How to make prices less sticky and maximize revenue?
All of this is great to know, but really you’re here to figure out how you can help your business by making your prices less sticky. There are three main ways:
1. Understand your costs and where your costs come from
Next to not knowing your customer’s willingness to pay, not knowing your costs is one of the worst things you can do in business. Yes, there will be some murkiness with calculating overhead costs, but you need to know the ballpark level of your costs. Additionally, you need to know where these costs are coming from, so if you see a major shift in an input cost, you at least know the impact and whether you need to hedge against the shift. This knowledge has allowed some businesses to take the flat rate approach, such as JC Penney’s new pricing strategy that we previously blogged about.
2. Align your business model to usage and value
The best way to loosen your prices is to ensure that once you align your business model around usage and your costs of doing business. We chatted a bit about this in our blog post on optimizing the pricing page, but take a look at Wistia, a company that hosts businesses’ videos. Their bandwidth costs are (more than likely) enormous each month, but one of the key value metrics they charge customers on is bandwidth used. In this manner, they ensure that if someone uses an extraordinary amount of bandwidth, they are charged accordingly.
3. Gather data on customer value to know how far you can push the price
You must, must, must know what your customer’s willingness to pay is for your product(s). This is just a cardinal rule of pricing, in general. You may not charge them at the top end of this range because of different contributing factors (although you’ll technically be losing money), but you’ll at least know where you can push the price. The price optimization software is great for this, but even simply picking up the phone will do.
4. C is for communication
We wrote about how consumers tend to understand price changes or price conversations in a price optimization article on communication. Yet, understanding your customer and communicating honestly with them bears repeating. Price changes happen, and consumers understand, especially when justified to them.
Not all prices are sticky; those giant white billboards at gas stations display different numbers every time I drive past. Depending on the sector, businesses have to decide when to alter their prices and when to keep them constant. It’s a balance, and either way, the see-saw turns, it is important to be aware of the phenomenon of stickiness and understand its effect on any pricing strategy.
Also, to dig deeper into developing your pricing strategy, check out our Pricing Strategy ebook, sign up for one of our (free) price optimization assessments, and take a gander at our price optimization software. We're here to help!