Most pricing strategies can be categorized as cost-plus or value-based. Both are good but incomplete. In my experience, those who set the prices don’t know, forget, or leave out costs that they shouldn’t. Sometimes it is the cost of the salary of the principals. Sometimes it’s all the costs involved in being able to provide this product or service.
Value-based pricing incorporates the costs and the value this product or service provides the customer. If all the true total costs are accounted for, then determining what the customer gets out of it should be relatively simple. Market research, competitive analysis, and usability testing gives you a place to start.
However, while value-based pricing can help you get the right customers, it doesn’t focus on helping you keep those customers, or on encouraging them to “recruit” others like them. A Legacy Pricing™ strategy can accomplish both. It not only focuses on the present of your company, but lays out a path to a bright future for your business.
If what you sell is a commodity and you are only looking for breathing, paying bodies, then legacy pricing is probably not right for your business. But if your business relies on repeat customers, and you’re committed to providing an exceptional customer experience, legacy pricing can help set you up for long-term success.
3 best practices for successful legacy pricing
If you think legacy pricing might be a good fit for your company, here are three best practices to consider:
1. Price your products and services based on what your desired legacy customer values.
The latest research suggests that about 15% of your customers account for 55-70% of your total sales. If those 15% are the kind of customers you want more of, set your prices so that you cover your true total costs and can afford to profitably provide the benefits these particular legacy customers value. In order to know what your legacy customer appreciates, you need an up-to-date picture of your best customers, or what I call a platinum customer profile.
Whether you are selling to a consumer, business, non-profit or government, you are always dealing with a decision maker. With that in mind, your profile should define that person in many ways. It should include demographics, psychographics, risk tolerance, decision-making style, and purchase behavior. It also includes the main “game” they play as they go through life: social (status), big business (global), small business (community), university (fact-oriented), government/non-profit.
Price your products and services based on this profile and you won’t leave money on the table. You will also have less risk that you exceed their pricing flinch point. This is the point at which you can almost see a physical negative reaction to the price you name. Price for your legacy customers, and you will scare away the kind of customers who could really drag the business down.
2. Price for positioning, now and in the future.
Don’t forget where you’re going with your business and who you want to go with you. Positioning is key to long-term success. What do you want customers to think of your company and its product or services? High class or low end? One of the biggest dangers to positioning is the use of discounts, coupons, etc. Each one these can ruin the long-term positioning that you have established in the customers’ minds. Overusing discounts can lead your customers to stop seeing your products and services as the best.
High-end companies don’t discount high-end quality products and services. Neither should you. They may add a mid-range or low-end group of products or services. But to keep legacy customers now and in the future, they keep the price up where it belongs.
Seeing discounted rates can make legacy customers lose faith in what you deliver. Why would they change their belief in your company and what it sells because of price changes? Because the best products and services provide something more: extra quality, more relevant benefits, and higher long-term value. People know it takes time, effort, and money to make things right. If customers feel you’re not charging enough to ensure things are done correctly and provide them with an exceptional customer experience, then they will lose their loyalty and respect for what you sell. Their referrals to others like them will drop off, too.
You want to price so that you can efficiently and profitably provide the extra quality and beneficial value that make your customers feel special. This is the only way to ensure that they consider you to be exceptional and continue to happily do business with you.
There is one universal truth about sales: you can’t steal a happy customer. Loyalty and feeling special make customers feel like they belong. When they add you to their tribe, they will stay. Because they stay, others who trust them or compete with them will be attracted to you as well.
3. Make sure the right person does the pricing and determines any exceptions.
Who has the pricing authority in your business? Is it the right person? To implement legacy pricing well, I recommend using a good feedback loop. If you do the pricing, have someone else review your decisions, including any exceptions. If partners or staff handle pricing, have all those who work with the product or service give you input before putting anything in writing. This includes sales, service, operations, financial management staff, and even the person who answers the emails or the phone. Vendors can also be helpful, especially if they add value to what you sell.
Be sure to do your market research based on that legacy customer profile along with their wants and beliefs. Check your numbers again. See if it will support the positioning you have and the positioning you want to maintain. It’s also wise to get someone who’s not connected with your business to review what you’ve done and ask the hard questions.
It’s so important to get feedback and do market research on your legacy customers when you are introducing a new product or service. It’s even more important if you are re-pricing an existing product or service. Ultimately, someone makes the decision and determines any exceptions. From there, the business either has to live with the results or go back to the drawing board. The buck stops with the owner.
Legacy Pricing and Your Business Future
Legacy pricing wisely looks at the past and present to plan for the future. The future of your company depends on a strong reputation for quality and service. Appropriate pricing can maintain and improve your customers’ opinions of your goods or services, and can boost your ability to attract more of the kind of customers you want to keep on your side.
If you would like a free copy of the Business Success Center’s Pricing Glossary, please go to: http://ownersview.com/free-business-resources/.
For more information on other kinds of pricing strategies, I recommend The Strategy and Tactics of Pricing by Nagle, Hogan, & Zale (any edition will be useful). Because I believe in buying locally, I suggest you buy it from your favorite independent bookstore. Mine is Book People in Austin.