How Customers Can Improve Your Pricing
No one is suggesting customers should be the primary voice in your pricing decisions.
But you can still benefit from involving customers in the process, note Marco Bertini and Oded Koenigsberg in the MIT Sloan Management Review.
"If you sense that your company is leaving good money on the table and struggling to convert product differentiation into revenue and profits, then you should consider enlisting the help of unlikely partners: your customers," they write.
How can customers help? Here are four questions the authors provide, to help you figure that out:
1. Is there a significant disparity among customers in their valuations of your product? You might think your product or service is differentiated enough to warrant premium pricing--or at least a premium tier. But this basic question can help you assess if customers, too, believe that your product merits differentiated pricing.
"If the answer is no," write Bertini and Koenigsberg, "then there is no reason to ask customers to take part in the pricing process."
But if the answer is yes, ask yourself the following:
2. Can my company document these differences in valuation with confidence? If so, you're in great shape. You can implement multiple tiers of pricing, based on the valuation differences you've already documented.
But if you're not sure you can document different customer valuations, that's okay too. You can conduct a pricing experiment--with a big potential payoff. Specifically, you can create a new, tiered pricing menu. Structure the tiers so that customers "reveal their valuations through their choices."
Armed with the choices your customers make on the new menu, you'll now have some documentation of how customers value your products or services.
3. Do customers understand what your product is worth to them? Of course, there's always the chance your customers just don't grasp that your product warrants a higher price.
In that case--no matter how many tiered pricing experiments you run--you're not going to get results that please you.
What you need to do is revamp your branding or messaging around the product. The goal is to educate customers, so they understand what they're paying for. How can you go about educating your customers in this fashion? Well, this is one instance of how customer participation can improve your pricing.
For example, a classic means of educating customers on pricing is through the fine art of negotiation. Negotiating on price can create meaninful, in-person interactions about what customers perceive they're paying for. These interactions will provide extremely helpful feedback. You'll learn not only about what you should be charging, but also about how to articulate your value proposition, in a way that allows customers to feel that--even at premium prices--they're netting far more than what they're paying for.
(As a first step, you can always ask them this one question.)
4. Is demand for my product likely to outstrip its supply? "If the answer is 'yes,' then it may make sense to run an auction, which is meant to identify the people who place the highest valuations on your offerings," write the authors. "If the answer is 'perhaps,' however, managers need to be wary about entering into a situation in which demand uncertainty puts excessive downward pressure on prices."
On top of all this, giving customers a measure of input on pricing creates a path to customization. The authors explain:
When managers think of customization, they generally think of tailoring the product's features to the buyers' individual needs and wants. However, they forget that price is a product feature in its own right. Occasions where the amount paid can be used to signal social status (luxury goods, for example) are a case in point. In such contexts, the ability to customize price is attractive because it allows customers to say something specific and credible about their own abilities, resources and values.
That's something to consider, next time you're pondering a price increase or devising a pricing structure for a new product or service.
The larger lesson here is a basic reminder: Whatever you're selling, you need to gain a firm understanding of customer demand. Customer participation--in the form of an auction, or a name-your-own-price experiment--can enchance that understanding.