Bundling products and services is a time honored technique used by businesses of all types. Walk into a McDonald’s and you will see bundling in the form of Value Meal where you can buy burger, fries and drink for the price that is lower than if they were bought separately. When you book your vacation package that includes airfare, hotel and car rental for one low price you are buying a bundle. In customers’ mind bundling saves them money by paying less than what they would have to pay otherwise. Businesses also benefit from bundling because they are able to sell more even if they sell at a discount. It appears that bundling is a win-win for both customers and businesses.
The goal of pricing a product or service for any small business owner is to charge the maximum amount that customer is willing to pay and maximize profit. If you charge lower than what customer is willing to pay you leave money on the table. If you charge higher customer will walk out the door and you will lose profit.
To some it may seem like Black Magic, but pricing is combination of art and science. Big corporations, such as Wal-Mart, do lot of research and number crunching to figure out to the pennies exactly how much they should charge so that they get the maximum profit. This is the science side of pricing. No matter how much number crunching and data analysis you do human behavior and psychology plays a big role in customers determining whether a given price is a good deal or not. This is where art comes into play. There are number of ways in which business owners can convey the message about good deal (aka pricing) and take advantage of how customers react to that message.
The scenario may look familiar to many small business owners. You are doing a brisk business with loyal customer base. The sales are growing steadily. You are making decent profit. The same holds true for other competitors in the neighborhood. The existing customers in the town are divided between your and other businesses. In short, equilibrium has been established amongst existing businesses.
And then, a new competitor decides to get a piece of the action. Suddenly, everything changes. The new competitor tries to grab customers with lower price and increased marketing. The existing ones try to hold onto their customers. Employees will leave for bigger opportunities. It’s as if someone threw a stone in the calm waters causing ripples everywhere in the neighborhood.
The initial reaction for many existing business owners may be to counter the new competitor with force right away to ensure these ripples do not cause significant damage to your boat. However, this may be a mistake. The best strategy may be to watch and plan for the future before taking radical steps. In particular, it is important NOT to do the following right away.
If there is one company that is loved by its customers, employees and shareholders equally it is Apple!! It is hard to find any other company that generates the excitement that Apple does. The company is valued at almost $600 Billion that is estimated to reach $1 Trillion in too distant future. That amount will be higher than the GDP of many countries on the planet. The amazing thing is even at this size Apple manages to grow its revenue and profit at astronomical rate of 70-80%! There has never been a company in the history that has achieved what Apple has in the last 10 years.
While it may not be possible for small business owners to achieve success at the same level as Apple there are important lessons you can learn that will help you grow your business. Below we analyze Apple’s critical success factors and explain how you can apply them in your business.
Pricing is both an art as well as science as we discussed in earlier post on Ten Commandments of pricing. There is no one right way to determine the price of products or services you are selling. To a large extent, the price is based on the value customers perceive to get from the product and what they are willing to pay for it.
The law of pricing says that you should charge each customer the exact amount he/she is willing to pay for it for maximum profit. This is how auction system works. You let each customers announce how much he wants to pay and pick the highest bid. While it would be ideal to determine the price in this fashion, in practice it becomes a challenge to sell your products this way. That’s why it is necessary for business owners to come up with an advertised price and augment it with other ways such as coupons to attract more customers.
So what factors do you need to consider when pricing your products and services?
Pricing a product or service is one of the most complicated yet important decisions that can determine the fate of your business. Most small business owners tend to price their products and services lower than the customers are willing to pay for out of the fear that increasing the price will make customers flee. However, it is possible to increase your price, and have customers love you for it. It is not only desirable, but imperative that small business owners understand how to properly price their products. After all, it is much more fun to compete on value rather than price Look at how Apple is able to charge premium for all its products
Based on our own experience and feedback from our readers we have compiled a set of rules that will help you in pricing your products. Here they are:
In the previous post we discussed how you can charge premium price without losing sales and still have customers love your products. No one does this as well as Apple, the most valuable company in the world by market value. Apple never competes on equal playing field with their competitors. They write their own rules and come up with innovative products that no one has dreamed off year after year. Their slogan explains how they have been able do this – Think Different! As a result Apple has been able to charge premium price for all its products and enjoy remarkable sales growth and margin for a long time.
What is their secret sauce? In this post we attempt to decipher their strategy by understanding how they apply the rules of premium pricing we described in the earlier post.
Do you want to increase prices for your products without getting a hit on your sales? How about customers thanking you for charging them higher price? You probably think we have lost our minds, but trust us; it is possible do just that! We will show you how in this post.
It seems counter-intuitive to say that you will be able to improve customer satisfaction and increase sales while at the same charging more. Conventional wisdom says that if you are not doing well lower the price and customers will flock to your business. As natural as it seems, this is simply not true. Competing on price is not a sound business strategy for small business owners as explained in the previous post.