Should dealers look at their pricing paradigm? Absolutely, says pricing strategy consultant Rafi Mohammed, writing in the latest issue of the Harvard Business Review (“Expand Your Pricing Paradigm”). Given today’s economic uncertainties, a look at successful moves in other industries could be an eye-opener and a route to more income and profit.
Mohammed founded the pricing consultancy Culture for Profit in 2006 and advocates that businesses can examine different ways to charge customers and consider pricing tactics that can both attract new customers and increase revenue from existing ones. “By adding pricing options, you increase the odds that customers will find one tailored to their needs,” he contends.
Truth is, we’re all creatures of tradition or habit, particularly in the pricing of goods and services. Deli meats are sold by the pound, firewood by the cord. But many forward-thinking companies have changed their pricing paradigm and boosted revenue and profits. For example,
shipping and mailing were always priced by weight and distance traveled. But the U.S. Postal Service innovated with a program that allows customers to cram as much as possible into a flat-rate box for a set price regardless of weight or destination. Flat rate sells.
The “G-B-B” model is another example. The good-better-best pricing approach is used to drive off-time traffic at, say, restaurants that offer early-bird, regular and chief’s table options. On the other hand, a business can successfully offer all-inclusive plans that appeal to customers who want to avoid extra charges and respond favorably to a fixed-payment deal.
Still another approach Mohammed advocates is appealing to customers who are on a tight budget. Firms that offer financing alternatives — considered a form of pricing — can help customers afford services and gear within their cash-flow constraints. Buy-now-pay-later promotions, layaway plans, and zero-interest, short-term payment options all work well. Indeed, a study last fall by LendingTree found 36% of businesses predicted they’d go with a BNPL plan in the next six months.
Capped or flat-rate pricing also have big appeal, especially for today’s customers who prefer certainty over surprises. A key part of Uber’s and Lyft’s success is that the customer has a quoted flat rate for the trip versus the uncertainty of a metered taxi ride.
Meanwhile, another popular pricing approach is mixed bundling, which combines related products or services into a package at a single price. Of course, we’ve all seen TV commercials about bundling insurance coverages, but this type of pricing can be very effective.
Another strategy that generates income is offering volume discounts. This encourages customers to purchase more than they otherwise might and is a compelling strategy for the business, especially when the cost of a product is negligible.
Using pricing to enhance business efficiency is another approach Mohammed cites. For example, offering terms such as 2/10 net 30 means customers get a 2% discount for payment within 10 days. It’s a tactic that can reduce accounts receivables. Or how about those down times in the service department? Offer off-peak pricing for routine maintenance that could smooth the work flow and reduce capacity constraints.
Still another idea is a monthly subscription fee for certain basic services. For example, living in Florida, my home air-conditioning system is key to our happy life. So we subscribe at $14 per month to a service that biannually checks and maintains the system (parts not included). Buyers like subscription deals because they can mean lower up-front costs and payments, while businesses like subscriptions that renew automatically, rendering more predictable revenue with a proven higher lifetime customer value.
So what to do? Mohammed says zeroing in on possible pricing models that could work for a dealership starts with a group brainstorming session. Questions include:
• Do customers differ in their usage needs?
• What would help us and our people who are on tight budgets?
• Will a discount plan lead to more purchases and new customers?
• Can customers understand and see the value of any offering?
And don’t overlook pricing options that could help the dealership in ways other than simply generating more sales, such as smoothing demand or shifting purchases away from the busiest and most hectic times.
Once tactics are identified, it’s time for the all-important cost-benefit analysis. It should look at the cost, complexity, time and any investment required to execute each plan. “Don’t underestimate the cost and challenge of communicating any complicated pricing change or program to the customers,” Mohammed says.
He cites a Netflix case in which the company was still renting DVDs but also had moved into streaming. The company announced a plan to price the two offerings separately, renaming the DVD operation Qwikster. But the program’s complexity called for customers to create two accounts with separate fees. That drew a backlash, and the company’s stock plummeted. Plan abandoned.
Bottom line: With any pricing plan, time must be taken to carefully examine the real benefits — i.e., making good ballpark estimates of the boost in the number of customers, sales,
revenue and profits that might result from each new pricing tactic. There’s always some guesswork involved.
As Major League Baseball legend Yogi Berra said: “Somebody’s gotta win, somebody’s gotta lose. Just don’t fight about it. Just try to get better.” Exploring and adapting new pricing strategies may prove better than doing things the same old way.
Rafi Mohammed’s books include The Art of Pricing: How to Find the Hidden Profits to Grow Your Business and The 1% Windfall: How Successful Companies Use Price to Profit and Grow.
