Charging different prices for different value is not only highly sensible, it's a highly effective way of increasing profits.
But because value cannot be defined absolutely with surgical precision, different customers with a similar perceived value of what you are offering will have different degrees of price sensitivity. In other words, just like value, an 'acceptable' price cannot be precisely defined either. Your various customers will have a 'price band' in mind and if your price falls anywhere within this band, they will be able to agree to purchase, all other things being satisfactory.
“Just like value, an 'acceptable' price cannot be precisely
defined either”
This band in its turn is not fixed and inflexible either, but will be determined in large part by their current perception of value. A price not outrageously beyond the band may enable the customer to re-evaluate your proposition, but of course a price significantly below it can have the same impetus, causing the customer to wonder if they have over estimated the value.
If you are serving a market where people spend someone else's money on themselves, recognise their minimal incentive to economise and seize the opportunity to charge higher prices.
When you tailor your various value propositions to different customer groups, you are in a position to reserve capacity for your best customers. Your goal must be to maximise your profits, not necessarily to fill your capacity.
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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.sws3.co.uk
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.
