Use Pricing Strategy to Build Your Business in ValueChia-Li Chien, Ph.D., CFP®, PMP®, CPBC
Chia-Li Chien | Mar. 07, 2012
Determine the best strategy for your business, because profits matter!
What is the most innovative company in the world? My answer would be “Apple!” Most of Apple’s competitors basically just follow Apple’s lead in consumer electronic and technology trends. This allows Apple to set future trends—which means they continue to keep a majority share of the market. Apple does a lot more than make products. Their continued product innovation keeps their buyers loyal and interested.
In the chart above, you’ll find “Quality” on the Y-axis and “Convenience” on the X-axis. Where do you see Apple in this chart—Box A, B, C or D? If you answered Box A or on the top zone of “Quality” axis, you’re correct! This allows Apple not only to be the trendsetter for their competition (such as Android technology) but also allows Apple to set the PRICE in the market.
When was the last time you went into a Walmart? Where do you see Walmart in this chart—Box A, B, C or D? If you answered Box D or the far right zone of the “Convenience” axis, you’re correct! Walmart is classic example for profit on volume—very large volume. They compete in both convenience and price.
- Reference: Trade-off : why some things catch on, and others don’t by Kevin Maney
Where do you see your business in this chart? Is it in box A, B, C or D? Wherever you place your business, please don’t find it in Box B or Box C. Why? Because in Box B, high quality and high convenience really don’t mix well. Are you competing in price or not? Box C, low convenience and low quality—who wants to be there?
I’ve worked with many clients over the years, and have noticed that entrepreneurs play in two pricing zones. One is to declare a price war with competitors. The other is to name your price in a narrow niche with a subculture.
If you enter a price war, then you are in competition for “convenience” (or Box D.) Make it convenient to buy from you—but you must be prepared with volume if you want to protect your profit margin. If you are in the “name your price zone” (Box A), then you should be focused on providing the quality, aura and experience your buyers want. No matter which pricing zone you’re currently in, it comes down to how much profit margin you, as the business owner, want to protect.
The bottom line is that buyers, customers and/or clients are armed with the knowledge of where to get the goods and services they want, regardless of the economic condition. People are really smart and savvy when it comes to recognizing the right product for them.
So whether you play in Box A: Quality or Box D :Convenience, do you see how your price is quickly determined depending on which axis you play in? In the other words, you either want to be the Apple of your industry or the Walmart of your industry. The choice is yours.
<=====Case Study P1=====>
Ann (not her real name) has owned a heavy cutting machinery shop (not her real product) since 2001. She typically sells forty pieces of machinery a year, and the average price of the machine is $100,000. To compete in her industry, she wants the sales process to sell 40 the same as 400. She implemented a process and automated a system to handle this volume. In addition, she capitalized her business process by implementing a franchise distribution channel. Three years after implementing the systems and distribution channels, she now sells on average 5,000 pieces of machinery a year. Which Box (A or D) do you think she plays in?
<=====End Case Study P1====>
The Role of Your Business Model
Even if you’re clear on which zone you play in, before you jump to the question of “how should I price my products (include services)?”, let’s take a look at one big picture—your business model map.
If I were to ask, “What does your business do?” you could probably answer in thirty seconds. However, if I were to ask, “What is your business model?” you might pause a while before coming up with an answer. It’s not just you. A lot of business owners can’t effectively answer this question.
There are three components in a business model:
1) Your business purpose
2) A list of your core competencies
3) The profit formula
Most businesses have misaligned their business model, so they don’t have a sustainable economic engine regardless which price zone they play in.
The first component in a business model is your business purpose. Business purpose has two parts:
1) Value Propositions (why they buy from you)
2) Customer Segments (whom you sell to)
Leverage a Customer Proposition
“Price affects positioning and the kind of customers you attract,” says author Dan S. Kennedy in his book No B.S. Price Strategy. This book describes the concept of five kinds of propositions and how to incorporate them into your business:
1) Unique Selling Proposition (USP)
• Why should your prospect buy from you vs. any and every other option available?
• Why should your prospect buy from you you regardless of price, be unconcerned about price, and never consider comparison shopping based on price?
2) Unique Value Proposition (UVP)
• The value of the benefits to the user. For example, low price, design, brand, new, performance, customization or just “getting the job done.”
• Money to be made or saved through ownership of the product (include service). For example: cost reduction, risk reduction.
3) Irresistible Offer. What do your customers find irresistible to buy from you?
4) Unique Safety Proposition (USP) for example “money back guarantee.”
5) Unique Experience Proposition (UEP) for example coffee at Starbucks vs. coffee at A gas station. iPhone vs. LG smart phone, etc.
- Reference: No B.S. Price Strategy by Dan S. Kennedy
The effective use of these five propositions can boost conversion ratio and ultimately result in more revenue for your business.
<=====Case Study P2====>
To attract prospects or distributors (franchisees), Ann focuses on “speed of response.” This means her team can close a deal in a quarter of the time of her competitors. She offers a double your money back guarantee if her machine doesn’t demonstrate a positive ROI for the buyer within a one-year period. Given this information, which of the five proposition(s) above would you say she used?
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When tackling the right pricing strategy for your business, you must consider leveraging four types of revenue in your business in order to create business value or wealth for you, the owner. There are four types of revenue:
- New Business – This is the typical revenue generated by your business. For example, if you build houses for your clients, that is your regular revenue business. If you also sell pool products, those products create new business revenue.
- Repeat Business – Don’t we all love repeat business from the same clients? We spend so much time and money chasing new clients, but retaining them is key. Building a loyal customer base gives you more time and money to streamline and improve your customer services, which improves your customer loyalty … which gives you more … well, you get the picture.
- Residual Income – If you sell auto insurance, your policyholders pay their premiums each year. When they renew, you receive the residual income without really working too hard, except to maintain that relationship. That is residual income.
- Non-Residual Income – If you have a virtual sales force, chances are you will have non-residual income. For example, if you’re in a multitier marketing business of let’s say, vitamins, when your downstream salespeople sell products, you get the non-residual income. But to ensure they continue to sell on your behalf, you have to maintain the relationship and continue to offer sales support to them. But you don’t actually have to sell the products. Franchise businesses and software licensing are similar in this way as well.
- Reference: Show Me The Money: Run Your Business like a Prosperous Investor by Chia-Li Chien.
<=====Case Study P3====>
When Ann structured her revenue streams, in addition just selling to one customer at a time, she created a small franchised annual loyalty fee. Now she has a profit sharing model in place with her franchisees. She also gives every new customer who buys a piece of her machinery a 10% discount on any parts. So, what types of revenue streams did Ann use in her business model?
<=====End Case Study P3====>
At this point we’ve been through the things that impact pricing strategy and eventually attract the right type of customer to you. Remember the three components:
- Quality vs. convenience zone
- Five types of selling propositions within your business model/business purpose
- Four types of revenue to incorporate into your pricing strategy
How many tools from this article can you use today? Join us for further discussion by signing up for our ninety-minute webinar that will help you increase revenue and your business value.