7 Ways to Improve Pricing With a New Mix of Products
Think your business has a pricing problem? Odds are the issue really has to do with the mix of products or services you're selling.
That's because the best pricing strategies involve tinkering with your offerings.
Rather than annoying your customers by raising prices, you might come up with a new "premium" version of your product that happens to sell at a premium, too. Or you might choose to break even on one product, but then package it with an array of complementary products that you then sell at higher margins.
Both of these strategies play off basic attributes of human nature: Some people will always buy the best, and a person who buys one thing is more likely to buy something else.
Here are some ways you might boost earnings margins by experimenting with your line-up:
1. Have a bare-bones offering.
The idea is to attract more price-sensitive consumers -- people who are looking for a bargain but are still worth your while because you can squeeze a small profit out of each of them. This is an old business idea. If you travelled third-class on an early 19th century railroad, you needed to wear rain gear because there were no roofs on the coaches. This wasn't because the railroad couldn't afford it. No, they let you on because they could make a profit off of you, but they also wanted the experience to be tough enough that the more well-to-do would never ride third-class.
2. Good, better, best.
When substituting out products for others, the classic strategy is good, better, best. Go on a long flight, and there's a choice between coach, business and first class. A grocery store might sell generic Cheerios, actual General Mills Cheerios, and then a high-end, organic, Cheerio-like cereal. The idea is to still capture the bargain-hunting customers, and then have a much larger price margin on the premium products or services, because the person who wants to fly first class or eat sustainably manufactured cereal is not going to care as much about price. And when price doesn't matter as much, people will usually opt for the better-priced product.
3. Find a loss leader.
McDonald's will sell a double cheeseburger at a loss on its dollar menu because it knows that the customers will likely buy more profitable fries and soda drinks at the same time. The whole idea is use the bargain item to get customers through the door, then sell them more profitable items.
4. Give away a durable to sell consumables.
Gillette has this strategy down pat with razors. It will mail people free razors, knowing that they'll make profits off selling the razor cartridges. Sodastream might sell a home soda fountain for around $100, but it then charges $20 every time a customer trades in a carbon dioxide canister for a refilled one. Give away a durable product that a person will use almost forever, and then make money selling the disposable items that go with it.
5. Add accessories.
Charge higher margins for accessories that go along with a particular product. A person buying a bicycle might want a helmet, knee pads and a horn. Give the customers a bargain on the product they're basing their decision on -- such a bicycle --, and then tantalize them with higher-margin accessories.
6. De-bundling products.
An in-flight meal or a bag stuffed into the overhead compartment used to be part of the price of an airline ticket. Now passengers have to pay extra. Airlines realized that the decision item is the price of the actual ticket. Once they have you trapped on the plane, they can then sell you a high-cost sandwich. This is all about pulling apart products and services in order to accessorize.
7. Bundling products.
On the opposite side of the spectrum, you might bundle products together into packages or deals. Rather than complementary pricing that relies on creating an array of higher-margin products around the decision item, you're trying to boost sales volume by bundling things together in order to get people to buy more. Comcast offers its Triple Play deal because it wants to boost the number of its television customers who also use its cable-based phone and Internet. There might be some who might have purchased all three anyway, but most probably would not have without the deal.
Try some of these strategies, and your pricing problems may diminish in no time.
Mark Stiving, PhD, MBA, is a recognized pricing expert with has more than 20 years' experience in helping businesses boost revenue and profit. He is also an instructor at Pragmatic Marketing. Mark is the author of Impact Pricing: Your Blueprint for Driving Profits, from Entrepreneur Press.