Guest blog post by Ginny Wholley
A successful strategy meets company’s goals and aligns customer’s needs. However, there is never one company goal or one customer need.
Companies often focus on the ubiquitous goal of increasing profitability. This is a worthy goal, but; it requires actionable objectives to be achievable. Start with top level goals and refine them into action based objectives. Goals are dynamic and vary with the season and life cycle of a business, therefore; successful pricing strategies will too.
For example: Woo Outfitters, a family owned sporting goods store often finds at the end of a season they have a lot of inventory left over and need to take steep discounts, eroding profitability. They also find themselves short on cash reserves and need to borrow money to support operations in the following season.
Woo desires to increase overall profitability and minimize cash tied up in prior season inventory. They set a specific objective of identifying slow moving merchandise by mid-season with enough time to take action before the season ends.
Formulating Successful Pricing Strategies
In July, Woo still had a lot of inventory in seasonal swim wear and gear. They need to move the inventory by the end of August or it would be destined for the clearance rack.
They crafted a mid-season pricing promotion offering a hard to find and popular swim goggle at half price with the purchase of a full priced swim suit. They had a limited supply of the popular goggles, so; they made them available only with the promotion.
When Woo sells the goggles at half price they still cover their cost and sell a much higher margin swim suit. The combined sale contributes significantly more profit than they would receive by selling a full priced goggle and a discounted swim suit.
By aligning their business goals with their customer’s desires they could sell the inventory at good margin and avoid costly borrowing.
Understanding the Differences in Customers
Many companies have a well-defined target market. However, there are often many differences in what customers’ values within a target market. Understanding those differences is essential.
Let’s use A&T Accounting Associates, as an example. A&T targets small businesses needing accounting and tax services in the Boston area that have sales between $1 and $5 million annually. Historically they priced their services based on the client’s legal entity and number of forms they needed to complete. There are two partners, Alex and Tess; both work seven days a week during tax season. Their goal is to increase the profitability of their tax service and work fewer hours.
A&T reviewed their customer base and found their clients fit into three categories.
Customers who purchased:
- Accounting and tax services (full service)
- Accounting services only
- Tax service only
Alex and Tess quickly identified that the clients who used both their accounting and tax services were the most profitable. Since they did the accounting work they knew it was current and accurate. At the end of the year they would simply transfer the client data into their tax software and do a quick review. It did not take long, so; it was highly profitable.
The clients who only used their tax service could be broken down further:
- Clients with electronic files
- Clients with manual files
The clients with electronic files were easier than the manual files because they were able to upload the records into their tax software. However, Alex or Tess still needed to review the records to ensure the accounting was accurate and this required significant time. The clients with manual records were by far the most time consuming in addition they required manual entry into the tax software. Since the pricing structure was the same for all clients both of these groups were less profitable than their full service clients.
The third group only used their accounting service. This group had their taxes done elsewhere. Alex and Tess identified these clients as an opportunity to increase their tax revenues.
Formulating Successful Pricing Strategies
A&T did not want to increase the base price on their tax service because it was competitive in their area. However, they did not want to continue to overwork and lose margin on the inefficient tax clients. They chose to deploy a fencing strategy. Fencing is used to drive behavior creating an obstacle, which a customer is willing to jump over, in order to obtain, the desired service at a desired price. The obstacle is the way of aligning the company’s objectives with the customer’s desires.
They would offer the base price to full service clients only. If a non full service client wanted to receive the competitive base rate they would need to pay a premium fee for the extra services they were going to receive.
The premium fee had two tiers:
- A fee for the professional accounting review of electronic records
- A more substantial fee for the data entry and review of manual records
If they did not want to become a full service customer, they would pay the added fees for the services they valued. If they did not value the service they would leave. The clients who would leave were not likely to be profitable clients anyway.
In order to attract the clients to convert to full service they would offer a free month of accounting services. This promotion would also extend to the clients who currently used their accounting services only, to incent them to add the tax service.
With the new pricing strategy they would be able to increase profitability, and grow their tax business. With the added profit they could hire a bookkeeper and work fewer hours.
Successful pricing strategies are developed by thoroughly understanding the company’s goals and aligning them with the customer’s desires.
This guest blog post comes to us from Ginny Wholley of Success Pricing. Ginny is a trainer and advisor and works with early stage and established companies. She is specialized in the development of successful operating structures to increase profitability and shareholder value. We had the pleasure to host a pricing workshop with Ginny where she shared her wisdom with us.