Mention innovative pricing to gain more profit, and most
people think of charging more for "extras." I got a new set
of glasses this week. The lenses only cost $59, but they
tried hard to sell me an "anti-glare" coating for another
$50. Based on what I know about coatings, this probably
costs $0.10 to apply. I'm on to that kind of so-called
innovative pricing. No, thank you!
Lower prices instinctively feel to most people like a way
to shave their profit margins, and drown in the resulting
profit squeeze. While you certainly need to be careful
whenever you lower prices, help can come in the form of
price adjustments that reduce your costs at the same time.
Let's explore how to find these cost-reducing price
adjustments.
You can also use pricing as a carrot or a stick to
influence which offerings your customers and end consumers
will choose. Whether you use the carrot or the stick in a
particular circumstance depends, in part, on your fully
analyzed current and potential costs.
Adding volume has widely differing impacts on average and
marginal costs across various offerings. This is true in
both the short term and in the long term. You should
consider both time perspectives and dimensions of costs.
Consider Southwest Airlines. That carrier uses pricing in
both ways to reduce costs.
First, the airline specializes in lean operations that have
lower costs than all other major air carriers. This enables
the company to offer lower prices for vacation travelers
and others who can book flights well in advance. Such
discounted prices are usually about 10 to 20 percent less
than competing airlines for the same routes.
You can often fly on the airline coast-to-coast for the
same price paid for a similar, discounted flight 38 years
earlier. Those low prices attract lots of customers, and
the airline often has a higher percentage of seats filled
than its competitors. That popularity drives down costs
because the extra expense to add another passenger is very
small. As Southwest might say, it's just peanuts. Most of
the increased revenue turns into profit contribution.
Second, like other airlines Southwest also charges more for
people who buy tickets at the last minute. However,
Southwest's prices differ from those of other airlines by
being based on a much smaller percentage increase from the
discounted fare. Thus, a business traveler may be able to
buy a last minute ticket as little as 25 percent of the
price of a competing airline. This drives a lot of last
minute travelers to Southwest at premium prices, further
lowering costs while fattening margins.
How can you use lower prices to cut your costs even faster
than your prices drop?
Copyright 2008 Donald W. Mitchell, All Rights Reserved
----------------------------------------------------
Donald Mitchell is chairman of Mitchell and Company, a
strategy and financial consulting firm in Weston, MA. He is
coauthor of seven books including Adventures of an
Optimist, The 2,000 Percent Solution, and The Ultimate
Competitive Advantage. You can find free tips for
accomplishing 20 times more by registering at:
====> http://www.fastforward400.com .
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