Two prices are better than one

It’s said that two heads are better than one. And the same is true for pricing. Two prices — or even more — are much more profitable than one.

The reasons are simple. Different consumers are willing to pay different amounts. Which makes it impossible to set one perfect price. Set your price too low, and you leave money on the table from customers who would have paid more. Set your price too high, and you turn away price-sensitive customers.

The solution? Create versions of your product that appeal to people willing-to-pay different amounts.

Many companies, especially those driven by a strong finance or accounting department, set prices through a traditional, inward looking approach. They carefully delineate fixed and marginal costs, add a target profit margin, and translate the result into one market price.

But as the late, great business guru Peter Drucker used to say, “there’s no such thing as cost plus pricing.” Only the market gets to decide the price.

So effective pricing means keeping costs in the back of your mind while figuring out what people value and then finding ways to create product versions that capture sales all along the willingness-to-pay spectrum.

Apple, Inc. is a master at this. The company’s iPad now comes in 16 distinct versions, with 16 distinct price points, starting at $329 and going all the way up to $1,699 for people who want the sharpest display and biggest hard drive.

Cruise lines are some of South Florida’s best practitioners of this pricing technique. Companies like Carnival, Royal Caribbean and NCL version their products by itinerary, cruise length and cabin category. A three-night cruise in a windowless cabin on a low deck starts at $149 per person. But seven-nights in a suite with floor-to-ceiling windows, a balcony and concierge service runs 17 times more, at $2,649 per person.

But you don’t have to be a multibillion-dollar corporation to apply these pricing tactics.

A few years ago, Miami law firm Holland & Knight helped pioneer differential pricing in the legal profession. The firm successfully reached a risk-adverse and price-sensitive market segment by offering discounted hourly fees in exchange for a bonus for winning.

“Happy hours” and early-bird specials have long been a mainstay of the restaurant business — attracting price-sensitive guests to off-peak hours of operation. And Miami-based Busy Bee Car Wash pulled a page out of the same playbook — offering “happy hour” for your car, with discounts and free use of the vacuums on select weekday afternoons.

But an effective pricing strategy doesn’t just focus on generating more business through discounts. It’s equally important to offer your customers added services for which they’ll pay more.

At my neighborhood dry cleaner, same-day service carries a 10% premium. The machines and staff are working in either case, so bumping a few items to the front of the line doesn’t cost the establishment anything extra. But if I have to have my favorite suit tonight, the 10% premium is well worth it.

Wynwood has recently been host to Levi’s Miami Haus Pop-Up Shop, which offers an infinite number of ways to customize denim jeans. Customers can personalize a pair of classic 501’s by tinting the color, adding a lasered embroidered pattern, and selecting a bespoke belt patch and pocket tag. It’s really cool. And it jacks up the price of a $98 pair of jeans to $150 or more. Most of the increase is all profit.

So, here’s my advice: Create two new versions of your product. One with stripped down features that you can offer at a lower price to appeal to a wider market. And another with added features or conveniences for which your customers are willing to pay a premium.