Think about it like this.
You’ve got a product that costs you $4 and you’ve got 10 potential customers. Three customers are happy to buy your product at $5, three would buy it at $8, two at $10 and two at $12.
Your first thought is to set the price at $5, that way you will be able to sell to all ten customers. Your revenue will be $50 and your profit $10.
Then you think again. Would it be better to sell the product at $8? You do the maths and discover that at this price you will only sell seven units but will make a profit of $21. That sounds pretty good.
Buoyed by discovering that the $8 price is better, you do the maths on the $10 price. At that price you’ll only sell four units but your profit will be a healthy $24. Wow.
You do the numbers on the $12 price but quickly see that selling just two units isn’t going to be enough, so you settle on the $10 price.
Then, out of curiosity, you calculate how much profit you would make if you could sell all ten units at the price that the individual customers would be happy to pay.
An astonishing $43.
Well that puts the $24 profit you’ll earn on the $10 price into perspective, doesn’t it? But you can’t charge different customers different rates for the same product, can you?
Yes, you can, by using a technique known as setting ‘hurdles’.
Hurdles work by putting an obstacle in the way such that only the price-sensitive customers get to pay the low price.
It’s a clever tactic worth thinking about. Though not easy to implement, here are some popular hurdles, which might give you a little food for thought for your own business.
Have your ever bought an appliance for, let’s say, $150 in cash with a $25 discount if you mail the forms back to the supplier? Did you actually mail the forms back? Most people don’t bother – they’d rather suffer the extra $25 than fill out the forms. But price-sensitive customers do it, and they are rewarded with the lower price.
A variation on the rebate, this time customers have to cut out the coupon and remember to take it to the store. On average, less than 10 per cent of us go to the trouble. But those of us that do receive the lower price.
Price match guarantee
This rewards the tenacious price shopper again. Most of us don’t actually check the competitor pricing because we assume that if there is a price match guarantee in place that the price must be the lowest around. Wrong!
Who has paid more for milk from the corner shop than the supermarket? Yes, same product but some of us are happy to pay for convenience.
Cars and phones: same model but different price depending on when in the product lifecycle you buy it. Price-sensitive customers have to patiently meet the ‘waiting’ hurdle but get their reward. Eventually.
Who’s had a little fun comparing prices of books on Amazon UK and Amazon US? Identical product, different price.
Have you ever booked theatre or plane tickets months in advance only to discover you could have got them at a fraction of the cost if had you waited to buy them on the day?
There are lots of different hurdles and the point is not to necessarily copy any of these but rather to know that if you want to capture the price sensitive customer, you don’t have to lower your price across the board.
Instead, think of some hurdles you can put in place to separate your higher price customers from your lower ones and profit accordingly.
What pricing ‘hurdles’ work for your business?
Read the full ‘Pricing for wimps’ series: