240-The Holiday Season: The Most Creative Pricing Season We Have

Watch the deals that retailers offer during the Christmas season. They find ever more creative ways to get us into their stores and shopping. I want to note a couple of these creative ways.

But first a bit of context. A price has four typical components: 1)the package of benefits the product or service offers, 2) the list price, 3) the basis of charge for the product (i.e. the unit in the dollars per unit in the list price) and, usually, some 4) optional components of price. The optional components of price are helpful to companies who want to change the effective pricing for a particular customer or segment. The retailers in this note are making creative use of some optional components of price.

The first example is the use of price to get people into stores by offering them a particular deal. Sometimes these are simply Loss Leader products, for example, offering very inexpensive bread and milk sold at the back of a grocery store in order to get a shopper in to buy other products at the store. So, one optional component of price is a Loss Leader product. Here is a creative twist. Offer the Loss Leader product in a “flash sale” with a very limited time frame. For example:

• Penney’s ran flash sales called “7 Hour Steals” offering towels for $3.69 that normally sell for $7.99 and 70% off gold and sterling silver jewelry.

• Banana Republic stores offered 40% off full-priced sweaters from 11 a.m. to 2 p.m.

Other optional components of price encourage multiple purchases. One way to do this is to offer discounts on all sales above a given purchase price. For example, a company might offer 20% off for all purchases above $50. A more creative, and aggressive, approach is to offer discounts that increase with the money spent. For example, a company might offer 20% off on a $50 purchase, an additional 20% off all purchases from $50 to $75 and a final 20% off on all purchases over $75. According to consumer research, many consumers would assume that they get a total of 60% off on all purchases over $75 with this offer. In fact, they get about 49% off on their total purchases. Still, a compelling deal.

In our study of several thousand pricing initiatives, we have found many of these optional components of price. They enable a company to improve its market share and margins in any price environment. These are available at StrategyStreet/Improve/Pricing/Innovation Ideas.

Posted 1/3/11

Update:

The optional components of price are powerful tools you can use both to reduce or to raise prices. We offer many examples of each of the components below. You can use these examples to brainstorm improvements for your own company.

Reduce price.  Here are the commonly used optional components of price in order to reduce a price for a customer or customer segment:

-provide a rebate

-offer a coupon

-extend a discount in kind

-waive fees or make a payment

-offer a trade-in allowance

-provide a sample of the product

-provide a free or heavily discounted product from a third party

-provide a separate free or heavily discounted company product

-set a price cap

-extend a payment term

-offer a put or a call

-provide a meet or release agreement

-set up performance payment.

For many examples of each of these optional components, see HERE.

Raise price.  Optional components of price are equally effective in raising prices for selected customers or segments. Here are the commonly used optional components used to raise price:

– add an extra fee

– shorten the normal payment term

– set or raise minimum purchase requirements

– eliminate forms of discount

– set limits on the product usage

For many examples of each of these components of price, see HERE.

11/22

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