Tuesday, July 20, 2010

Add More Profit to Every Sale

In an earlier post I said your prices were too low.  But did you realize that every company loses potential profit on every sale?  It’s true.  You could be earning much more income than you are now.  The key is to reduce your price flexibility.


Perceived Value vs Price
A customer who chooses to buy attaches a value to the purchase.  He assumes that buying will benefit him in a manner that offsets the price and justifies the expense.

All rational customers perceive a value exceeding the price or they won't buy.  Whenever the amount a customer would pay is greater than the listed Price, the merchant is forfeiting potential profit.  Each client perceives a different value of a purchase depending on their needs.  And the greater the perceived Value compared to the lesser Price, the more readily a client will choose to buy.

This means a customer is usually willing to pay more for your offering than you charge.  Although it’s illegal to charge different prices to different people for the same thing, there is a way to maximize the profit for each sale. By allowing your customers to self-select additional value during a transaction, they will increase the price until the total is closer to their perceived value.  A savvy marketing department can test price flexibility over several dimensions to build value and profit into every sale.



A transaction has many dimensions of value.  Focusing on the dimension time within a transaction is an excellent way to add unrealized value.  A customer usually anticipates the benefit of a purchase immediately.  Satisfying the time dimension costs the merchant nothing.  But the client perceives it as valuable so the company may credibly assess a surcharge to provide it.

Case Study
One of our clients was an information aggregator that provided specialized data tables to engineers based on a requested set of parameters.  The customer ordered the tables one day and usually received them the next.

When brought in, we surmised our client company was pricing its data services too low.  A little research revealed their competitors typically fulfilled data orders within four to six weeks.  So to determine the perceived value to their clients we recommended this company inject time into the transaction as a self-selectable dimension of value.

We suggested the company immediately announce they were increasing routine turnaround to four weeks.  Even after this increase they would still fulfill orders more quickly than their competitors.  We further directed them to let clients know that they could upgrade to expedited delivery on any order by paying an appropriate rush surcharge.

Introducing this policy served several functions: it reminded the customer of the previously ignored time component of the transaction; it induced clients to upgrade in a way that cost the merchant nothing to provide; and it added profit as clients self-selected additional components of value to pay a price closer to their perceived value.  A client who believed the service to be worth much more than they were paying unhesitatingly upgraded to expedited delivery.  And by evaluating the percentage of clients who upgraded, the company discovered where prices fell compared to their perceived value.

In this case, almost all its clients chose to pay for expedited delivery which indicated the company’s prices were much too low.  Faced with this data, they began the process of raising them to more closely align with their customers' perceived value.

Approach and Results
How did they accomplish this?  By using the Grandfather Discount Method to increase prices for both standard and expedited services.  They then alternated between periodic increases and inserting and valuing additional dimensions of value to continue to stretch price flexibility.  This boosted the value and the correlating price for the tables self-selected by the client.  After several rounds of this, prices were realigned with expected value and most of the excess slack was removed from price flexibility.  This technique boosted their revenue fifty percent immediately and tripled the bottom line by the end of the first quarter.  Their income soared.

Yours can too.  By strategically raising prices through self-selectable upgrades, the additional profit you'll earn costs nothing.  The extra income drops straight to the bottom line dramatically increasing your margin.  Try it!

Later this week we’ll continue fleshing out our marketing plan.  And next week I’ll talk about how you can train your customers painlessly to increase loyalty and satisfaction.  Until then,

profitable business All!


P.S. To read more about Creating Value, refer to Value-Added Selling

2 comments:

  1. I notice that this technique is very popular with shipping and delivery companies and it also helps a customer out if they need the product fast.

    ReplyDelete
  2. If your business deals with shipping items in any form or fashion I recommend using UPS, from my personal experience they have served as a great shipping service provider. Just thought I would give any newbies here some advice.

    ReplyDelete

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