There is a wide misconception that lowering the price of your product or service will always increase sales. Lowering the price may increase sales, or it may decrease sales, just as increasing the price may increase sales or may decrease sales. It’s scary not knowing which way sales would go when you change the price…
High-low pricing is a pricing strategy where a company will inflate its manufacturer’s suggested retail price (MSRP) and generate a majority of its revenue from selling the product at a discounted price.
Far too many companies fail to develop a long-term life cycle pricing strategy that is continuously adjusted across the product life cycle (PLC). Typically, the savvy company will conduct extensive pricing research to find the a launch price that is aligned with their target group’s willingness-to-pay, but then fails to re-evaluate the pricing continuously. This is problematic in two ways: Firstly, you will either be losing out on revenue or leaving money on the table as you fail to take into account the changes in the customer’s willingness-to-pay, and secondly, it will most likely deteriorate the returns on other products in your portfolio. Proper life cycle pricing across both the early, mid- and late-stage of the PLC is absolutely crucial to reap the rewards from the R&D investment.
Migros, the largest supermarket chain in Switzerland, has launched a new campaign where they offer personalized discounts based on willingness-to-pay data from customer reward cards. By using this data, the retailer can avoid granting discounts to customers who would have paid the full price and at the same time encourage price-sensitive buyers to purchase products they normally wouldn’t have.
In 2010, the British discount retailer was required to cease the usage of its long-time slogan “Yes, Everything’s £1!” as more and more prices deviated from the famous £1 price-tag. And recently, the retailer started selling Pep & Co clothing from their stores - a move that means approximately 1 in 10 products will be priced either higher or lower.
Over the last two and a half years, the Boeing 777X has experienced sluggish sales growth, and consequently, it has been widely discussed whether the aircraft manufacturer should lower their prices to increase their sales volume.
Sellers are almost always in more hurry to sell than buyers are to buy. Buyers almost always have the upper hand. Have time on their hand. Unfortunately for many companies, they do not realize this is the case.
I've worked a couple of times for public enterprises and a couple of venture capital backed companies, and in both instances, the businesses marched to the drum of quarterly and annual revenue goals. Goals, of course, are important but should they be in terms of revenue?
In every one of these companies, towards the end of the quarter, it was a mad dash to reach those quarterly goals. Executives sent out the salespeople to "get the deal at any price," and consequently towards the end of the quarter, discounting was rampant.
There are several problems with this strategy:
(1) Customers, who, like I just said, are not in a hurry buying, only wait to the end of the quarter to place their order because they know they can get a better discount then. In fact, I have, on more than one occasion, been told by prospective customers that they are just going to wait a few weeks because, as they say; "We know we can get higher discounts then."
(2) Sales people also try to convince customers to place an order earlier than they had planned, again, at the end of a quarter, to get that discount. When this happen, the only the results is that the company actually competes with itself and that order that would have been forthcoming in a couple of weeks, now comes to the seller early, but with a lower price.
In both these cases, the company shoots itself in the foot. They don't sell more; they have the same sales level they would have had without these quarterly discounts, just with lower prices. Lower prices that zap profits!
But, you may ask, is it not important to get those low-profit orders at the end of the quarter to defend your market share? Will your customer buy a competing product where they get that end-of-the-quarter discount?
Well, if that is the case, you sell a commodity where price is the only decision driver, and you are already working on razor thin margins making those end-of-the-quarter discounts even more damaging to profits.
Discounts and other incentives to close deals are important, but they should not be predictable in such a way that customers will use them against the seller. There should be no difference in the what level of discounts that are offered at the beginning, middle and end of the quarter. Discounting should also be used strategically to guide customers to more profitable products.
But what about goals, you may say? Goals should be tied to profit, not tied to revenue. Because it is with your profits, you build and expand your business. A simple truth that for some companies is difficult to grasp.