Tweaking Prices

Consider pricing as two steps, setting the price level and tweaking.

The price level is based on Value Based Pricing.  This is when you focus on your customers’ Willingness to Pay.  When setting the price level you are deciding between prices like $50 or $100, big differences.  Getting the price level right is by far the most important step.

After you know your price level, then you can tweak the price.  Tweaking is deciding between prices like $4.95 or $5.00.  Price tweaks may not have huge effects, but they can make a difference to your profitability.

Past blogs have covered the pricing ending concepts of round prices and just-below prices.  These are examples of price tweaks.  These price endings can influence customers’ perceptions of prices, products and companies.

However, there are price tweaks besides price endings you may want to consider.  Here are three.

Straddle prices

Pricing is all about understanding when and how your customers use price to make decisions.  There are some industries, like real estate, where the potential buyer uses a computer and enters a price range to search for alternatives.  For example, the user may choose between <$250,000 to $300,000> or <$300,000 to $350,000>. Notice that both of these include the number $300,000.  If you were going to price your house at $299,950, you may consider instead charging an even 300.  You could get twice as many viewers to your offering.

After tax prices

Imagine you have a limited amount of time to serve as many customers as possible, for example halftime at a football game or between innings at a Yankees game or even the morning rush at a bagel shop.  The last thing you want to do is spend time making change.  Instead, consider setting your prices so that after the sales taxes are added, they come out to even numbers to increase the likelihood your customers have exact change, and even when you have to provide change it’s faster.  The less change you make, the more customers your serve, the more money you make.

Disti markup breakpoints

Many distributors use consistent markup formulas and you can take advantage of this.  For example, one distributor I’ve worked with uses a 45% markup for products under $1.00 and a 40% markup for products at $1.00 and up.  If you sell a product for $0.99 to the distributor, they will charge their customers $1.44.  If you charge an even $1.00 the disti will charge $1.40.  Notice that you could increase your price from $0.99 to $1.00 and the disti will decrease their price from $1.44 to $1.40. Why wouldn’t you?

In the end, these are just pricing tweaks.  The majority of your pricing efforts should be creating value, understanding the value you create, and capturing as much of that value as possible.  This emphasis on value is about price levels.  However, after you have the right price level you may be able to make a little more profit by tweaking your prices.

Can you think of any other examples of price tweaking that matters?  Please share them with us.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Photo by najjie

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