Jun 01, 2018 The 5 Myths and Mistakes of Pricing – Mistake #4 – Drive Customer Behaviors Against Yourself
I believe that the most powerful and constructive use of pricing is to use pricing to drive customer behaviors into patterns that drive profitability forward. In order to do this you need to understand what customer patterns will achieve this result. To figure this out, I typically perform an Apollo Profit Acceleration Technique™ analysis. Your can get more information about this technique by clicking on this link https://apollogr.com/profitability-improvement/. Out of this, I identify what needs to be done to significantly improve profitability.
Take the example of a doggy day care I worked with. The analysis indicated that their problem was that they had some days with few customers and other days where they were fully booked. Their average facility utilization was low. The difference in their costs between a day with 20 dogs and a day with 100 dogs was very low, as they only needed a few more dog handlers. All their other costs were fixed. The analysis showed us that we could significantly drive up profitability (by over 200%) if we could drive up their average facility utilization. The analysis also showed us how we could do this with pricing changes. We raised the price of using the facility for a single day. We also raised the price of the ten visit punch card. These actions discouraged the occasional use customers. We created a monthly all you can use price. This price drastically discounted the cost per use for customers that came in 4-5 times or more a week. The result was to encourage the more profitable customers that would use the facility more. The impact on profitability was dramatic.
So by pricing too low for the one time or infrequent customer, the company was driving customers into behaviors that did not help their profitability. By incentivizing the frequent use customer, we encouraged behaviors that led to increased profitability. While all company situations are unique in terms of cost structure, price elasticity of demand (customer sensitivity to price changes), market position, target customer set, etc., using pricing can be a very important tool to drive customer behaviors into patterns to increase profitability.
Apollo Consulting Group, Newport, RI