Beyond Discounts: 5 Smarter Pricing Strategies to Maximize Profit & Protect Your Brand (Even When Buyers Demand Lower Prices)
Pricing Pointers, Issue #12
1 - Don’t assume cutting your prices will increase your sales and profits
A lower price reduces your contribution margin, meaning that you may have to sell a lot more to profit from a price cut.
The lower your product’s contribution margin, the more your unit sales must increase to earn at least as much as before.
For example, suppose you cut your price by 5%. Scenario 1: If your contribution margin is 50%, you need a 11% increase in unit sales to earn just as much profit as before. Scenario 2: If your contribution margin is 25%, you need a 25% increase in unit sales.
Keep in mind your competitors may respond by cutting their prices also. A price cut is one of the easiest moves for your rivals to match. The result could be everyone is selling no more than before, but now at a lower price.
2 - Is price cutting your only option? Think again
Many businesses default to discounts when facing competition. However, you have smarter, more profitable options.
There are two major drawbacks to cutting your price. First, it’s hard to raise it later. Second, it cheapens the image of your product.
Remember, price is only one aspect of your offer. You don’t have to cut your price to improve it. Give them more for their money instead.
Increase the quantity, improve the quality, or add a complementary product. Explore faster delivery or more flexible payment plans.
3 - Mixed bundling is a way to give a quantity discount when buyers typically purchase just one
For many products, buyers purchase just one unit. For example, It’s the rare consumer who walks into an appliance store and says “I want two clothes washing machines.”
For these types of products, a quantity discount won’t increase your sales. But mixed bundling can increase sales by offering a discount on a second, different item.
Mixed bundling is the practice of selling two (or more) items separately at full price or together for a single, discounted price.
For example, an appliance retailer offers a washing machine for $699 and a clothes dryer for $578 if purchased separately.
However, suppose buyers can purchase the washer and dryer together for $1,149. That’s a price savings of $128.
Here’s the cool thing! The buyer of the washer thinks she’s getting a discount on buying a dryer. And the buyer of the dryer thinks he's getting a discount on a washer.
4 - A simple trick to attract price-sensitive buyers: without cutting prices for everyone
Effort-based discounts (e.g., coupons, rebates, waiting) are a form of differential pricing where buyers sort themselves by their willingness to invest time and effort to get a lower price.
This tactic works because those who place a lower value on their time are typically more price-sensitive. For them, the inconvenience (e.g., clipping coupons, mailing forms, or waiting in line) is a worthwhile investment for a reduced price.
It minimizes "cannibalization" by ensuring that less price-sensitive customers, who highly value their time, are unlikely to bother with the effort. This allows you to maintain full-price sales for that segment.
5 - No sale without cutting your price? Try this approach
When a buyer asks for a lower price, offer them a less expensive version of your product or service instead.
When you discount your price, you train your customers to expect a discount every time they do business with you.
Other customers may demand a similar discount when they find out you've given someone else a break on price.
By offering different versions at different price points, you're forcing your customers to trade off price and value.