The Balancing Act: Pricing Strategies and Customer Retention

LAUREL KJERSTEN

Associate Consultant

GALLUP CONSULTING

twincities@gallup.com

gallup.com

Topic: Leadership

Most companies' pricing strategies are based on four things: 1) competition, 2) the market, 3) cost plus, and 4) some estimation of value. In the best of times, pricing strategies are often based more on art than science; but these are surely not the best of times.

The downed economy makes setting prices even more challenging. If you aren't sure you're getting the most out of your prices when times are flush, how do you know what to charge when consumers are reluctant to buy at all? It may be difficult to determine solid pricing formulas in a tough economy, but it's not impossible. Now more than ever, businesses must understand the psychology of their customers.

When companies are considering their ability to compete, they may have to choose between losing profitability and losing customers. This is not necessarily a problem. If your company is healthy enough to consider taking a hit to its margins, it's probably healthier than most.

If your company can't cut production costs or reduce content — and if profitability is at stake — one of the only options left may be to raise prices. Nevertheless, there are ways to approach a price increase that balance the risk of alienating customers.

• Considering delayed payment plans, such as installment payments or credit, can make consumers feel better about their purchase.
• Consumers are more likely to feel they're getting their money's worth when the payment occurs as close as possible to the time of consumption.

Understanding customer psychology is an important concept to keep in mind when considering pricing strategies, especially those involving annual renewals. Learning how people feel about making purchases can go a long way toward getting them to continue doing so. It is important to make sure your strategy will be sustainable for the long term.

Smart Pricing
The economy will eventually right itself, and consumers will stop seeing price tags as threats. The companies that live to see that day are the ones that work smarter now — and part of being smarter is knowing how to price. But, how do you make sure you continue to be one of the products people buy?

The answer is to be worth the right price. The right price is the one that's offered the right way, feels fair, keeps a healthy balance sheet, and maintains customer and business integrity.

Further Information
For more information on Gallup’s Customer Engagement Practice, please contact twincities@gallup.com

2010-01-02 01:00:00 -0500