The Science of Event Pricing
Most discussion of event pricing in this business focusses on increasing bookings and not losing money (counting stems, controlling costs, etc.). In this article, however, we’ll talk about shooting for bigger profits.
We tend to look at quoting events as a binary win/lose proposition: you get the sale or you don’t. The truth, though, is that it’s more complicated. There are multiple potential outcomes, only one of which is ideal.
Let’s imagine that you have done the basic consultation, you have a good sense of what the customer wants, and it’s time to quote. There are four things that can happen:
3. You lose the sale because you didn’t charge enough
You’re unlikely to get feedback that explicit, of course. If you get any reason at all, it will likely be something like, “We went with another shop.” But coming in too low can be a real problem. And there are few things worse than knowing you could have made a sale if only you had charged more.
People associate higher prices with higher quality, especially when they don’t understand the product. Most customers don’t know much about flowers or design, and shops often make the mistake of trying to compete with more prestigious competitors on price.
Some areas that have a dominant shop that gets to charge exorbitant prices. Other florists in the area scratch their heads in frustration as they try—and fail—to compete on price. The problem is that they’re focussing on value while dealing with a customer who is focussed on quality.
4. You get the sale for the highest price the customer was willing to pay.
This is the only ideal outcome—you book each event with the biggest possible profit you could get from that customer. And this is what we want to have happen with every single opportunity.
So how do we get there?
The solution is to use a differential pricing strategy designed to maximize profits rather than just controlling costs. We’ll sell at lower margins to the comparison shoppers who won’t pay full prices, without cannibalizing higher-margin sales to the customers who will. And we’ll have high-end, high-profit prices that elevate your brand and appeal to the customers who associate price with quality.
1. You lose the event because there was a lower competing quote.
That might be OK if you had priced it really aggressively and weren’t prepared to do it for even a little less. Or, you’re thinking, “Damn… I would have gone a little lower if I had known that’s what it would take!”
2. You get the sale, and realize you could have charged more.
If you lose a few sales as described above, it’s tempting to sharpen your pencil and reduce your margins. The problem is that, when someone says yes, it’s going to feel like they said it too quickly. Also referred to as “leaving money on the table,” this will haunt you as you prepare each corsage and centerpiece, knowing you could have charged more and that the extra would have been pure profit.
This is a well-known and problematic phenomenon among small businesses of all types—conflating being busy with being profitable. You know that friend who boasts on Facebook about booking every wedding they’ve quoted? After a few drinks, they’ll often admit to being frustrated—they’re busy, but they’re not making any money. Most experts would say that if every quote generates a sale, it’s likely you’re quoting too low.
Our first step is to present three prices for essentially the same product. The prices (and profitability) will vary widely, but the product will vary relatively little. There will be a low (smaller margin/profit) price for the thrifty comparison shopper who will go somewhere else to save a few bucks. There will be a really high-end choice for the money-is-no-object buyer who believes price is indicative of quality. And there will be a middle of the road option for everybody who falls between these two extremes. If we prepare and present the prices properly, people will pay the highest one that is acceptable to them.
For example, let’s consider how another business approaches this problem.
In Toronto, the base price for a movie ticket is $13.50. It’s cheaper (33%) for kids and (25%) for seniors. And you can save almost 50% if you’re willing to go on a Tuesday night and endure a theater packed with teenagers.
Why does the theatre do that when it would be more profitable to charge everyone full price?
The theatre understands not everyone will pay full price. A family of five or a person on a tight budget will just wait to see the movie on Netflix if full price is the only option. So when dealing with someone who can’t or won’t pay full price, the theatre is willing to sacrifice full profit in order to generate some profit.
But the theatre also recognizes that some people will pay more—substantially mor—for a slightly different variation on the same experience. For an extra $3, they can watch in 3D. For an extra $5, they get 3D plus a reserved seat. For an extra $6, they get all that plus the IMAX screen. For an extra $11.50 (almost double the regular price), they get the 4DX experience, or can watch in the VIP room— with no kids and the opportunity to purchase alcohol.
In each case, the moviegoer is getting the same basic product: the movie. But they’re paying different prices for slightly different versions of it.
There are two things that make this work and both will seem foreign. One is contrary to standard industry practices; the other is contrary to our intuition. Let’s take a look at both.
The first involves the way we generally set prices. The cost-plus pricing model, where your cost is used as the most important factor in determining your selling price, is used overwhelmingly in the flower business. But it has been abandoned almost everywhere else.
Instead, prices should be based on how customers value a product. It’s about how much they will pay, not how much it costs to make.
If that seems strange, consider eBooks. They clearly cost less to manufacture, distribute, and deliver than a paperback, but they sell at a higher price. The reason? They offer other benefits (they don’t take up space on your shelves or in your luggage, they remember what page you were on, they’re available instantly) that are unrelated to production cost.
Customers do not care about your costs. The only thing that matters to them is whether they value the benefits your product provides as much as the price you are asking.
The only thing that should matter to you is charging as much as the customer will pay. Sometimes it may be a little less than your cost plus formula would suggest. Other times it will be more—hopefully much more. That is all perfectly acceptable, and it is the way almost every other industry prices their products.
The other thing that can seem strange is the idea of offering lower prices. You may worry that if you offer a lower price, everyone will take advantage of it.
It’s a reasonable fear but, fortunately, it’s not true. Consider gasoline. American automobile owners waste over two billion annually on premium fuel for cars that don’t need it. They happily pay extra for something most of us already consider too expensive, something that offers no benefit, something that, in many cases, they are actually advised not to buy.
a.) It’s called Premium
b.) It’s more expensive.
The logic here? If it’s more expensive, it must be better! Very few of us really understand the role octane ratings play in engine timing, detonation, and performance but, to some degree, we all believe that you get what you pay for.
People choose to pay more all the time. We just need to amplify and take full advantage of that.
PUTTING IT INTO PRACTICE: LINGO
The first step is to come up with names for three different service levels that represent a spectrum of value vs. quality. On the far left, you’re going to have the name that most strongly implies value above all else and, on the far right, the name that suggests unsurpassed quality and exclusivity. Everything else goes in between.
It’s important that the names you choose fit in with your brand. If you’re at the high end of your market, you don’t want to betray that with a name like “Saver.”
PUTTING IT INTO PRACTICE: THE LOW END
At the low end, we want a price that ensures we get the sale—one that targets the bride you believe may be shopping for the lowest quote, or even considering a drop shipment of flowers. You aren’t going to get your full profit on that sale but, if you’re prepared to compromise, you can make some profit.
Remember how the movie theatre dealt with the same dilemma? They know there are some people who won’t pay full price, so rather than just write them off they offer them a discount. They can see the movie for almost 50% off, but they have to come on Tuesday night and endure a theatre full of rowdy teenagers, talking, checking their phones, and other things.
This is called a hurdle, and it is introduced to deter all but the most committed bargain hunters. It ensures that anybody willing to pay full price chooses to pay full price.
Now you need to do the same. How can you remove value from your offer in order to deter all but the thriftiest shopper? How can you create a version that only appeals to coupon clippers?
At this point you’re no longer trying to negotiate what they’re buying; it’s more about what they’re paying. That means big tangible changes (like reducing the number of centrepieces) is out, but smaller changes to size and quality are OK.
Another option is to reduce the level of service. Instead of providing delivery, the customer has to pick their flowers up. Most brides and grooms have other plans the morning of their wedding, so if they’re prepared to run around dealing with flowers that day, it probably means they’re very serious about saving money.
And just like the word “Premium” makes expensive fuel more desirable, a name like “Saver” can effectively reduce value and deter full-price buyers. Do you know who is OK with the “Saver” package for their big day? The person who was really thinking about buying from ProFlowers.
There are options beyond this, but they’ll involve a more intimate and honest understanding of how people value your brand. Is there something that makes you special? A well-known or highly respected designer?
Whatever you offer that people value, consider withholding it at the low end. Your celebrity designer who appears on your local morning shows should not be the one preparing designers in the “Saver” package.
PUTTING IT INTO PRACTICE: THE HIGH END
Next we look at the other end of the spectrum. Movie theatres can charge almost double by adding a little value. How do you create the IMAX 3D version of your product? How do we make a bigger profit from the customer who is prepared to pay more?
Again, the focus is on making small changes to your costs but, hopefully, large increases in your margins. That means we’re not looking at big changes to the product, instead concentrating on service and other less tangible factors.
Once again the name plays a big part in this exercise. The “Ultra-Exclusive” package instantly seems more desirable than other options because of verbiage. It’s the opposite of the “Saver” package.
And doing the opposite of the low end is a theme here. At the low end, we talked about removing the well-known head designer from the process to make it less valuable. At the high end, on the other hand, we’re going to increase their involvement.
Maybe the “Platinum” package comes with the promise that, throughout the process, the client will be dealing exclusively with your well-known head designer who’s accredited with AIFD and CAFA and/or that aforementioned designer will personally prepare every single piece. And maybe the “Diamond” package comes with the promise that the same desirable, value-adding designer will personally deliver, attach, and adjust every single corsage, boutonniere, pew bow, etc.
This brings up a good question for smaller shops… is it OK to charge more for the services of the head designer if the head designer is going to be doing it all anyway? Yes! Sometimes when you pay UPS for five-day delivery, it shows up in three. The customer who pays full price is paying for the guarantee that the extra special bonus will happen.
And, again, further options will depend on how people value your brand. The movie theatres understood that some people would choose to pay more to reserve a seat, for a bigger screen, for adult-only screenings, and they capitalized on that.
You need to do the same. Understand what people prize most about your brand, make it an essential component of the high-end package, and charge more for it.
PUTTING IT ALL TOGETHER
So now when you have to present a quote, you’ll be ready with a differential pricing approach designed to maximize profit.
At the low end, you’ll have a price that appeals to the bargain hunter and nobody else. It should keep customers from defecting to your low-end competitor or drop shipper, but without cannibalizing higher priced sales to the people who are willing to pay more.
Meanwhile, at the higher end, you’ll have a much more profitable price that appeals to affluent customers—customers you might lose to a higher priced competitor if you stick to your regular cost-plus formula.
The interplay of these prices is part of the magic of differential pricing. It’s like holding up a mirror that reflects and reinforces the customer’s own beliefs. The thrifty bargain hunter compares the prices and thinks, “I don’t care which designer prepares my flowers and I can save money by picking them up. Great!”Meanwhile the high roller looks at the low-end package and thinks, “I definitely want to deal directly with the head designer, and there is no way I would give that up to save a little money.”
OTHER PRICING TRICKS
Venues and caterers charge a premium for the most sought after dates and offer a discount on less desirable dates. Learn what these are and charge accordingly. The bride getting married at the most exclusive venue on the most popular date is used to paying more —don’t disappoint her! Build in a bigger profit. Meanwhile, the bride getting married on a Friday night in February is likely on a very tight budget, so sharpen that pencil.
Unless you are truly an ultra-exclusive high-end shop, use charm pricing ($49.99 rather than $50) at the low end. At this point, it’s part of our consumer DNA to believe that good deals only end in 9. At the high end, it’s the opposite—consumers associate round prices (prices that end if zero) with higher quality.
Hotels and resorts base their pricing according to how far in advance they are reserving rooms. If a date is filling up quickly months out, they know they are not charging enough and will increase prices. Conversely, if it’s not filling up quickly enough, they lower them. A handyman friend of mine uses a similar formula: if he’s booked more than two months in advance, he raises his prices. Too often in this business, the priority is just booking to capacity as far in advance as possible. If you ever have to turn business away because you’re already booked, try charging more.