Dynamic Pricing: How to discount without diluting your brand

Written by Dr Josephine Palermo, Director, Geared for Growth and co-creator Higher Spaces

Rafi Mohammed, founder of Culture of Profit and author of “The 1% Windfall: How Successful Companies Use Price to Profit and Grow” recently spoke to Harvard Business Review. He said that business leaders should re-evaluate their pricing strategy rather than panic and slash prices. And if this sounds like a daunting thing to do at a time when there is so much uncertainty, don’t feel disheartened. Most organisations large and small struggle with pricing according to Rafi. Let’s talk about Dynamic Pricing and the correct way how to discount.

value for money

I recommend this podcast as it’s a great discussion on pricing strategies. It has some very practical tips on what we need to consider to better respond to customers during an economic slump or recession. The podcast is available on major podcast platforms here.

Here are the main ideas I took away from listening to the discussion.

Increase prices rather than discounting

Covid-19 safety practices might must you to provide a more intensified service to fewer customers. The reasons for this could range from limiting the number of people able to physically be in your space at one time, to staff implementing safety practices that slow down their productivity per customer. In this context, customers might be willing to pay a Covid-19 levy. This is especially true if you explain to them why you are charging it and that it’s a temporary measure to address the increased costs in serving them.

Slashing prices may dilute more than your profit

It has been long established that advancing price one percentage point at a time can make a significant impact on your business’ bottom line. McKinsey.com (2003) suggested that a one percent increase in price could generate an eight percent increase in operating profits (when demand remains consistent). The opposite is true of course when considering the impact of reducing your prices, especially right now when demand in some sectors is experiencing record lows.

Rafi suggests that discounting your price right now may also have lasting impacts on your brand. The lower price point could drive the perception of lower quality or value for your customers. It may be more appropriate for you to increase your prices and promote higher value to customers with extra service offerings rather than reducing prices. A pricing strategy will be critical, according to Rafi, to help businesses ride out the next year or two as we move to recovery.

Pricing is more than adding a “+” to costs

Rafi suggests that the main misconception about pricing is that it’s all about adding a profit to your costs. He suggests it’s not that black and white and business owners should be looking at the grey area in between cost and profit. He recommends that businesses listen to their customers and what they are saying about your prices and the value you provide. You might need to address the demand from customers who don’t have the same amount to spend. Yet, you could provide different options for them at a lower product value, rather than discounting your premium product or service. And it’s worth remembering that there will be some customers who will still be willing to pay your premium price.

One example that Rafi quotes, and I love, is that of Hyundai in the US and how they addressed their customers’ pricing concerns. in 2009 Hyundai’s customers’ main concern was job security. They worried about purchasing a car resulting in liability if they lost their jobs. So in 2009, Hyundai rolled out an assurance strategy that said, if you lose your job you can return your car to us, no questions asked. As a result, they lead the market in auto sales at a time when the auto industry experienced a sharp downtown. And only 50 cars were returned. This is an incredible example of a company listening to their customer and creating a pricing strategy to solve what their true needs were.

Surveying your customers

Rafi doesn’t cover this in the podcast, but I thought it might be important to add some information about how to ask customers about pricing, especially if it’s something you haven’t tried before. See his article in a Harvard Business Review in 2012.

A checklist for how to survey customers:

  1. Position the interview as a customer satisfaction survey. Customers like to share feedback on how you can serve them better
  2. Ask about what rival products they consider purchasing. Customers who shop around are more likely to be price sensitive.
  3. Ask them what they think about your price; too high or too low? Then listen.
  4. Find out what features they would like added to your product or service to increase its value.
  5. Ask about the way they buy products like yours and what they like or don’t like about it. You might find that the barrier isn’t pricing at all but the pricing technique (eg. Two-part, subscription, buy now – pay later etc).

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