Pricing is one of the best ways to drive cash. One of the reasons we get pricing wrong is that we fail to understand that we are selling to people. This is even for those selling business-to-business.
You are not selling to a company but rather to a person selling a person. And one of the things we know is people are not logical; they are psychological.
Another unique thing, particularly among unicorns is that they are more focused on changing prices based on demand than any kind of fixed price.
In the 21st century, the drive is to cut costs, which is a big part of cash control, but your real power is going to be in your intelligence and strategy around pricing.
Dr Robert Cialdini, the godfather of influence, in his book Influence: The Psychology of Persuasion did research targeting restaurants and found out that most restaurants list their wine list from the least expensive to the most expensive wine.
He found out that if a reverse was done on the list, to start with the most expensive wines to the least expensive, this would drive revenue by an average of 26 per cent and most of the cash would go directly to the bottom line since the wines were not changed nor the price.
And then if you anchor that wine list with three or four expensive bottles of wine you will pull revenue up to 250 per cent and a lot of that will go to the bottom line.
As the world is recovering from the pandemic, one way to stabilise prices is to look at the capacities and volume of production.
It’s impossible to be profitable if you are operating overcapacities.
When a company or an industry puts too much product into the marketplace, prices and margins inevitably decline.
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Exceeding demand inevitably affects prices and competition.
To stay ahead in business, give out discounts in kind and not price discounts. Price concessions can be granted as reductions of the nominal price or as discounts in kind. Offering discounts in kind has several advantages, for instance, the nominal price level remains unchanged.
Discount in kind is more advantageous with regard to profit than price discounts and they generate more volume and therefore create jobs.
In addition, a discount in kind is easier to phase out than a direct price discount which normally weakens the list price.
To create a leading brand, you have to attach great importance to price consistency.
If customers demand a discount, which they do regularly, you may consider offering an additional piece of product for free. In most cases, the customer is happy with this and does not ask for further discounts.
Another way of deepening your bottom line is to deploy non-linear pricing and price bundling.
With non-linear pricing, the price per unit is not constant but decreases with the number of units bought.
The simplest form of non-linear pricing is the volume discount, for example, “buy three for the price of two” or “buy one, get one free”.
The main difference between this method and a simple price reduction is that the customer only gets the lower price if he or she buys more.
However, as an entrepreneur you should exercise caution concerning the profit impact, you want to move volume and at the same time not ruin profits margins.
While non-linear pricing is restricted to one product, price bundling is for several products. A customer who buys a predefined bundle or package pays a bundle price that is noticeably lower than the sum of the individual product prices.
Products bundling allows the seller to make price concessions that would be disadvantageous for individual products. The rationale for bundling is to transfer willingness-to-pay for a product to the bundle.
Well-known cases of price bundling are for example the KFC bundling for menus and software application sellers such as Microsoft’s office suite, among others.
As an entrepreneur, you should be in a position to defend your prices tooth and nail as put by Hermann Simon in the book, Beat the Crisis.
The are several ways to fight price erosion such as negotiation mastery for prices, and deeper knowledge of the customer’s value chain and business.
Another way to add to your bottom line is to increase prices that are transparent to a customer. A selective price increase is possible when you simplify your pricing systems and are transparent to customers on which lines of prices are increasing.
For instance, if you take a bank loan, the price list consists of many charges that a customer may not be aware of. Typically, a customer focuses on and remembers only a few prices.
Differentiate your product or service and apply selective price increases. Here you could create categories such as the good, the best client will pay a higher price for the best option.
Another way to stay profitable is to ensure you or someone in your business is looking at the cash position daily. By seeing what is coming in and coming out every single day, you will have a gut feeling about how your business is going.
Get your invoices out on time and make sure that the invoice is easy to read, this is bound to improve your cash conversion cycle and get more cash in out of your receivables
Lastly, marketing is key in driving revenue, identifying which marketing route to employ, for example, digital marketing that allows you to buy internet marketing traffic for example on Facebook and Instagram and convert traffic into sales.
You may start with one marketing plan that may evolve.
It’s possible when you are starting not to be aware of the evolution of your marketing plan.
What is needed is to be clear on which approach you are taking, for example using a sales team, internet marketing or advertisement in media.
Establishing a marketing rhythm is bound to expand your sales and grow your business.