Before you set your exact price, you must decide upon a
pricing model – this strategy should be consistent with your overall business
model. Pricing always needs to accomplish a goal… but that goal is not always
to make the most money, especially when you are selling on the Net.
At the risk of oversimplification, there are two basic
business models, each with its own objective. We’ll very briefly examine a few
less frequently used models afterwards.
OK. Let’s get the ball rolling…
Model #1 Price to Penetrate
Your goal is to penetrate the market fast and deep. In other
words, sell as many of the item as possible. So you set your price low. But how
low?
There’s no point in giving away the store. You want to find
the highest lowest price that maximizes profits and number of units sold.
Use this strategy to establish a powerful position in the
market quickly. Why? The basic goal is to acquire as many customers as quickly
as possible. Taken to an extreme, you might even price at a loss. Why?
For this powerful reason… each customer has a lifetime
value. That value can be hundreds of times greater than some small gain you
might make on the first sale. With this knowledge, you are happy to reduce or
forego that first profit.
Penetration pricing is especially appropriate if you sense
that more competition is on the way. Lock in the people who see your product
being offered now.
Key point... penetration pricing only makes sense if you
keep those customers. There must be a strategy in place to realize that
lifetime value. Here’s a quick primer on how to convert “first-time” to
“life-time.” Feel free to mix and match...
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Pricing Isn't All Logic. Discover The Hidden Pricing Tactics You Can Use To Increase Profits!
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1) Stickiness -- this is customer loyalty with a twist. Once
someone buys from you, does it quickly become too costly for her to switch to a
competitor? (high ‘switching costs’). The costlier it is to switch... the
stickier is your product.
Offline example -- Shaver handles used to be expensive. And
they only fit a certain brand of blade. The cost of switching to another brand
was the cost of buying another expensive handle, so customers had to continue
to buy expensive refills. Hence that old phrase... the “razor-and-blade”
strategy.
Online example -- Consider free Web site hosts like
Geocities. Once you build a site, it becomes tough to move it elsewhere. Also,
the amazingly cheap online brokers are remarkably “sticky” -- it takes a while
to learn a system and set everything up. Once you do that, you don’t want the hassle
of switching.
2) Great product -- an outstanding product guarantees the
customer’s return. You know that she’ll be back!
Offline example -- Shaving companies realized that they
could make much more money, in the long run, from the resale of razor blades
than from the handles. They started to sell the blades at give-away prices. The
customers got used to a good shave with relatively inexpensive blades and just
kept on buying those profitable refills. Hence that old phrase... the
“razor-and-blade” strategy.
Online example -- Good books and good prices are a winning
combo. In the beginning, Amazon.com discounted prices deeply in order to
dominate the book (and now every other category!) market in cyberspace. They
are losing massive amounts of money due to discounting. But they are building a
massive base of customers... lifetime customers, they hope.
3) Freeze-out -- this is a variant of great product. You
offer an “introductory low price” for a product that is a recurring purchase
for a customer. That first sale effectively sticks him to you, not your
competitor... if the quality is there, of course.
Offline example -- Buying a long term membership in one gym,
keeps you from joining another one. You don’t join two gyms. Also, magazines --
most people purchase Time or Newsweek, not both.
Online example -- Web hosting services often offer low
“first year” rates to take customers out of their competition’s hands. Then as
long as they offer good Web hosting, customer stickiness takes over.
What’s the bottom line?
If you want to establish dominance in the market for any
reason, price to penetrate... even if it means you have to accept low or no
profit margins. This pricing technique, referred to as “buying market share,”
comes at a “cost”, no doubt about it. You are foregoing the additional profits
of a higher price to “buy” this larger percentage of the market.
There is one school of thought in marketing that says that
“market share dominance” is the most important factor in the marketplace. The
Net raises the bar to alpine levels...
If you’re pricing high on the Net, you better have a unique
and patented product. Even then, you’re begging for someone to attack you with
vicious price-cutting.
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