Facing shrinking market and declining sales businesses may be tempted to slash prices to keep their customers. But businesses that practice effective price management do not use price cut as the only tool to attract and keep customers. The Wall Street Journal features three small businesses , -Townstream Corp, Lone Star Limousine, and Mr.Transmission – that practice at least two of the three components of effective price management to drive up profits.
- Segmentation: Not all customers need the same level of service, why offer the same product at the same price to all? If one price is good, two prices are better.
- Incremental Analysis: Knowing the impact of the price cut on current profit and future profit growth is crucial.
- Total Margin: Focus on all revenue opportunities by selling complements. It is not apparent from the WSJ story how these business implement but we can see several opportunities to sell additional services to their customers.
Townstream Corp was finding difficult to sell its high end Internet access for $999. They offered a mid-range version at $500 targeted at those segments with lower need and lower willingness to pay. A simple price cut would have lowered the reference price and would have made it difficult for the company to increase its pricing when the economy improves.
Lone Star Limousine noticed a change in customer perception of using limousines. This was not only due to cost cutting but due to “flashy image” associated with limousines. If they had not had the second insight they would have simply cut the prices. Instead they added vans to their pool and kept their prices for limousines. The cost conscious segments chose the vans while those who still preferred limousines were not discounted. This way the company got to maintain its brand as a high end limousine provider without losing businesses of those cost cutting customers.
Mr. Transmission selectively offered food and gas cash cards to those customers who had transmission overhauls. This is one of the most expensive work ($1800) and cost conscious customers were postponing this repair work. Targeting those with a promotion and not a price discount helped to not only bring those customers to store but also preserved their reference price.