What do I mean by strategic pricing? Strategic pricing means assessing competitive forces, market conditions (supply & demand) and your own internal costs of doing business BEFOREHAND in an effort to profitably set your prices.
Positive-Sum Competition is selling against your competitors by creating more value for your service and/or more operating efficiency. So, your hourly rate may be $5 more than XYZ company, but you offer something they don’t. That means that knowing your competitors is very important. Do they have the same vehicle model that your company has? Do they have special packages with attractive amenities? Do they book dinner reservations for clients or make club arrangements or are you the only one? Rather than attracting customers by taking in less profit, catch their attention by offering more value.
When you’re working strategically, you’re thinking before you’re acting in the face of competition. It’s tough to think coolly and logically when you’re under attack; however, you should NEVER stop thinking rationally when threatened. I’ve outlined four ways to reduce the cost of reacting to a price threat:
1. Create a “flanking” offer available only to the more price-sensitive buyer. This involves eliminating some element of service, amenity or changing the type of vehicle – anything not highly valued by the price-sensitive segments.
2. Focus your reactive price cut on a particular geographic area where the competitor has the most to lose, relative to you, from cutting the price. Remember, the purpose of the retaliation may not be to defend your sales but to get the competitor to stop the price-cutting that puts your sales at risk.
3. Raise the stakes to the competitor of its discounting practices by being an informant. For instance, if you know that your competitor is giving discounts to new accounts, it’s fair game to let their longer term customers know this.
4. Leverage any competitive advantages to increase the value of your offer as an alternative to matching price. Let’s face it; this is an extremely competitive marketplace. People ask me all the time about how they should best compete for the business, and with the business being so unpredictable in recent years it’s been hard to give good advice. Here are a few tips on surviving the negative-sum pricing game and how to focus on positive-sum pricing that I gleaned from speaking to operators at our Leadership Summit last fall.
1. Avoid competitor confrontations unless you can structure them in a way that you can win and the benefit from winning exceeds the likely cost.
2. Do not initiate price discounts unless the short-term gain is worth it after taking into account the competitor’s long-term reactions.
3. Have a pricing structure that reflects the value of the service or no one will appreciate the “extras” that you offer.
4. Determine what differences in your service add value, then unbundle them and start charging for them.
5. Create revenue sources or provide incentives to your customers to change their behavior to eliminate costs to you.
Our aim at LCT is to help operators make money and save money. Please be mindful this year of your pricing structure and get your strategy in place now before the busy spring season.