When I help a company with their pricing strategy, the typical first day of an engagement entails the client company’s vice president saying with a grin: “So, how are you going to help us raise prices?”
While price-raising opportunities generally do exist, this is a provincial view of the upside of revamping a company’s pricing strategy. The real creativity—and often, the bigger opportunity—involves growing a business by activating dormant customers. Contrary to popular thinking, this often requires offering selective discounts—in other words, lowering prices, not raising them.
Wouldn’t it be nice if you could identify price-sensitive customers and discreetly offer them discounts—without having to lower prices to those who are willing to pay full freight? This is the exact goal of individual negotiation. Car salesmen who inquire where you live and what other cars you are considering aren’t making idle chit-chat; they are sizing you up and seeking clues on the most you are willing to pay. This enables them to charge a range of prices for the same product—higher to those wearing designer clothes compared to those who dress down. (This is why my typical car-buying attire is jeans and a ratty T-shirt.)
Of course, negotiating price with each individual customer is labor intensive, so most products and services can’t viably be sold this way. (Can you imagine an individual price negotiation with every customer for each product in their cart at Wal-Mart?) The good news is there are a variety of retail tactics which can be used to offer carefully targeted discounts.
A key pricing strategy involves using hurdles to identify price sensitive customers. While everyone likes lower prices, hurdles separate those who truly won’t buy without a price break from the posers who don’t really care about price. For example, customers who take time to search for, clip, and redeem coupons are jumping over multiple hurdles to prove they are discount-worthy. Ditto for consumers who fill out rebate forms—their actions prove their price sensitivity.
One way to create a hurdle is to introduce uncertainty into your product. Consider the Rolling Stones’ 2013 U.S. tour. The Stones were able to attract plenty of expense-account types and diehard fans who were willing to pay high ticket prices (as much as $2,000)—just not enough to fill arenas. The challenge the Stones faced is how to lower prices without losing these high-margin sales. The solution: They sold $85 tickets with an unusual condition. Specifically, you wouldn’t find out exactly where the seat was until you entered the arena. The rationale, which made sense, is that fans with a high willingness to pay wouldn’t play this seating-roulette game, and would instead pay full price for certainty.
Uncertainty pricing is a
driver of new sales. Dubious? Discount travel company Priceline is now valued at over $61 billion based on a business model of using uncertainty to sell to the budget-minded. To book a highly discounted hotel room on Priceline.com, you have to select the general area in a city you want to stay in, as well as hotel quality level (1–5 stars), and then submit a non-refundable bid. Only after inputting this information do you find out if your bid is accepted—as well as which hotel you won. The process adds several elements of uncertainty: What hotel will I get? How much should I bid? The reward to consumers for jumping over these hurdles is big savings. Priceline’s pitch to hotels is just as compelling. It offers a distribution channel to discreetly sell excess capacity without having to advertise rock bottom prices. Regular customers continue paying full price and the hotel’s brand is not tarnished. No one is the wiser…except those who win Priceline bids. (Disclosure: I love Priceline and use it often. I travel to New York for business and even though I pass my travel costs on to clients, it bothers me to pay $450 (plus close to 15% in nightly taxes) for a small room in a non-luxury hotel.)
But now an interesting wrinkle has cropped up for Priceline and its rival Hotwire. Popular web sites such as BetterBidding and BiddingforTravel are now providing information to assist bidders in understanding how much to bid, as well as which hotel they’ll likely get. This resolves much of the uncertainty associated with purchasing through Priceline. Are these sites going to harm Priceline’s business model? Not really. Using them takes time and savvy, which is simply another hurdle. I recently tried to explain to a friend how to benefit from insights on these Priceline-information web sites and he quickly became frustrated, claiming he didn’t need the headache. What he was really saying is that he doesn’t value the cost savings enough to jump over the discount hurdle. Counterintuitively, these rival websites may actually boost Priceline’s sales. I, for instance, wouldn’t use Priceline if BetterBidding did not provide guidance on which hotel I’d likely win.
Most companies overlook the upside from high growth discounting. Creating hurdles can draw in new customers without cannibalizing full price sales.
The question managers should ask themselves: What type of uncertainty can you introduce to your company’s products to grow sales?