Great pricing means determining your customers’ Willingness To Pay (WTP) and setting your price just a little below that. However, once you’ve determined approximately how much you are going to charge, you still need to set an exact price. You need to decide on the dollars and the pennies. Tweaking your price a small amount up or down may have a real effect on your profitability.
What should you consider when making these tweaks? Here are four different ways to make that decision.
Just-below prices (e.g. $2.99 and $399.00) indicate to customers that this is a low price, a great deal. If you are competing on price, choose a just-below price. Round prices (e.g. $5.00 or $3,500.00) signal a high quality product. If you have a high quality product at the high end of the price scale, use a round price. However, if you are creating a custom bid on a project, make it a random ending (e.g. 4,592.87). This looks like a carefully calculated price and seems less subject to negotiation.
After tax prices
Does your retail outlet have long lines? As the lines get longer are you at risk of losing your customers? Many times I’ve walked into a bagel shop in the morning, seen a long line and just walked out. That bagel shop lost my business because of the line. One way to keep the line moving quickly is to not make change. If the prices the bagel store sets are round prices after tax is added, then the cashiers spend less time making change. If you find that making change slows down your time to serve, consider making round after tax prices.
Typically distributors use markup formulas where the percent markup decreases in steps as their cost of the product increases. For example, parts under $1.00 may be marked up 45% while parts over $1.00 are marked up 40%. Here’s an interesting artifact of this behavior. If you have a part and are trying to decide between charging (to your distributor) $0.99 or $1.00, which should you choose? The $0.99 gets marked up 45% so the distributor sells your part for $1.44. The $1.00 part gets marked up 40% resulting in a distributor price of $1.40. Notice when you charge more to your distributor, he charges less. You make more money and appear more competitive in the market. How well do you know the price breaks and markup formulas of your distributors?
If your customers commonly search for products on-line you may want to offer a straddle price (which is always a round price). A straddle price because the price straddles two search ranges. For example, look at a website the presents houses for sale. They usually allow the customers to select a price range. One price range may be $250,000 to $300,000 and the next price range may be $300,000 to $350,000. If your house is priced at $300,000 it shows up in both searches. Your house is seen by more people. Using competitive price information can help you determine what straddle price is optimal.
The majority of your pricing effort should be focused getting the right price level. But once you know the approximate price, think about your price tweaks. Sometimes tweaking prices significantly increases your profitability. It almost always has at least some small effect. Besides, you have to make some decision, just make it with a little more forethought.