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In the 1950s, a toothpaste company in America was struggling to improve sales. Nothing seemed to click. Wondering what to do, they ran a contest seeking ideas. The winning idea was, “Make the hole bigger”. Widening the nozzle of the toothpaste tube by 1 millimetre actually did it. More toothpaste being squeezed each time meant that overall toothpaste consumption went up by 40%. Sales began to soar. This may be one way to boost sales, though the ethics are questionable. But another way is by having a sound pricing strategy.
Often, one buys a product or service if the price is right. Unless the item is an essential or there is a short supply, pricing determines how much revenue a business makes. But sometimes it’s difficult to figure out what pricing strategy works. This is a challenge especially for ventures that are not sure which industry segment they fit into.
There are several ways one can explore to get the pricing right. Cross selling of different products or services to existing customers can prove beneficial in raising the top line.
Often, one buys a product or service if the price is right. Unless the item is an essential or there is a short supply, pricing determines how much revenue a business makes. But sometimes it’s difficult to figure out what pricing strategy works.
Fast food restaurants use a good trick. They have different serving sizes to meet various price points. For example, pizza is sold in small, medium and large sizes. The quantity of ingredients and the effort involved in making them determines the price. Soft drinks at fast food places too are served in small, medium or large cups.
As we saw in the toothpaste example, price is not the only factor. But whatever the strategy, compromising on ethics could backfire. When the toothpaste company sneakily made users consume more, they could have felt cheated and stopped purchasing the product altogether. However, business is all about risks. And at the end of the day the customer has a choice. So, play your cards wisely if you are considering taking this path.
I recently had an experience on similar lines while doing some online shopping. I wanted to buy a case to keep my clothes in and went looking online. I noticed an item that I felt met my needs. However, I observed something about the pricing.
Fast food restaurants use a good trick. They have different serving sizes to meet various price points. For example, pizza is sold in small, medium and large sizes.
A pack of 3 cost Rs 189 (Rs 63 each) whereas a pack of 6 cost Rs 899 (Rs 75 per unit). Why should the price per unit vary for higher quantity? If at all, it should be the other way, I thought.
• Is this by mistake?
• Why aren’t the economies of scale working?
• What could be driving this pricing?
But soon I realised there was a possibility that this could be intentional. Because
• Many people do not check the pricing in detail and fail to do the math.
• The seller could be playing on the psychology of the buyer (because usually per unit cost is lower for higher quantities)
I discussed this case with a few peers. While we do not know the truth behind this pricing, most people felt that the seller was trying to cheat buyers. Others thought it was fair game on the principle of caveat emptor (buyer beware).
What are some common mistakes business make while pricing their products?
- Overpricing or under-pricing products and services, or not considering the affordability of the customer segment.
- Not putting a monetary value on the time and effort involved in delivery.
- Forgetting to include the fixed cost component in the per-unit price.
- Not including specific taxes or project specific costs in the price per unit.
- Not cross selling to existing base of customers.
(This article is an edited extract from ‘Where’s The Moolah?’, a book about financial growth hacks for business profitability.)
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