Pragmatic Marketing’s October highlighted activity is personas. So how does this relate to pricing? In many ways, but let’s split this topic in two’s, buyer and user personas. Recall that in general, we build products to solve problems for user personas and we market our products to buyer personas.
But before we start pricing for personas, remember the general rule, Charge what our customers are willing to pay.
User Personas and Pricing – Different user personas have different willingnesses to pay. This is logical because different users have different problems they are solving which drives a different value proposition.
For instance, imagine we are selling lawn care products to two different personas, a homeowner and the greenskeeper of a high end country club. The expectations of results are very different. The homeowner’s problem is to keep the lawn green enough that the neighbors don’t complain. The greenskeeper on the other hand needs the lawn to look perfect so new members will join and current members will not go find a better place. Two different user personas, two very different problems, two extremely different willingnesses to pay.
The solution to charging homeowners and greenskeepers two different prices is usually to create two different products. This is one reason why in many industries we see the “handyman” versions and the “pro” versions of products.
Buyer Personas and Pricing – To price well for buyers, we must understand their buying process. Different buyers use different processes. Although it is very difficult to generalize on this topic, here is one of my favorite examples.
Imagine buyers at two different companies, a huge multinational conglomerate and a small company. If you were to ask which one is more price sensitive, the answer may surprise you. The huge company hires purchasing agents that are brutal negotiators. They get the best deals possible on everything that matters. Note the last three words, “everything that matters”. For large volumes and large dollar values, the huge company is very price sensitive and will undoubtedly get the best price possible.
However, for small volumes, huge companies are horrible at negotiating and finding the best deals. It’s barely worth their time. Yet, for small volumes, our smaller company cares a lot about the price, because they only buy in small volumes. The small company will shop around for the best price, stock up on cheap inventory, anything they can to keep their costs lower.
When you understand the buying process each buyer persona uses, you have the opportunity to capture higher prices. In PragmaticPricing history you will find many posts on how price segmentation works. These are the techniques we need to employ to charge different buyers different prices.
To summarize, knowing your user and buyer personas will effect your pricing decisions. We frequently create different products (at different prices) for different user personas and we should use price segmentation techniques to charge different buyer personas different prices.
Photo by marketing facts
A friend and fellow pricing expert, Jon Manning, posted this article, “Comedy club charges customers per laugh” in the Pricing Propheteers LinkedIn group. If you click on the link and scroll to the bottom of the article, you’ll see a video that describes it well.
To summarize, they hooked up cameras to the seat back in front of each patron and used that camera to count laughs based on facial expressions. The show was free to enter, but entrants were charged approximately 30 cents per laugh up to a maximum of 24 Euros.
Imagine you run a theater company and when you decide how to price it, the most logical choice is to set a price for the seat. After all, it’s common. We see that pricing model in other shows, in movie theaters, in airplanes. We are used to charging and paying by the seat. It’s easy. If you run a theater of course you are going to charge by the seat.
But these guys went way beyond what was obvious and answered the question, what are people really buying? Patrons are buying the entertainment, not the seat. That’s what they charged for, the entertainment, not the seat.
What about your company? Most companies do what is obvious. Charge for the product. Charge by the seat (in software). These are obvious and it’s what your customer expects. But what if you could charge directly for the value?
What are your customers really buying? Do they really buy the right to use your product or software? Probably not. They are probably buying some function, some result. Their value comes from that function or result, not from the right to use your product.
Now the hard question: Can you find a way to price your product based on the value your customers receive instead of simply taking the easy way? Think hard. Be creative. If a theater company can charge by the laugh, surely you can come up with something too.
A frequent question during our Price class is “How should we compensate our sales force?”
Salespeople have a huge influence on our achieved margin. They are the front line in any negotiations. They are the ones who communicate our value to the customer. They set the customer expectations on what price they should be paying.
Since they have so much influence, how do we influence them to do the right thing when it comes to getting the highest price?
You may have heard the phrase, “Salespeople are coin operated” meaning they do what they are paid to do. (Nothing against sales people because I think we all do this.) However, salespeople usually make commission on the sales they make. The most common type of commission is a percentage of revenue.
Unfortunately, when we use a percentage of revenue as their compensation plan, it motivates them to close more deals quickly, even at lower prices. That’s not what we want. We like the more deals quickly part, just not at lower prices.
Here is a good explanation by the Freakonomics authors, Steven Levitt and Stephen Dubner on why real estate agents don’t try to get the best price for your house. The same is true for most sales situations. It’s hard work to get the last few dollars in a sale, and it’s just not worth the salespersons time to go get them.
How can we structure a compensation plan that will go get those last few dollars? First, please know that compensation is a huge topic which we are not exhaustively covering here. Instead, we only want to focus on the price piece.
One idea would be to compensate sales as a percentage of the margin achieved. That way when the company makes more profit, so does the salesperson. Sales would have a decent percentage of the profits so they have more incentives to get higher prices. The big downside to this is most companies don’t want to share their costs with their salespeople. When sales knows the costs to build a product, it often drives prices down, not up. Sales then knows how low they can go and the company will still accept the deal.
A better solution is to determine a target price for each sales situation. What price should a salesperson be able to achieve? This target price is often a function of the industry, geographic territory, type of customer, size of the deal and more. You can determine this target price by what customers have historically paid.
Once you have a target price, you can then offer incentives based on how much above or below the target price the salesperson closed the deal at. For example, you might have a commission structure that looks something like this:
- 10% for any deal at or above 10% over target price
- 8% for any deal at or above 5% over target price
- 5% for any deal at or above target price
- 3$ for any deal at or above 5% below target price
- 1% for any other deal we accept
With a compensation plan that looks like this, small changes in realized price can make a big difference in the salesperson’s commission. Hence, the incentives are more aligned for sales to try to get the highest price possible.
Sales compensation is a big topic, but the lesson here is important. If we want to get that last 1% of the price, we need to find ways to incentivize our salesforce to try harder. This technique does that.
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Last week I attended the Train the Trainer class put on by Ed Tate and Darren LaCroix of the World Champions Edge. Great class. There is always something new to learn, but that’s not the point of this blog.
They had arranged a special rate of only $49 a night for a room at the Palms Resort. What a great price. As a very frequent traveler, I haven’t paid $49 in years. And the Palms is a nice resort. My room was as spacious and clean as any 4 star hotel.
When I checked in the agent told me they had a $25 resort fee. Wow! A 50% up charge as a fee! The below is from the Palms website www.palms.com/faqs
The resort fee is a daily fee of $25.00 (plus applicable tax) that is charged at the end of your stay. This is a standard practice at the majority of the hotels in Las Vegas, we promise.
The resort fee includes:
Complimentary In-Room High speed internet service (faster rates available for additional fee)
Complimentary access to Palms Cardio Center & Palms Place Fitness Center
Shuttle Service to and from the Forum Shops 11AM-8PM Daily [please note hours may adjust some]
Daily Newspaper (available at select locations)
Unlimited local and toll-free calls
Airline Boarding Pass printing
Copies and faxes at the Front Desk and Concierge (does not include color and large print jobs)
Many of us at the event joked that we paid $25 for “Complementary WiFi.”
I’m not complaining. $74 a night is still a great price, but notice how well the Palms understands their customers decisions. The room rate is critical in that decision so the Palms works hard to keep that as low as possible. Then, once they have you on location, they try to make as much as possible, not only from their “resort fee” but also from food, gambling, and more.
I ate in the resort the entire time, because it was convenient and there weren’t any restaurants within easy walking distance. Their restaurants were a little pricey, but not ridiculous. My breakfasts were about $15, one lunch was about the same, and one dinner was well over $100 at their steak place. The food was good so again I’m not complaining. Just pointing out their pricing strategy.
Don’t forget the gambling. Of course they want you to gamble. I played a little video poker. Won $6 the first night and lost $20 the second, so they got another $14 from me.
There are many other ways they can get your money that I didn’t experience. For example, they had a spa, a shopping area and even a fortune teller.
The key lesson here though, the Palms Resort clearly priced the room at a very low price to attract customers. The room rate was the factor that helped people choose the Palms over other locations. Then, once their customers check in, they find other ways to earn profit.
You should be thinking the exact same way. What product or service do your customers use to decide whether or not to engage with you? Consider pricing that product aggressively to attract more customers. Of course, that only makes sense if you have add-on products and services where you can make the profit you give up from your aggressive pricing tactics. If you don’t have additional means to make profit from your customers, then it’s very difficult to be aggressive with the price on the original product.
You may be thinking this is deceptive and you don’t want to do it. What happens to you if your competitors implement this strategy? If they have the ability to charge very low prices for the decision product, how will you compete? Maybe the owner of the Palms Resort doesn’t really like doing business this way, but the Rio and the Orleans resorts, both close by, use this pricing strategy. The Palms doesn’t really have a choice if they want to stay in business.
Think hard about how you can use a complementary pricing strategy.
Photo complements of Wikipedia