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How to increase prices – part 2

When looking to increase prices, it is vital to understand that different customers are willing to pay different prices. Like first class, business and economy on a plane.

If you have a single price it’s either nearly always too high or too low and whatever it is you will lose. Think about it, if the price is too high they will not buy from you and you lose. If the price is too low they will buy but they will pay you less than they are willing too and you lose again!

The key is to find creative ways to charge different customers, different prices based on what they are willing to pay. This is called Price Discrimination.

Let’s have a look at some numbers to see the implications of that idea.

Let’s say you have a hundred customers and 90 are willing to pay just £5 for whatever you sell but 10 customers who would be willing to pay £10.

If you charge everyone £5 (regardless of what they are willing to pay) and let’s say the cost of supply is £4, you will make is £100. But, look at the alternative – if you charge 10 customers £10 your profit goes up to £150. That’s a staggering 50% more – what would 50% more profit mean to you?

The idea is to charge different customers different prices, legitimately without ripping them off. That’s our challenge and the great news is it’s happening all around us already.

Here are six ways to do this:

  • Trade-ins
  • Quality
  • Timing
  • Bundling
  • Channels
  • Concessions

 

The first example is trade-ins.

Have you ever wondered why a white goods retailer is willing to give you £50 for an old washing machine against a gleaming new one? They don’t want your old rusty washing machine. They probably just throw it away which would cost them money. So, why on earth they would pay you £50?

Well, the answer is this is one way of charging different customers different prices. Think about it, if you already have a washing machine your need for a new one is not as great as somebody who does not have a washing machine.

For example, if you are a newly married couple you need a washing machine and you are probably willing to pay more for it. But, if you are a happily married couple, whose washing machine is still working fine, you do not desperately need a new one – so perhaps you are not willing to pay so much.

The second idea is making a quality distinction.

Can you have a premium and an economy version of what you sell? Pubs do it; the same pint of beer is more in the lounge bar than it does in the saloon. The same words in a book cost more in hard book than in paperback. It’s not cost that driving the products prices. It’s the fact that different customers are willing to pay different price.

The third strategy is charging different prices linked to timing.

Many businesses offer or allow customers to pay different prices according to a time dimension. For example, a peak time train ticket cost a lot more than a ticket on after 9:30. Peak rate phone calls cost a lot more than in the evening. Peak time drinks in a bar cost a lot more than in happy hour. All these are examples of how businesses have introduced a time element to charge different customers at different times different prices.

The fourth strategy is bundling.

Ever wondered why when you go a restaurant you can chose of the expensive A la Carte menu or a set menu? And, on the set menu there are usually some of the nicest and most expensive things on the A la Carte menu.

But, they are bundled together at a ridiculously good value. Sometimes you pay the same for a three courses about the same as the one main course off the A la Carte.

How does that make sense from the restaurants point of view? Well, that’s perfect because they know that some of the people that are coming will be budget conscious. There will also be others who don’t give a monkey’s about the prices because they try to impress the person they are with.

So, they will order the A la Carte and expensive wine. Some people are willing to pay more than the others. If you had a single price you wouldn’t be able to accommodate them and that single price would either be too high or too low.

Also, restaurants will not let that happen. They have a set meal and a wide range menu. So different customers pay different prices and the restaurants make a lot more money in the process.

The fifth way to change different prices is the channel through which you sell things.

Think about it the same roll film cost a lot more in Disneyland than it does in boots chemist. It’s the same product but the channel through which you buy allows different prices.

Products and services tend to be available cheaper via the internet than in person. Those people who are willing to pay more for personal service can, others who want to pay less also can. Dell online is a good example.

The sixth strategy is concessions.

Why do businesses like cinemas, hairdressers and museums offer old age pensioners, children and students a price lower than they do the vast majority of the rest of us?

Because they recognize old age pensioners, children and students can’t afford as much of that single price.

A lot of people wouldn’t come in and that will be crazy because it’s all about maximising revenue from the capacity. It costs the cinema the same if they are full or have either seats, any extra revenue from concessions is all pure profit.

Concessions allow some people to pay less and we don’t object to that, it’s just the way it is.

The challenge for you is to find ways to take these principles and apply it to your business so that your customers can pay different prices.