Model #2 Top Pricing
The opposite strategy to penetration is top pricing. Here
the price is deliberately set high in order to reap large profit margins. This
is usually at the cost of failing to capture a large number of customers.
The most valid reason to use this price strategy? You are
launching a hard good that is radically new and significantly better than the
competition, and you have strong patent protection. The high price attracts and
does not deter “pioneers.” This strategy helps to recoup your capital costs.
Who, or what, are... pioneers?
They are people who want something that nobody else has yet.
Pioneers are not afraid to be “first” or “unique” -- actually, it’s a badge of
honor to be “first one on the block.” They are not particularly concerned about
price. Often, to their way of thinking, high price indicates quality.
Such must-have, open-wallet customers are your best friends.
If you can equate uniqueness and quality with your price statement, substantial
profit will surely follow. In the short term, you receive a good income from
the high-priced product.
But...
Long term, this comes at the cost of establishing a powerful
position in the market by dominating market share (i.e., percentage of the
customers). So don’t stick with this strategy forever.
High prices tend to attract competitors. They see your big,
fat profit margins. They know they can offer a similar product, at a much lower
price than you are doing, and still take home a fair penny.
High price tactics are also known as “selling off market
share.” You gain incomem from those high profit margins, in exchange for having
a smaller and smaller percentage of the market buying your product. There are
other valid reasons for top pricing, besides “pioneer pricing.” For example...
Luxury pricing… You make a top quality product, among the
very best of its kind on the market. You are able to create a certain “luxury
cachet,” building a high perceived value. You accept smaller unit-sales in
return for higher margin. To thrive long term, of course, you must continue to
offer a “best of breed” product and maintain the luxury image.
----------
Pricing Isn't All Logic. Discover The Hidden Pricing Tactics You Can Use To Increase Profits!
----------
Pricing a service… If you offer professional services, you
may find it preferable to cater to a small number of high-paying clients. Of
course, you have to be able to “walk the walk.” A diametrically opposite
strategy for your same service would be to offer a “cookie-cutter” service to
“the mass market” at a much lower price.
Offline example -- Apple sold the Macintosh computer (with
its unique-at-the-time, user-friendly graphic interface) for years, at prices
that were $1,000-$1,500 above that of the PC clones. In the long run, though,
their lowered sales volume allowed IBM and its clones to become the industry
standard. Mac almost died as a result.
Offline example -- The DVD. Pioneers covered the R&D
costs and delivered fat profits. Over the years, the DVD became fiercely
competitive and prices evaporated. Today, it’s a commodity.
Offline example -- Mercedes Benz is an excellent example of
luxury pricing. Unlike the VCR, Mercedes can sustain its top pricing model for
as long as it delivers a superb automobile and maintains the image.
Online example -- High-end design companies capture a niche
market based on their uniqueness which can’t be copied. These companies usually
can only handle a limited number of clients at a time. Customers are willing to
pay a higher price for this selective service.
Before you adopt this strategy, remember that market
penetration (i.e., unit sales) will be hurt. Does that make a difference to
you? If so, then decide when you will switch strategies.
Be careful, though. You have to carefully watch the public
relations side of this. If people hate your company for taking advantage of
them, your death will be quick and painful. One thing Macintosh always did
right -- their users loved (and still do!) the Mac. They never felt gypped,
even though they could have bought comparable computing power for far less
money.
It applies to services, too…
Professionals and consultants often don’t give enough
thought to the rationale behind how they price their services. Basic
goal-setting and strategizing up-front will clarify matters. For example...
Pretend that you are in the price consulting business. One
of your services sets up pricing surveys for companies.
Let’s examine two scenarios...
Scenario #1, Top pricing -- you don’t want to grow a huge
consulting business -- you just want to support yourself and shoot a few games
of pool the rest of the week. So you charge a higher price, $500. The last
thing you want to do is to have too many clients, which means working more
hours per week and making the same (or less) money. Instead of shooting pool,
you’ll be... behind the 8-ball!
Scenario #2, Penetration -- you want to use this pricing
service as your “foot in the door” for your higher-priced services. You don’t
mind breaking-even or possibly losing some money in return for more customers.
Each customer has a lifetime value, in terms of future business, referrals,
etc. So you may decide to offer this service for $100 as an “introductory
offer.”
No comments:
Post a Comment