies take a shortcut is that calculating costs and adding a percentage markup is easy. While differentiating your customers, figuring out what they value, and understanding what they are willing to pay is harder.
But it’s not that much harder. Good car salespeople do it all the time.
They always start by asking about the car you’re currently driving, whether you bought it new or used, whether you financed it, and what your monthly payments are.
Your answers to these initial questions provide a wealth of information. The car you’re currently driving tells them a lot about what you value in an automobile: performance, safety, style, carrying capacity, etc.
If you bought it new, you’re probably less price sensitive than a customer who previously bought a used car. If you financed the car, you probably have a decent credit rating and are a good candidate for a new auto loan. Your current monthly payments say a lot about how much you’re willing to pay for a car.
From there, the salesperson will ask questions about what you’re looking for in a new car: Do you have children? Do you need extra boot space for golf clubs? Do you want the latest technology? Something sportier or more conservative? Are you coming out of lease and looking to trade up?
Then, they go on to ask: What sort of financing option is most appealing? All cash? Purchase financing? A lease? If a lease, are you willing to put money down to lower your monthly payments?
And then, the clincher: What’s your budget?
Armed with the answers to all of these questions, a good salesperson who listens closely is in a great position to steer a customer to the most profitable sale. He or she knows what features you value most, what you’re currently paying, and how much you’re willing to pay for something new.
The probing questions that good car salespeople ask can be a model for any business that has direct, one-to-one sales negotiation with its clients. When done right, it leads to meeting the needs of as many customers as possible while making each sale at the highest possible price.
But even if your business doesn’t lend itself to direct price negotiations with each potential customer, there are lessons to be learned from the car sales process that you can use in setting your company’s pricing strategy.
Offer both premium and stripped-down versions of your product aimed at different types of customers. Offer discounts during off-peak periods or via coupons and special sales events so you can also serve price sensitive consumers. If you do this, your customers will self-select — accomplishing much the same thing as direct negotiation: Different customers are served with a range of product features and prices based on what they value and are willing to pay.
If street vendors and cars salespeople can do it, so can you.
Adam Snitzer is a revenue strategy expert and president of Peak Revenue Performance, a consulting firm that specializes in designing and executing innovative pricing strategies. He can be reached at firstname.lastname@example.org, or via the company’s website at PeakRevenuePerformance.com.