The 4 Evils of Margin-Based Pricing Strategy

Margin-based pricing sounds great in theory — it predetermines profit for a specific product by setting a definitive goal for the difference between price and cost.

Unfortunately, the reality is that margin-based pricing creates a host of potential issues for the simple reason that determining price involves many more factors than just cost. Margin-based pricing ignores these other variables, simplifying the process but weakening your results.

To give you an idea of how margin-based pricing can negatively affect your bottom line, we’ve outlined its four biggest evils.

  1. Emphasizes Costs, not Value

Margin-based pricing relies on two major variables—cost and desired markup. It disregards a third variable—the value you create for the customer. This third factor determines what your customer is willing to pay, so margin-based pricing risks one of two undesirable outcomes:

  1. You arrive at a price higher than the value you create for the customer and lose the transaction and any associated profit
  2. You arrive at a price lower than the value you create for the customer and win the transaction, but leave profit on the table

Moreover, margin-based pricing, by ultimately depending on costs, means your prices may change even when the value you deliver the customer does not change or, alternatively, keep your prices flat even when the value you create for the customer changes. Either results can produce a disconnect between your price and the value you create for the customer, ultimately putting your profits at risk.

Take a step back for a moment and consider why your customers chose your company as a vendor in the first place. Most likely, it isn’t because you’re consistently the least expensive option out there (which is a difficult position to maintain anyway). What else are you offering them? Bundle these benefits into a value communication to your customers consistently and often. Weave them into your brand’s message, and make sure customers understand they are included in the price, in addition to the tangible product-based elements of your offering.

  1. Assumes Your Customers Are Clones

Are you treating your customers like the exact same person? You shouldn’t be. When you assume the same price fits all of your customers through margin-based price management, you create three major pricing potential issues for your company:

  1. Tailored Value Propositions are impossible to create, creating a crater-sized hole in your pricing strategy.
  2. You sacrifice increased margins from customers willing to pay more due to incremental value you create for them.
  3. You run the risk of losing customers who draw the line at a specific price point.

A more profitable pricing strategy takes these scenarios into account and plans for each of them. For example, when you outline value proposition to your customers across their various buying situations, you understand that one size doesn’t fit all. Your customers exist in different markets, seek different products, and find different things appealing in different situations. Do a little research to determine what matters most to specific customers, and use this data analysis to properly segment them into groups (“pricing segments”), each with their own designated pricing strategy.

Also consider segmenting your customers into groups defined by price responsiveness. We all have customers who don’t balk at incremental price increases either out of loyalty or an accommodating budget. And we all have those customers who pinch pennies and demand answers at every tiny price increase. This is not taking advantage of the customer – it’s a practicing a subtle yet powerful form of value-based pricing.

Instead of having pricing for all customers ebb and flow with input costs, set a profitable price for each customer segment and then do your best to hold it there. Most customers will appreciate the consistency, and your team will most likely save on the resources and time that accompany negotiation around constantly-changing prices. Of course, if there are massive changes in input costs, customers will likely be aware of this and you should temper your approach in these situations accordingly.

  1. Assumes Your Products Are Clones

Margin-based pricing also has the evil tendency to lump all of your products together as it does with your customers. Many companies employing this strategy set a margin goal for huge groups or — gasp — every single one of their products.

For example, if your company carries a standard 5 pound bucket as well as a non-standard 4 pound bucket, it wouldn’t make sense for you to charge the same price for those products, even if the costs for them might basically be the same. A non-standard product in inventory immediately gives it a higher value than other similar products, and you should be passing on this premium to your customers in the form of a higher price. After all, the 4 pound bucket has a slower product velocity, and you’re creating value for your customers by keeping it on your shelves.

For effective product segmentation, start with taking stock of all of your products and their implied value to your customers. Then segment these into smaller groups and price them accordingly. To enhance your price performance for even better profits, build upon this and a customer segmentation strategy to determine effective pricing for specific products within distinctive customer groups. This can get complicated quickly, so having an intuitive and effective business analytics solution to help you juggle, organize, and properly analyze all of your data is key.

  1. Relies on Volume for Profit Improvement

The last evil on our list is narrowing focus on growth to volume alone.Businesses have five levers to improve profitability: price, cost, customer mix, product mix, and volume. Margin based pricing takes the first four out of play completely. Prices are dictated based on a set margin percent, and costs gains are immediately passed through to customers, eliminating those levers. Margins for all customers and products are set to a single rate, so you have no ability to improve customer or product mix. This leaves you with volume as the only lever to improve profitability. Why would you want to adopt a strategy that limits you to only one lever to improve performance when you could have five levers?

Moreover, businesses that focus heavily on volume to drive growth usually end up having to cut prices to reach their goal. This, in turn, often triggers price wars and put companies on a downward spiral that’s difficult to stop. By focusing solely on volume, your company relinquishes control over your profits.

Change direction by using all five profit levers — price, cost, customer mix shift, product mix shift, and volume — in tandem to find the quickest and most sustainable path to profit.

Brilliant oroginal by : Chris Sorrow June 2, 2015

A growing number of companies are using “dynamic” pricing

Schumpeter: Flexible figures.  as printed in The Economist Jan 30, 2016

chameleon

 

A growing number of companies are using “dynamic” pricing

IF A cynic is someone who knows the price of everything and the value of nothing, as Lord Darlington observes in Oscar Wilde’s “Lady Windermere’s Fan”, then it is getting progressively harder to be a cynic. A growing number of companies keep their prices in a constant state of flux—moving them up or down in response to an ever-shifting multitude of variables.

Businesses have always offered different prices to different groups of customers. They offer “matinée specials” for afternoon cinema-goers or “happy hours” for early-evening drinkers. They offer steep discounts to students or pensioners. Some put the same product into more than one type of packaging, each marketed to a different income group.

Dynamic pricing takes all this to a new level—changing prices by the minute and sometimes tailoring them to whatever is known about the income, location and spending history of individual buyers. The practice goes back to the early 1980s when American Airlines began to vary the price of tickets to fight competition from discounters such as People’s Express. It spread to other airlines, and thence to hotels, railways and car-rental firms. But it only became the rage with the arrival of e-commerce.

The price of goods and services sold online can be varied constantly and effortlessly, in accordance with the numbers and characteristics of those making purchases, and factors such as the weather. Competitors can be monitored constantly, and their prices matched. Amazon updates its price list every ten minutes on average, based on data it is constantly collecting, according to Econsultancy, a research and consulting firm.

The practice is spreading to physical retailers, which are installing electronic price displays and borrowing pricing models from e-retailers. Kohl’s, with nearly 1,200 stores in America, now holds sales that last for hours rather than days, pinpointing the brief periods when discounts are most needed. Cintra, a Spanish infrastructure firm, has opened several toll roads in Texas that change prices every five minutes, to try to keep traffic moving at more than 50mph (80kph). Sports teams, concert organisers and even zookeepers have embraced dynamic pricing to exploit demand for hot tickets and stimulate appetite for unwanted ones.

The dynamic-pricing revolution provides plenty of benefits for businesses. Besides helping them smooth demand (which can spare them the cost of maintaining extra capacity for peak times), it makes it easier for them to squeeze more out of richer customers. Travel websites have experimented with steering users of Apple computers—assumed to be better-off than Windows PC users—towards more expensive options. Airlines have been caught charging loyal travellers more for a ticket than infrequent travellers, on the assumption that they are more likely to be on a work trip, so their employer will probably be paying. The technology is far from perfect: ever since buying a coffee machine online your columnist (who is not good at newfangled tasks such as clearing browser cookies) has been inundated with offers for coffee machines, as if the purchase was proof not of a need that had been satisfied but of an insatiable desire.

Even if the technology becomes more sophisticated, there are two risks for businesses with dynamic pricing. The first is psychological resistance: companies’ reputations can suffer if they offend customers’ sense of fairness. Uber encountered a backlash when it increased its prices eightfold during storms in New York in 2013. Such “surge” pricing makes perfect economic sense: drivers are more likely to go out in hostile conditions if they get paid more; and many customers would prefer a high-priced ride to no ride at all. But these arguments cut little ice when prices run counter to people’s sense of equity. So, in this week’s snowstorms in New York, Uber capped its surge prices for its regular taxis at just 3.5 times the normal fare.

Psychological resistance can be fierce when companies use data collected from their customers to charge them more. That is why, in 2000, Amazon quickly dropped a scheme to charge some customers more for DVDs based on their personal profiles, and why it has trodden carefully since. Customers are learning to play the game. Some are searching for flights from an internet café instead of their living-rooms, to get lower fares. Others are piling goods into their online baskets and then failing to click “buy”, hoping this will prompt the seller to offer a better deal.

Price-fixation

The second risk with dynamic pricing is that it ends in a race to the bottom. Companies that sell online have long been caught up in a war for the top slot on price-comparison sites: even being cheaper by a penny can make all the difference. Physical retailers are being caught in the same logic: those adopting dynamic pricing are mostly doing so to avoid being turned into mere showrooms by customers who inspect the goods but then buy online. The Nebraska Furniture Mart constantly watches what competitors such as Amazon and Best Buy are charging, and updates its in-store electronic displays each morning to meet its guarantee of offering the lowest price. This is obviously good for customers. But getting fixated on prices can distract businesses from seeking ways to make their products and services so attractive that customers will be less fussy about their cost, as the most successful purveyors of luxury items, from Ferraris to Hermès scarves, do.

The oldest form of dynamic pricing was practised in ancient bazaars, where merchants would size up their customers before the haggling began. Those retailers might not have been able to compute as many different variables as today’s algorithms. But they still have something to teach today’s dynamic pricers about the importance of establishing trust and playing on desire. Cynical as it sounds, to understand a customer’s underlying willingness to part with their money you need to pay a good deal of attention to values.

CHASING DUCKS

CHASING DUCKSWhen businessmen tell me that being low priced is the only way to stay in business, I am sceptical. Price is the simplest way for a consumer to compare and is overused as the basis for a decision to buy. Price noise is the screaming toddler in the room- demanding excessive attention relative to importance. And most businessmen pay excessive attention.

In the July 2015 edition of the Business Examiner, the owners of Command Industries admit their shock after quizzing their customers. A mentor had suggested that they speak directly with their top customers and ask them, why do you buy from Command? “I was sure the answers were going to be pricing related and focused on comparing costs with our competitors. “said Rob Woudwijk. “But the results of those conversations shocked me. It was never about the money. Instead they talked about the way we communicated with them, the level of transparency and honesty we have as a company and our problem solving mentality”.

Would price have figured in the equation at any time? Of course, but it looks like price was further down the list than they believed. In a study reported by Right Technologies by Bob Thompson called the Loyalty Connection, price features lowest as the reason that customers stop dealing with a company. In his analysis, customers leave almost 75% of the time due to customer service problems while owners see that as being important in only 22% of the cases. Quality is seen by customers as an issue fully 32% of the time while owners rank quality as the suspect only 18% of the time. It appears that staff indifference is a greater cause of losing customers than doing a bad job.

Similarly, price was ranked by owners as the number one issue at 45% of the time while customers felt price was important only 25% of the time.

And what about employees? Do they value their pay cheque more than a great boss or satisfying work?

Does Money Really Affect Motivation? A Review of the Research

In “Does Money Really Affect Motivation? A Review of the Research” by T. Chamorro-Premuzic published in the Harvard Business Review, the authors reviewed 120 years of research to synthesize the findings from 92 quantitative studies. The combined dataset included over 15,000 individuals and 115 correlation coefficients. In the study there is a weak, almost negligible correlation between pay and happiness and so they conclude that money is a weak motivator.

 

So, where does this leave the average business owner? To focus exclusively on price differentiators is evidently NOT the answer. My dog swims with determination after ducks, but she never catches one. Being cheapest in the market place leads in only one direction – the dumbest competitor will win. And after the ducks have flown, those left standing.. er, swimming.. will have the best employees, happiest bankers, most motivated bosses and HIGHER prices. Where do you want to be?

The Price of Money – a Lender Perspective.

Bag-of-MoneyMoney is not a commodity. By definition, a commodity is a generic product that is bought and sold on price alone. Money, Canadian bills for example, look the same, smell somewhat the same, and are available country wide. But, when you want to borrow money, rent the money in fact, the price for that money is not at all consistent.

Why does the price of money fluctuate from person to person? Why do some people borrow at prime minus rates and some at 18%? It is because, in part, that your lender does a risk assessment of you and your circumstances that affects what they will charge. Let’s look at this from the point of view of a mortgage for your home.

The first consideration is location. If your home is 100 kilometres from the nearest small town of  4000 people, you might not get a mortgage at all, but if you do, the lender will add risk factors. If you default, will anybody buy the property and redeem the mortgage? Your Shangri-La is perhaps too unique to attract a buyer.

Then there is the home price bracket to consider. A home priced to sell in a hot price bracket is easier to mortgage than a million dollar home. There are simply more buyers who equate to an easier exit from the loan in the event of default.

Then there is the loan to value calculation. A high ratio means only that you do not have enough “skin” in the game and if things get overwhelming it is too easy for you to walk away, leaving the lender with your house. A higher loan to value ratio simply means you will pay a higher interest rate or have to give up your first born child.

Then there is your employment. Self-employed or just started a new job? You will pay more for your money. That is because the risk of not being employed or having too little money coming in to service the mortgage is higher than having a nice steady government job.

Then there is your credit report. Credit is something to be managed. Keeping your record clean and current shows that you are fastidious about paying your obligations. Having a low score means you are a deadbeat.

All of the above explains why some people pay 2.5% and some 15% on their mortgages. It is, in part, a reflection of the supply and demand function.

One Studied Tactic to Negotiate a Better Price

deal1One Studied Tactic to Negotiate a Better Price: How you frame your initial offer affects how high a buyer is willing to go.

Whether you’re negotiating the price of a big client order or selling your company, is it better to offer a single initial figure or a range? According to a recent study, the latter is the better option.

Researchers from Columbia Business School ran a series of five negotiation-simulation experiments involving Amazon’s Mechanical Turk workers and business school students. Participants were asked to not only guess what their partner’s reservation price (the lowest price they would accept), but were also asked questions designed to show how they perceived their partner—the study’s authors were curious as to whether certain negotiation tactics might lead to a likability cost, even if they resulted in a few more dollars for the partner.

In the paper, which was published in the Journal of Personality and Social Psychology, the researchers said that those who asked for a range were more likely to get their reservation price than negotiators who gave a single offer. There was also little evidence that a range offer would cause the negotiator to be seen in worse light.

In other words, open with a price of $7,000 for your car, and you’ll get counter-offered $6,500. But open the bidding with a range of $7,000 to $7,500, and the bidding starts at $7,000.

So the next time you’re posed with the salary expectation question, looking to sell your business, or trying to get a profitable price for your product, remember to always give people a range—you’ll reap the benefits in the end.

reprinted from Profit Report – Kristene Quan and David Fielding || April 15, 2015

Gartner Survey on Pricing Strategies Used by Retailers

snakes and laddersPrice is a critical competitive issue for retailers.  (That is, of course, an understatement). A recent survey by a Gartner Company subsidiary and point of sale research firm, Software Advice, examined how retail technology adoption, especially pricing strategy,can help a retailer stay afloat in today’s make-or-break market. The report confirmed that retailers face a number of important decisions when determining how to price their goods and services. Setting prices correctly, after all, can attract customers, drive sales, burnish a retailer’s reputation, and, affect the retailer’s very existence. Incorrectly-set prices, on the other hand, can have a profoundly negative impact on sales and customer loyalty. To help make more informed decisions, retailers must rely on the use of various pricing strategies and competitive price monitoring and analysis.  See the full report at www.softwareadvice.com/retail/industryview/pricing-strategies-report-2015.

The Most Effective Pricing Strategies, Defined

Eight different pricing strategies rated as most effective by the retailers were Discount; Bundle; Below competition; MSRP; Odd pricing; Price lining; Dynamic; and High-low.

The survey found that a majority of respondents (51 percent) use software to manage product pricing; 39 percent of them using a stand-alone pricing application. Discount, below competition and bundle were the most effective pricing strategies for the department, specialty, grocery and e-commerce sectors, but discounting took the lion’s share of pricing strategy in every category.

Most Effective Pricing Strategies:

Most interesting to us were the comments from the retailers on various strategies they use to increase sales and diminish inventory:

*One retailer said his company used bundling, discount, price lining and odd pricing in for its online store. “We use different strategies because our customers are not just one solid segment of people in the market,” he explained. Millennials, baby boomers, bargain hunters and office managers are all groups targeted. “We use the different pricing strategies and then run them through a market analysis weekly,” he said.

An example he gave: If the product is ink for a particular printer, the target market would consist of customers who purchased that printer in the past, which might include college students, accounting offices or small businesses. Depending on which customers purchased the printer, different pricing strategies are used to attract them.

“Bundling, he said, conveys a sense of value through the savings the customer receives on each item by buying in bulk.” (For example, selling water bottles for $19.75 each, dropping the price to $18.76 per bottle when three or more are purchased.

The retailer noted that while the discount strategy attracts aggressive bargain hunters to his business, it’s not the most effective strategy on a per customer basis, but it’s still significant enough to his overall business to warrant its continued use.

*The CEO and founder of a group of fashion retail stores said his stores use different pricing strategies to meet different goals. One such strategy, with the goal of selling more units, is incremental discounts that increase with the number of items purchased (for example, getting 20 percent off the second item purchased and 30 percent off the third). The company also uses specific promotions to drive sales of items for which the store has large amounts in stock.

Because this retailer has high-end stores with name products, the concept of odd pricing, which implies bargain pricing—is not the perception he wants to create of his merchandise.

*Everyday low prices, another common grocery price strategy used by stores like Walmart and Target (and which undid Ron Johnson at JC Penney) was included in the survey but is not among the strategies rated most effective by respondents because not everyone has the buying and pricing power of the giants.

*A Canadian retailer reported that he uses MSRP in his online shop which sells vaporizers and related accessories. The MSRP, he said, allows him to maintain good relationships with manufacturers, but can be hard to maintain when the same products he sells show up at Amazon or eBay at lower prices. To avoid price wars, maintain good terms with manufacturers and maintain its own margins, he developed a line of house brand accessories to pair with the core products sold at MSRP.

Bottom Line:

When it comes to pricing technology, the most sophisticated, forward-looking global retail intelligence leaders offer SaaS-based intelligence and analytics solutions that transform the way retailers price, select merchandise, and manage products in order to maximize sales and optimize margins.

For example, the Upstream Commerce Suite of Solutions empowers retailers to base all shopper-centric decisions on real-time market data. The Company’s highly configurable, flexible, and user-friendly platform enables retailers to effectively manage their pricing strategy through accurately tracking and comparing product pricing, availability and promotions using price intelligence; pricing dynamically; optimizing product selection; monitoring MAP; making relationships with suppliers better informed, and price predictively for optimal sales and profit.

with thanks to Naomi K. Shapiro

 

 

What I learned in China #2

snakes and ladders

As per my previous article on my visit to China, we have much to learn about and from their people. It is potentially the largest market on earth with 1.3 billion people in one country but much will depend upon the growth of a large and wealthy middle class. Wealth is not evenly distributed in China. Its economy is still only 20% the size of the United States. Our newspapers report a slowdown in China’s economy but it is just decelerating and not growing as fast. Wages and prices are rising fast in China and the smart ones are looking for better business models. The people I met are concerned about the slowdown and perhaps an opportunity for Canada has presented itself.

But first, we as Canadians must know how we can fit in.  I discovered that they have an interesting viewpoint on Canada. The Chinese people I met know little about our huge country. Many were astonished when I told them our entire population was smaller than some of their cities. I took a map of BC with me and they all pored over it, expressing surprise that the population was so small, so thinly distributed and empty in the North Country.

And they like Canadians. They think Canada is boring, lazy but safe; a stable supplier and a people to be trusted. Above all, we are not Americans.

Much of what we have, the Chinese would like to have for themselves. Food safety is an issue in China. Our food quality is highly is regarded. One visitor to Kelowna told me that there is bakery in Hong Kong that proudly announces that all their goods are baked with Canadian flour.

But what the Chinese people do not understand yet is that we can be a conduit to the US and Europe for their goods. The two largest markets today are Europe and the US. Canada has good trading relations and a free trade arrangement with both. We understand the business climate in both our trading partners. We speak the language and share a culture. The Chinese do not.

Can we use this knowledge to build businesses in Canada? We can become the conduit to both markets, working our magic as a multicultural country, encouraging immigrants and wanting to rely less upon America. We have systems in place that work and guarantee the quality of the end product whether it is animals or crops, intellectual property or machined goods. Our federal government is working to improve our trade relations and Mr. Harper’s last trip was to establish a  framework for Canada to become one of the few places on the planet (London and Singapore are among them) where Chinese yuan can be converted without using US dollars as the standard.

We are at the starting square in a game of snakes and ladders. Put on your thinking caps and start learning about China. The path can be a slippery slope or just a missed opportunity. The better way is up. The next few years are going to be truly interesting for those who embrace the opportunity.

WHAT I LEARNED IN CHINA.

china 1I will never be an expert on China. It is just too big, too complex and too old with layers of history and meaning that would take several lifetimes to unravel. As I said to my hosts, China, driven by it huge population builds big – Big airports, Big train terminals. Big road systems. Big apartment blocks. And yet you drink tea from cups the size of thimbles.

Because of the gigantic size of their market, many companies can specialise. I drove down 15 miles of road entirely devoted to furniture stores. We crossed over to the shoe district and then to the leather district. We visited a factory producing water based ink on his 10 acre site and a factory devoted only to embossing paper. On my last day, I found myself in a square mile of narrow alleyways devoted to wedding dresses and tuxedos in a quest for that right little number for my wife. In driving around, however, I was most shocked by the sight of a small shop of perhaps 500 sq. feet that sold only electric drills. In our micro market, where everyone has to be everything, all the time, it was refreshing to see a different and profitable business approach.

It reminded me of research on the US I did years ago where I found an obscure town in Nevada, I think, that produced most of the rubber pipe used in the US. The United States has a gigantic market and efficient distribution system (read road, rail and air) whereby it is possible to dominate a market and yet not be at the centre of it. Think of what we could do better with NAFTA which is in explicably underexploited by us.

How could we emulate the success of China? We have cheap power, high labour costs and some cheap raw materials. We are shipping raw goods to China. The successful Chinese manufacturers in turn buy German and Japanese equipment to operate lights out facilities and then ship back to us.  Is there a model there? Do we need ore entrepreneurs and highly skilled labour?

But China has entered a sluggish period and that is forcing a change that will have long term benefits. The old style entrepreneurs sold on price alone. Many have not found a way to break that mould. But a few have gone to the quality end of the spectrum. This is especially valuable in meeting the demands from BC over the next 10 years for the rapid development of the energy and minerals sector. I visited 2 vocational schools there that churn out 3000 CNC machine operators a year, that train 300 baristas a year – for the skyrocketing coffee culture in China. And the emphasis was on a quality product, customer service and cleanliness that would put to shame huge swathes of business in British Columbia.

China has lessons and opportunities for us. We need just to listen and pay attention – then act.

How Small Business Handle Their Money

Canada’s SMEs prefer to manage their finances in-house, according to our survey of 727 companies

Canadian business owners have a do-it-yourself approach to financial management, according to the latest instalment of the American Express Small Business Monitor.

Fully 92% of the 727 owners surveyed (each of whom employs fewer than 100 people) believed they could speak adequately to their businesses’ finances. While 71% said they handle their own bookkeeping, 95% deal with budgeting and forecasting in-house, and 79% handle their own payroll work.

Managing finances internally is not necessarily a drain on employees’ time, with 50% of respondents saying they spend less than five hours a week on it and only 9% taking more than 15 hours weekly.

The one area that remains tricky for many Canadian firms is taxation—only 55% of the businesses polled do their own taxes in-house. At the same time, taxes were ranked the most challenging aspect of business finance by nearly one-fifth of respondents, with the same number rating cash-flow management as most difficult.

Technology is key to respondents’ financial management: 33% use software that makes the process simple; 11% turn to websites to learn the basics.

Small businesses are remaining positive, despite the slow economic recovery. Sixty-three percent are “hopeful” about their firms’ financial future, and 52% said they saw a slight or significant improvement during the last quarter. However, companies are continuing to take a cautious approach, with 66% willing to take only moderate risks, versus just 6% prepared to attempt significant risks.

Here are other key findings of the AMEX Monitor, co-produced by PROFIT and Canadian Business.

with thanks to Canadian Business and Profit

 

At the Core: Lessons in Pricing from Apple.

apple

Apple has taught many entrepreneurs the importance of design, how to create buzz when introducing new products to the marketplace, how to pioneer new technology and the importance of superior quality.

But Apple also has wily pricing experts who have used pricing strategies to create extra profits.

The most recent example is the Apple response to Samsung’s huge presence in the India market. Apple’s products are too pricey for the average Indian, where many people still survive on $2 per day. Smart phones make sense in countries where electricity supplies and telecoms infrastructure is weak and prone to frequent blackouts. Phones add value to people’s lives by bringing them close to the markets. This has already happened in some poor fishing communities that dot the coastline. When heading back with the catch of the day, they can check the spot prices at various ports within reach and choose the best paying one. Clearly smart phones are an economic accelerator. So, how to get more smart phones into Indian hands?

Apple has used a price skimming strategy for the consumer market. Early adopters pay greatly for the newest and brightest toys. But Apple also knows that competitors can enter the market easily and quickly after Apple has pioneered the technology. So constant innovation is a hallmark of Apple products.

But that means the earliest smart phones are soon obsolete. Apple could NOT “dump” the old phones on the American or early adopter market, for fear of cannibalising its own consumer segment. So Apple took the older phones to India, effectively buying market share with a great if outdated product that has already generated all the profits Apple expected.

But not all of us have the luxury of dumping our old products on a foreign market. How can Apple’s leadership in this pricing gambit be put to use in a Canadian small business?

If your pricing model demands a profit margin on each and every inventory item you sell, you will not be able to sell the end of season or dust covered items for a dollar. You will lose money.

But Apple has a simple idea. Not all inventory moves equally. If you sell seasonal or fashion products, some product will be left over after the majority has sold. If your pricing model allowed for this hangover – check your records in prior years -, then you could sell the leftovers for $1 and make a profit.  See my prior articles on how the big box stores price this way or take a look at my book , Pricing Strategies for Small Business. If you sell strategically, you can gain new clientele. By contacting your customer list and advising of a tremendous sale, you move inventory that would otherwise gather dust and gain loyal customers at the same time.

Contact Andrew Gregson for your next convention, conference or workshop.