3. Channels of Distribution If you sell through any middlemen to get to the end-users of your product or service, then those intermediaries affect your pricing in two ways. First, you have to price so their margins will be large enough to motivate them to do what you need them to do. Second, you must consider the margins they add that affect the price your end-users ultimately pay.
4. Competition. This is where managers often make their fatal pricing decisions. First of all, don't kid yourself. Every company and every product has competition. Even if your product or service is unique (whatever that really means), your potential customer has been getting by without it until now, so there must be alternatives, however remote they may seem to you. Make sure, as you consider pricing approaches, that you think very carefully about whom you compete with from the buyer's point of view (the only point of view that matters). If you don't know all the alternatives buyers evaluate you against, pick up the phone and ask a few of them.
5. Compatibility. Pricing is not a stand-alone decision. It must work in concert with everything else you're trying to achieve as a company. Is your pricing approach compatible with your marketing objectives? With your sales goals? With the image you want to project? Again, those objectives have to be explicitly stated and written down. If your production goals, for instance, are to even out the process so you can better control inventory, the last thing you want is a pricing strategy that forces seasonal spikes in demand.
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How to Break the Mold
OK, you've figured out what you want your pricing to achieve (you wrote it down, remember?), and you and your managers have thoroughly examined the Five Cs of Pricing as they apply to your business. Now you're ready to start thinking creatively and proactively about pricing. To do that, you have to follow one simple rule: Forget absolutely everything you know about "how it's done in my business," and start looking at how it's done in other businesses. Then think about how other companies' and industries' pricing approaches might be applied (either directly or indirectly) to pricing your company's products or services. One more rule: Never look at a pricing approach from other companies or industries and think, Well, that would never work in my business. That sort of thinking is the kiss of death. Instead, always ask, How could that kind of pricing -- or some variation -- possibly be applied to my business?
To help you get started, you'll find 19 pricing approaches outlined in the Creative Pricing Primer. (See page 3.) These examples come from consumer products and services and business-to-business situations. The approaches presented are not mutually exclusive, and they are certainly not all-inclusive. They are offered as a way to stimulate ideas that will work for your company. Here's your assignment (after all, this is a mini-M.B.A. course): go through the primer, and for every approach presented, jot down in the space provided some way your company might be able to use that type of pricing.
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Final Hints
As you challenge yourself and your people to approach pricing with imagination and an open mind, here are several other considerations that can make you more effective:
1. Do not limit new pricing strategies to new products. Challenge the pricing on your existing products or services. How can you price differently to achieve your objectives?
2. Do not sell yourself short. The most common mistake in pricing is to assume you must price low. Find creative ways to figure out how high you can go. Can you test it somehow? Talk to potential customers about pricing. An old proverb says, "There are two fools in every market. One charges too much, the other not enough." Don't be a fool -- either way.
3. When making a price increase, try to time it with other changes in your product or service that add value. The car companies, for instance, raise their prices when the new models come out.
4. If you're thinking about lowering price, make sure you crunch the numbers to see how big an increase in sales you'll need just to get back to the levels of cash flow and profit you have now. An obvious point, maybe, but it's often overlooked.
5. Never stop looking for new pricing ideas. When you're shopping for anything as a consumer or a professional, think about how products or services are priced. Then try to apply the thinking to your business. Ask your managers and employees to do the same and report back to you.
Whoever first said "A penny for your thoughts" obviously assumed the seller would take a rather straightforward and unimaginative pricing approach. I'll bet the seller would improve profit margins by charging a nickel for the first thought and then using a stair-stepping approach for every thought after that, up to a limit of . . . well, you get the picture.
