3 Simple Ways to Improve Your Pricing Power

By Daniel Kehrer

Free is a powerful force in the marketplace — especially online. A fast-growing, Internet-inflamed “culture of free” is leaving more local businesses feeling profit pain where it hurts: in their bottom line. Business owners must now answer a pricing question that once seemed odd: What can you do when your products or services are more popular than ever, but consumers don’t want to pay for them anymore?

Perhaps surprisingly, there are some answers. Saul Berman, author of “Not for Free: Revenue Strategies for a New World,” pinpoints five areas causing the shift:

• High customer expectations for personalization, control, relevance and timeliness
• Low cost, saturation-level communications
• Bountiful, low-cost bandwidth
• Plentiful, real-time data processing power
• Rapid-fire technology and competitive innovation

These trends and expectations affect even small local businesses. Customers now instantly communicate local buying experiences; they expect restaurants, dry cleaners, health clubs and others to offer personalized, relevant offers and experiences. And they have unprecedented access to price comparison and other competitive information.

Businesses are being forced to squeeze out revenue in new ways as markets and expectations shift. But the changing landscape also creates new opportunities to grow revenues “organically” without expensive advertising or marketing programs. All you need to do is change your approach. The key is this: It’s not about creating new products or buying new technology. It’s about understanding customers and delivering value.

Start at the beginning – with your customers. But be careful. Most business owners still view customers through an outdated mass segmentation lens based on age, income, gender or geography. That view is dead, done in by technology. In its places there’s a new type of segmentation based on how buyers actually behave – how they use your products, services and information. This sets the table for building revenue in new ways:

1) Pricing Innovation

It’s not just “how much” but also “when.” No product is free – ever – notes Berman. Someone always pays for it. So the answer is not to price your product at zero, but to innovate around the amount of money charged and the point (or points) when you require customers to pay. Successful approaches include: subscription plans, variable pricing, by-parts pricing, bundling and rental models.

Rent The Runway, launched in late 2009 by two business school students, is a great example of pricing innovation. The founders took a traditional “buy-only” product (designer dresses) and reinvented it via subscription and “rental model” pricing. Rent The Runway is a membership site that rents designer dresses for less than 10% of what it would cost to buy one. Women can outfit themselves in a different designer fashion for every event they attend for less than what they would have paid to buy a single dress.

2) Payer Innovation

Sometimes the customer who pays is not the consumer of the product. Since nothing is free — and somebody always pays — the trick is to think of alternative “somebodys” who might pick up the tab, or part of it. A classic example is TV shows. They’re free to you – the advertisers pay. Sponsorships and white-labeling are two other examples. “White labeling allows product companies to sell outside of their traditional market without having to drum up demand themselves.”

3) “Package” Innovation

Don’t take “package” too literally. It’s not about the wrapper; it’s about all the benefits and features of a given product or service. Today’s most innovative companies are expanding revenue opportunities by changing the form an existing product takes. There are three basic ways to think about it:

• Breaking the product down into components
• Integrating different pieces of the value proposition
• Extending value in new ways

Understanding the underlying elements of pricing, payer and packaging can help you rethink and reformulate your revenue strategies. One you do, you’ll find new ways to keep customers paying today — and in the future.