Types of Pricing ProgramsTomChilders
Let’s start with the fact that pricing is really all about supporting your marketing strategy. While your strategy involves knowing your market, competition, cost, customers and more, this post will focus on basic types of pricing a contractor can use and how they are intertwined with your marketing strategy.
Strategy usually centers on one of two objectives. Simplified, the first is a primary demand based objective and it says you are trying to get new to the market customers or increase the rate of repurchase from customers. Think of a homeowner with an existing irrigation system who is considering upgrading to smart irrigation components. Your price will need to be justifiable in their mind to invest in the upgrade. They will think about water and money savings as well as more noble reasons, i.e. future generations drinking water. This will determine if they repurchase or not. What about someone considering a backyard renovation? Same process will occur as they mentally justify the price. If this sounds like elasticity, it is. Elasticity measures change in demand as you change prices. It says as prices go up, revenues go down and as prices go down, revenues go up. Inelastic says the opposite. Prices up, revenue up. Prices down, revenues down.
The second objective, again simplified, is a selective demand strategy which says the purchase is happening but price is being used in the selection process. Think of a builder who is definitely landscaping but getting bids. This pricing strategy is common where retention and acquisition are sought.
OK, so enough of the academic stuff. Let’s talk pricing programs and approaches.
Once you know your marketing objectives, you have three (3) basic pricing program approaches. The first is penetration pricing which uses low pricing as a way to stimulate demand. This applies to both primary and selective demand but requires demand to be elastic to be effective. In other words, at lower prices, more is sold and the market grows. If the market is not elastic, this method only makes sense if the competition will not lower prices. If they do, what can ensue is a price war. Same volumes being sold at lower prices. No one wins! Yes, this happens a lot in our industry!
The second approach is parity pricing which says you price at or near competition. It attempts to downplay the pricing role. This is really what a “meet the competition” claim is attempting to do. It says I will meet your price competitor so might as well price for profit. In an industry with inelastic demand, it is good way to mitigate price wars and one that many hope will grow in our industry.
Third and final is premium pricing which uses prices above competitive levels. It assumes company demand is inelastic and it typically relies on differentiation to support that. It offers superior quality, features, etc. and protects itself from price wars. Yes, we have a few in our industry but probably room for a lot more. This is where creating and investing in a brand’s value proposition can payoff. Competing on something other than price can be a real profit and cash flow enhancing strategy.
While this post focuses on the three pricing approaches, here are two closing thoughts if you aspire to use parity or premium pricing. Visit page eight (8) of the Houzz Survey and look at the budgets and compare the two columns. Budgets equal price and people are spending serious money with contractors. Are you targeting the right people and market? If you want to dig in and check on this issue, try this section Narrow Down Your Target Market.
Second and last, in our post on Why Landscape Businesses Fail, the referenced Forbes article, Five Reasons 8 Out Of 10 Businesses Fail, really nails this exact same issue. It states”…the fact many small businesses are not really in touch with customers through deep dialogue, have no real differentiation in the market, failure to communicate clear value propositions in a clear, concise, and compelling fashion, and inability to nail profitable business model with proven revenue streams…” are key reasons for failure. These are the same exact obstacles to getting your price. The article even contains a “Your Solution” complete with ideas and resources on how to fix these issues. So revisit the article, grab a copy of The Cluetrain Manifesto or Value Proposition Canvas, both in the article, and get your price…you deserve it!