Showing posts with label
degree of price discrimination.
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Showing posts with label
degree of price discrimination.
Show all posts
In my previous post I talked about price discrimination as a necessary option for getting your customers to self-differentiate, thus allowing you to charge different prices for different perceived value. There are actually three major levels of price discrimination:
* First - Charge the maximum the customer is willing to pay - e.g. Auctions
* Second - Charge the same customer different prices for identical items -
e.g. Bulk purchase discounts
* Third - Charge different prices in different markets - e.g. Money off vouchers given
to a segment of your market
Once you understand this you'll start to see more, more ingenious examples being practised in many markets!
Professional Service Providers are ideally placed to implement first level price discrimination, not because they run auctions but because they can determine individual price elasticity at minimal marginal cost. How? Simply by asking the right questions in a sales conversation!
Professional Service Providers occupy a market that most sellers would die for - The ability to establish a price with each individual buyer at extremely low cost.
“Positioning yourself as 'cheaper' just because you have lower
overheads is to be abhorred”
Professionals need to start taking advantage of this huge opportunity to move to first level price discrimination. Can't you see how daft charging by the hour now sounds in this context?
In the general context, at the macro level, there are only three possible pricing strategies:
* Skim - Premium products at premium prices
* Penetration - 'Value engineered' products at lower prices
* Neutral - Mid range products at mid range prices
Note the absence of 'low' prices! Too many Professionals assume they need low prices. Low prices just attract low value customers which you'll come to regret!
So what strategy should Professionals adopt? Whichever it is, it should certainly be based on value and not cost or time.
* Skim - More profit, narrower market
* Penetration - Not cheap but low priced relative to perceived value - Tends to be a
default for established service companies
* Neutral - General default strategy
Positioning yourself as 'cheaper' because you have lower overheads is just cost-based pricing and is to be abhorred - In any case it's a penetration strategy.
Professional Service Providers should start with a 'neutral pricing' strategy but, if they offer high value services by challenging established practices which customers are fed up with, they would be under-pricing. Professional Service Providers should be aiming at a 'skim pricing' strategy!
Professional Service Providers who charge for their time or their materials, or whose prices are influenced by their competitors can find out how to get paid what they're really worth at www.sws_emp.co.uk.
Being a Professional Service Provider means you are already a transformation business. Buyers of transformations are aspirational - They actively seek change. In a transformation business, the customer is the product. They are begging, "Change me!"
What happens after purchase and after consumption is what really determines price sensitivity amongst customers of Professional Service Providers, but you can't afford to wait that long. You need to price your services like an airline prices its seats on the same flight. To do this, you have to segment your customers by how much they're willing and able to pay. This is price discrimination.
Forget demographics! Get them to differentiate themselves each time they're thinking of buying. Whose money they're spending, and on whom, will also have a bearing. Use of the word 'discrimination' is correct in this context but it has unfortunate undertones! This discrimination is based on the customer's subjective perception of value.
“Great pricing strategies are designed to get customers to reveal
the maximum they are prepared to pay”
Great pricing strategies are designed to get customers to reveal the maximum they are prepared to pay. To do this your strategy needs to meet four requirements:
* Market Power - You are able to raise prices without losing all your customers
* Separable - You can divide your market into sub-markets
* Transaction cost less than potential profit - The cost of doing the segregating must be
outweighed by the extra profit
* You, the Seller, must separate buyers to prevent a 'black market'
All this is very easy to do when you're providing services! Very few services fail to have Market Power!
Segregation requires understanding of motivations - This is easy in a sales conversation, which is a necessity when selling services!
And it is impossible to create a black market in services because they can't be sold on!
Professional Service Providers really should be taking advantage of the strong position they naturally have.
Professional Service Providers who charge for their time or their materials, or whose prices are influenced by their competitors can find out how to get paid what they're really worth at www.sws_emp.co.uk.
