Pricing has undergone a revolution that has helped many companies achieve new levels of profitability.
It all began with a simple realization: The seller’s costs have no correlation to what the buyer is willing to pay. What matters is how the customer values the product and how much they are prepared to pay as a result.
Imagine your local pizzeria. The price you are willing to pay depends on many things — how much you like their pizza, how long it has been since you last had it, how hungry you are, the price and availability of alternative dishes (pizza and non-pizza).
What doesn’t factor into your valuation: the pizzeria’s costs. Would you value their pizza more if they signed a bad lease? Would you value their pizza less if they owned the building outright and did not have to cover mortgage or lease payments?
Pricing then becomes more than a cost plus formula. The cost plus model ensures you don’t lose money on a sale, but it does not help attract new buyers with lower (but still profitable) valuations, or help you get more money from customers with higher valuations.
Marketers, psychologists, and behavioural economists have joined accountants in the pricing process, and the results have been incredible. What has become known as “value-” or “psychological pricing” attempts to align prices with perceived value — generating more money from more customers. Prices themselves also become a key part of the marketing strategy — sending powerful signals about the brand, framing value, and directing customers toward the most profitable choices.
The Problem With Fixed Prices
Imagine you create a great new arrangement and your cost-plus formula suggests a price of $40.
You know you could sell more at $32 and still be profitable, but you also have the feeling some customers would pay $45, maybe more. Stumped, you decide to poll consumers. You ask 100 people what they would be willing to pay for the new design.
They come back with prices ranging from $20 to $60. Most people are closer to the middle, and the average value is $40. Your market research and the cost plus formula both say $40 is the way to go, but it is actually a very bad compromise. Why?
Right away you lose half of your potential customers. Every one of the people who assigned a value of the less than $40 is no longer interested.
On the other end, it’s even worse. The people who were prepared to pay $50-$60? They’re laughing. To them, you are giving it away; they would have gladly paid you an extra $10 to $20.
What if there was a way to sell the arrangement for less than $40, but only to those who really wouldn’t pay more? And what if there was a way for the people who said they would pay $50 or $60 to do just that? It seems crazy but it happens all the time.
One Product, Many Prices
Hollywood sells a product that anyone with an Internet connection can steal, but they keep making money. Smart pricing is a big part of if.
Lets say a family of four wants to see “Guardians of the Galaxy”. Seeing it in IMAX 3D costs $65.96, regular 3D costs $55.96, and the standard screen costs $43.96. Other options (matinees, discount Tuesday, VIP club, pre-purchased passes) all introduce different prices.
Not retail, you say? Check out the DVD/Blu-Ray section of your local electronics store. Major new releases are offered in five or more slightly different version of the same thing (a movie on optical disc) for between $15 and $40. And cheaper options keep being presented — digital downloads, pay-per-view, etc.
Hollywood doesn’t dig in and insist on a single price based on their costs. They come up with a profitable price for every single customer, and always provide an option to spend more.
The most profitable possible price for every customer: that is the goal. Many of the techniques involved will work for florists too. That is what this will be about. Using the techniques created and refined by other vendors to make selling flowers more profitable.
Introduce Some Hurdles
Let’s return to this hypothetical $40 arrangement. You can sell it at $32 and still be profitable, as long as you aren’t cannibalizing sales at $40. What if there was a way to selectively discount only to those who would not pay full price?
There are techniques for doing just that, and one of the very best is called a hurdle. To get the discount, the customer has to jump the hurdle, and only those who are really committed to the discount will do that. The people who were prepared to pay $40 or more? If you design the hurdle properly, most won’t bother.
Sound crazy? Think about it: every manufacturer’s rebate you have ever applied for was a hurdle, designed to discourage all but the thriftiest of shoppers. Ever enjoyed the lunch specials or early bird discounts at a restaurant? Reduced pricing for a matinee? Paid less for an overnight flight? Lined up at midnight with hordes of other bargain hunters to get a deal? In each case, you jumped a hurdle (accepting a less desirable time, sacrificing convenience, etc.) in order to save money.
Here are some hurdles you can employ at your shop:
• Pickup Only: Discounts on pickups are especially effective for urban florists, where parking is an issue.
• Vase Recycling: If customers bring in a vase, they can have it refilled at a discount. This is very effective at helping recipients become customers. It’s also an opportunity to score “green” points in the community.
• Food Drive: People who bring in a non-perishable food item get a discount. Only those who are really serious about a discount on flowers will do this.
Remember, the goal is to generate sales from people who would not purchase otherwise. You want to avoid having people who are willing to pay full price take advantage of the discount.
Thus: Discounting Don’ts
• NEVER automatically apply hurdle discounts. Doing so completely undermines the effort. These discounts are only for the people who ask for them.
• DO NOT promote discounts to customers who have historically paid full price.
Use discount hurdles to change behaviour, such as getting full-price customers to buy outside their usual pattern.
Focus on customers you have flagged as being, um, “sensitive to price.”
Look at inactive customers. Maybe they stopped shopping because of a rise in delivery prices. One of these discounts might get them back.
Focus on recipients who have never purchased.
Look for ways to find price-sensitive shoppers.
Stay tuned for next month’s issue for strategies to increase your perceived value.