Smart Pricing – The Next Generation

Smart Pricing is a Pricing Strategy that can be implemented in many different industries and combines the following:

• Profitability - Design an offer/promotion/service/product which is profitable. 
• Relevancy - Identify the customer’s profile that may consider the offer relevant. 
• Segmentation – Push the proposition only to the customer’s segment that the offer will be relevant and profitable.
• Timing – Identify the trigger event that has associated a higher probability of the offer adoption and push/promote the offer at that moment.

“Smart Pricing" sounds only as another marketing buzzword… not true.

So, it is easier to visualize the Smart Pricing concept through an example:

"Imagine a coffee shop that through a loyalty card tracks the orders of their customers.

From that, the coffee shop knows that a specific regular customer always order one medium size coffee and never orders any food.

Additionally, in this example there are the assumptions that the difference between a medium and a large coffee is only $1 and the coffee margin is high, and without a sale cannibalization, a discount of 75% on the coffee upgrade it still be profitable.

So, next time that specific customer checks in with the loyalty card, the shop assistant would be notified in the machine that the customer is eligible for a special promotion that day – he can upgrade is coffee to large only for 25 cents, instead of paying the normal price of $1.

If the customer doesn´t adopt the promotion, the shop probably still gets the usual medium size coffee sale… but if the customer bites it, there is a short term positive revenue and margin impact and from the product seeding there is a relevant probability of behavior change on the customer, if he starts ordering in the future a large coffee instead of a medium, even without a discount."

The Smart Pricing drivers on this example were:

• Profitability – The discount on the coffee upgrade is still profitable.
• Relevancy – The targeted customer already orders regularly a coffee, so the promotion is on top of what the customer is looking for. 
• Segmentation – Only customers that regularly order a medium coffee would be eligible and would be presented with this promotion.
• Timing – By proposing this deal when the customer is already buying one coffee in the shop increases the probability of the customer taking up the promotion, instead of sending him this promotion through a newsletter by email.

The Smart Pricing strategy is an effective way to increase revenues, profits and also customer satisfaction, engagement and loyalty.

Pricing Strategies - Skimming

The purpose of this strategy is to optimize profits in the long run, by segmenting the market in three types of consumers:
- “Pioneer” customers who are willing to pay a premium price to be the first to access your offer.
- “Common” customers who are only willing to pay a “value for money” price.
- “Opportunistic” customers who only buy when facing and outstanding price/discount.

Then the market is sliced in three timeframes to take the best of those three consumer segments:
- On the launch the price is set high to maximize profits on the “Pioneers”
- After the “Pioneers” segment is exhausted, the strategy is to decrease the price to take now a broader segment – the “Common” customers.
- And in the end, usually when a new other product is already replacing this one, they decrease even more the price to tackle the last segment – the “Opportunistic” consumer.

However, this pricing approach is not appropriate or available to all markets due to:
- Legal reasons – Some markets/product have their prices regulated.
- Some markets/products have extreme elastic demand which means that any price variation can collapse the demand.
- This strategy invites other competitors to enter the market, so or you have a very unique product, or the exclusivity of the market (e.g. patent) or the entry cost on that line of business is very high avoiding the entry of more competitors.
Example of a market that usually follows successfully the "Price Skimming" strategy:
- On the video games market, you can observe that usually those brands launch their new products with a premium price and usually those prices decrease over time until it reaches only 10% of the original price aiming to the “Opportunistic” segment in the end.

Supporting new entrepreneurs

In May 2013 I was invited by Beta-Start to make a coaching session for new entrepreneurs.

I made a presentation about a key element in Marketing which is usually forgotten when people think about Marketing.

The theme of my presentation was Pricing, more specifically about Pricing Methods and Pricing Strategies, followed by a Q&A session.

It was a real pleasure and I wish all the best to these new businessman and businesswoman on their new endeavors.

If you are a new entrepreneur, check out Beta-Start in the link below:
http://www.beta-start.com/