Earlier this week, I introduced the concept of the price-band, a way to understand what your customers are thinking about when they buy, and a tool to help you avoid the set-it-and-forget-it method of pricing.
The price-band is a fluctuating “window” of acceptable prices that a customer is willing to pay. At any given time, they might pay a higher price, or a lower price, or somewhere in the middle. And, over time, this window of acceptable pricing changes as the customer evolves.
Smart businesses know that adopting a set-it-and-forget-it mentality when pricing is dangerous, as illustrated by this example below (in which a high-end business sets a fixed price that the market is sometimes willing to pay and sometimes they are not willing to pay).
Instead, businesses need to set up a dynamic pricing model in which they revisit what they charge and adjust it based on the price-band fluctuations over time. Here’s a better (dynamic) example of a business selling to customers with high-end pricing…
Some brands are specifically built around in a specific part of the price-band (for example, if you are a high-end provider or a low-price provider). But businesses don’t necessarily have to stick to that part of the price-band if they don’t want to. If you choose to price anywhere within the acceptable price-band, then the price-band becomes a tool for you to manage your business.
Simply put: You can increase the price when things get really busy and you can decrease your price when things are slow. Thus, your price becomes a way to attract (or repel!) customers so that you can manage your business more effectively.
In the example below, a business is busy for a while and its prices are at the higher end of the price-band. But then they experience a slow-down. It could be because of any number of reasons (a fierce competitor or seasonal fluctuations or a news story). The business drops the price to gain more business.
Some of the reasons that dynamic pricing is important include:
- You are a professional who sells your services. Since there is only one of you, your price can be a tool to help you increase or decrease the number of clients you serve.
- Your business faces fluctuations (due to the seasons or some other factor).
- You have inventory that will spoil.
- You want to increase marketshare.
- You have a product that you aren’t sure how much to charge.
- You need cash flow
So, instead of thinking of your prices as a fixed number you charge every time, think of your prices as something that needs to fall within the price-band but is actually a “dial” you can adjust when you want more business.