"pricing for profit" – presentation by michelle villalobos

pricing for profitstrategies to consider to increase profits... even in (especially in!) a tough economy

All Content Copyright Michelle Villalobos, Mivista Consulting, Inc., 2009. All Rights Reserved. To reprint or repurpose for commercial use, please contact Michelle at http://www.mivistaconsulting.com

what is price?

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what is price?

price = value to buyer

amount of money a buyer is willing to give up to obtain what he/she wants, needs or desires.

takeaway: If you can determine the item or service’s value to your buyer, you can optimize price.

If you cannot identify what clients are willing to pay, a rule of thumb estimate for services is that you are leaving 20% to 50% of gross revenue on the table!




Q: how can you determine price?




A: determine value




what determines value?(discuss)



how are you setting price?

cost-plus target return

competition-based value-based

cost-plus: cost determines pricetarget return: seller’s goals determine price

competition-based: competition determines pricevalue-based: buyer’s perceptions determine price

takeaway: only ONE is based on BUYER’S perception (value-pricing), how can you introduce buyer value into your pricing structure?

Value-based pricing is usually the most profitable method - but often the hardest to set. The up-

front difficulty will likely be compensated by profits.


strategy #1What’s the big picture?



know your big picture goalsyour long-term strategy and competitive advantage will determine which pricing strategy makes sense.

takeaway: trying to capture market share? volume? move inventory? increase profits? revenues? survive?


“If your competitive advantage derives from a low-cost structure, cost cutting can pump up market share, positioning your firm for a payoff when the economy

improves. But... don’t use price as a competitive advantage for high-value products by giving away

services or discounting your best customers. You erode the base of profitable customers and reduce the potential for profitability when the downturn ends."

- Reed K. Holden, President & CEO, Strategic Pricing Group




strategy #2Pareto Principle (80/20 rule)



80% of revenue comes from 20% of clients & those clients are usually less price elastic

(this can be somewhat counterintuitive)

takeaway: crunch your numbers: revenues, costs & time taken, identify your top clients, create products or services that will solve a

problem or address a need, and offer them - at a premium.

Beware of “sucker pricing” which just tarnishes your brand and your relationships. Value-based

pricing is good, price-gouging is bad.

strategy #3Leverage

use leverage to get the highest price

set price when the need is the greatest (without exploiting); that’s when you have the most leverage.

takeaway: Set price at the outset of work (rarely, if ever, hourly); set when urgency, need and scarcity are peak

When you set price at the OUTSET, not only do you increase trust, but you also have an

opportunity to generate the most profits - especially if your competition is charging for

time. This gets easier and better with experience.


strategy #4Price Discrimination




price discrimination is GOOD

AKA “price segmentation” if you can determine how different segments value your item or service

differently, you can maximize profits & capture more of the “consumer surplus.”

takeaway: what segments do YOU have & how do they value your offering differently?

If you can price discriminate effectively, you can capture the “consumer surplus” that is usually written off as “theoretical”




price discrimination 101

1. charge each customer the most they are willing to pay for each item or service they buy.

2. charge the same customer different prices for identical items. i.e., giving volume discounts for multiple orders, cell-phone companies charging you “peak” and “off-peak,” hotel rates that fluctuate with the seasons, rush fees.

3. charge different prices to different markets. Like when you charge lower rates to a non-profit, or when you provide coupons to certain consumers.




strategy #5dress it up



dress it upto maintain price (but give breaks) consider creative

payment options or performance guarantees.

takeaway: breaking things into smaller, more manageable chunks will decrease “sticker-shock;” also, keep or raise prices

but reduce risk with a guarantee

Instead of bulk pricing or one-time pricing, offer more payments in smaller amounts. Or

institute free trials with no cancellation penalty - if you’re delivering on your promise,

you won’t have to worry about it.


strategy #6bundle



if you’re feeling pressure from clients who want discounts, added value, special treatment... try bundling

services or UNbundling services

takeaway: how can you combine services and bundle them together?

Consider bundling low-margin items with high-margin ones so you can strategically add and remove items when people request discounts.

You can play with how much the “price reduction” is without losing face.


strategy #7Evaluate the Competition



create a price-value matrix

know where you stand with respect to your competitors, and price accordingly.

takeaway: create your own price-value matrix to determine where you are or want to be based on your aforementioned goals

Make sure you get an unbiased and honest outside opinion when you construct this. Most of us just don’t have the neutrality to do one

of these by ourselves...


recap1. know your big-picture goals

2. price discriminate. Determine URGENCY. NEED. SCARCITY.

3. know your profitable clients. Cater to them.

4. set price when the need is greatest

5. consider changing payment structure or options.

6. train sales properly, consider incentives for profitability

7. determine where you are on the Price-Value matrix




7 signs you need to consider a new pricing strategy

1. excess capacity - downtime

2. too little capacity - bottlenecks

3. not getting the business you want

4. you use cost exclusively to set price

5. you charge the same thing no matter the client

6. your salespeople are the only ones talking price

7. you’re discounting a lot




resources

• Harvard Business School Working Knowledge Archive: How to Think About Pricing Strategies in a Downturn - Your Best Downturn Strategy? Think Twice About Price Cuts. http://hbswk.hbs.edu/archive/2884.html

• The 2001 Professional’s Guide to Value Pricing, by Ronald J. Baker (http://www.MivistaConsulting.com/articles/michelle_recommends/)

• Tim Williams, Ignition Consulting, Take a Stand for Your Brand, and several online free articles: http://www.IgnitionGroup.com

• Pay For Performance Pricing: http://www.mivistaconsulting.com/articles/pay-for-performance_pricing.html



http://hbswk.hbs.edu/archive/2884.html

http://hbswk.hbs.edu/archive/2884.html

http://www.MivistaConsulting.com/articles/michelle_recommends/

http://www.MivistaConsulting.com/articles/michelle_recommends/

http://www.ignitionconsulting.com

http://www.ignitionconsulting.com

http://www.mivistaconsulting.com/articles/pay-for-performance_pricing.html





Michelle Villalobos

Mivista Success Skills Training, Inc.

[email protected]

www.MivistaInc.com

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