Evaluate Your Pricing Strategy for Improved ROI
Three things happened to me last week that are of interest to the pricing community: First, my DSL bill increased by 10 percent. Second, a restaurant bundled appetizers, dinners and deserts, saving me about 35 percent compared to the normal cost of each item on the menu. Lastly, I forgot to pack socks for a business trip. I visited a nearby Target store, where I purchased three pairs of dress socks for just $5.99.
Each case represents a different pricing strategy. The DSL company raises prices; the restaurant uses a bundling strategy to maintain price integrity while offering customers a significant savings opportunity; and Target simply drives prices down, making it difficult for anybody to compete with it.
Not surprisingly, customers align themselves with one of these three strategies. Once customers firmly plant themselves within a pricing strategy, it's very difficult to move them up the pricing pyramid.
From a return on investment standpoint, it's important to segment customers based on pricing preferences. Once customers are placed into various pricing segments, carefully analyze year-over-year performance to see if they're willing to move from low-price item segments to discount/promo segments to full-price/high-priced items.
In particular, pay attention to customer migration trends during 2006, 2007, 2008 and 2009. As the economy imploded, many companies offered dramatic promotions and significantly discounted various items in attempts to clear inventory and maintain customer retention levels. If customers are continually moved down the pricing pyramid, it'll be increasingly difficult to grow your business via organic demand from high-priced items.
Also compare the habits of existing and acquired customers. If there's a disconnect (e.g., existing customers pay full price, while new customers require promotions or low prices) between the two segments, then there could be long-term business health issues that need to be addressed.
If your business is lucky enough to see customer movement into high-price/full-price segments, you may be witnessing the end of the Great Recession. Good for you! If not, carefully analyze customer preferences to see what impact your pricing strategy is having on your business.