The price-band: A tool to help you manage your business

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.

The price-band: Why you shouldn’t use the “set-it-and-forget-it” method to price your offerings

In a previous post, I introduced the price-band as a way to know what your customers are thinking about when they buy.

Just to refresh your memory, the price band is the acceptable price(s) that your customer is willing to pay for your offering. The price a customer is willing to pay can fluctuate based on a variety of factors, and the overall price-band fluctuates over time because a customer’s willingness to pay specific prices will evolve over time.

At any given time, your price might be on the high end of the customer’s acceptable limit of what they’re willing to pay or it might be in the middle or it might be on the low end. In the example below, I’ve given three price points (although the price-band might be wide enough for many different price points).

Any price higher than this, a customer won’t pay; any price lower than this, a customer won’t pay. When business owners think of pricing, they often take a “set-it-and-forget-it” mentality of setting their price once and then riding that price until no one wants the product any more or it’s no longer profitable.

Here’s an example of a business that sets its price at the higher end of the market but then doesn’t change their price with the fluctuating market…

Notice how sometimes they are making money (the green price points) but sometimes their prices are too high for the market to pay (red price points). The same would be true if the business prices their offering on the low-end. And, depending on the severity of the price-band fluctuation, it could also be true if the business prices their offering in the middle.

Instead, prices should fluctuate with the price band. Here are two examples…

Here is a business that sets its price to the high end of the market, but maintains dynamic pricing over time:

And here is a business that sets its price to the low end of the market but maintains dynamic pricing over time:

By maintaining dynamic pricing, you’ll always be making money.

But there are other reasons to maintain dynamic pricing. Stay tuned tomorrow to learn how the price-band is a tool to help your business.

As long as you remain in the acceptable price-band (and, of course, as long as you remain profitable), you can decrease the price slightly to take on more business or you can increase the price slightly to take on less business.

The price-band: How to understand what customers think about when they buy

Most businesses price their products or services backwards: They decide on a price almost arbitrarily and then slap a real or proverbial price tag on their offering and move on. As long as there is some profit built into their price, they feel like they can now move forward with their marketing.

But when businesses do this, they put an obstacle in the way of success.

  • They might leave money on the table
  • They might not be competitive in the marketplace
  • They might accidentally lose profit (because some expenses are not fixed)
  • They might spend most of their marketing energy trying to justify their price rather than talking about benefits

Setting a price shouldn’t be an arbitrary judgement call. And once set, that price shouldn’t remain static. Rather, setting a price is a dynamic part of your business that you should be willing to adjust over time. (You might also want to read my blog post Prices and pricing strategies: How to price your products more effectively and How to price a product or service.

Here’s a new way for you to think about the pricing of your products or services:

Rather than just setting a price, think about it from the other direction: What is your market willing to pay? The amount they are willing to pay will fluctuate over time within a narrow band.

I’ve illustrated this very simply in the blue band below. If you think of the vertical axis as specific amounts of money and the horizontal axis as time, you’ll see how your market is willing to pay different amounts over time (but always WITHIN THIS BAND).

I’ve purposely left dollar amounts and time periods off of this graphic because the specific amounts and time periods will change, depending on what is being a sold. A buyer of airplanes will be willing to spend millions over several years while a buyer of coffee will spend a few bucks in one short transaction. The amount of money and the time periods will differ but the concepts I’m explaining below are true for retail customers or business customers, no matter what you are selling.

Let’s take a fictional example of a coffee drinker to introduce the price-band concept. They are unwilling to spend $15.00 on coffee (that would be outside of the band on the upper end) and they are unwilling to spend a quarter on coffee (that would be outside of the band on the lower end). Their reason not to spend $15.00 on a coffee might be that they don’t have $15.00 to spend. Their reason not to spend $0.25 on coffee might be that they perceive twenty-five cent coffee to be too nasty to be worth drinking.

But within the price-band, they might be willing to spend anything between those amounts — For example, $12.00 for a grande-cafe-frappa-mocha-whatever at Starbucks or a thirty-cent discounted coffee with a fill-up at their local gas station. Any price in between those points is something they are willing to spend.

In the example below, I’ve shown 3 price points (in green) at one period of time in the price-band (although I think there are probably many more price points within price-band…

Again, the price points within the price-band are those price points that the customer is willing to pay. There are price points outside of the price-band that the customer is unwilling to pay.

What a customer chooses to pay or chooses not to pay depends on a variety of factors. Some of them include:

  • How much money the customer has available right now
  • How much money the customer thinks they will have or need in the near future
  • How desperately the customer needs the product or service
  • How closely the product or service addresses their needs
  • Peer pressure (to buy the product or to spend a certain amount)

Each individual buyer sets their own price-band but if you think of several individual price-bands on the same chart there would be some overlap. Some of your customers would have higher price-bands, some would have lower price-bands but in general those price bands would overlap.

Not only do prices with the price-band fluctuate, but price-bands fluctuate over time. To use the coffee example, again: A college-aged student might have a narrow price band that hovers around the lower-end of the market because they don’t have a lot of money. Later in life, when they are earning an income, their price band might grow. But then they make friends with someone who only drinks high-end coffee and they have peer pressure to pay even more. But then they lose their jobs and cut back on their coffee consumption to save money.

So what does this mean for you?

Well, there’s a lot I can say about this (and I’m going to write more about it in the coming week) but I wanted to first introduce the concept of the price-band so I could build on it in future blog posts.

The Business Model Canvas — a tool to help you understand and grow your business

I stumbled across a really cool tool that I thought you’d like. It’s called the Business Model Canvas and it’s a way for you to analyze your business model and create/innovate new ones.

The Business Model Canvas is divided into 9 parts:

  • Customer Segments (see the right side of the image) are the demographic groups you serve.
  • Customer Relationships are a description of how you relate to the people you’ve just listed in Customer Segments.
  • Value Proposition (see the center of the image) is the value you offer to your Customer Segments.
  • Channels is how you communicate your Value Proposition to your Customer Segments.
  • Key Partners (see the left side of the image) are the vendors and suppliers you do business with.
  • Key Activities are the things you do to make your Value Propositions happen.
  • Key Resources are the things that your Value Propositions require to be completed.
  • Cost Structure (see the lower left side of the image) is how you pay to run your business.
  • Revenue Streams (see the lower right side of the image) are the ways you make money.

Here’s a slightly more in-depth overview of the Business Model Canvas

HERE’S HOW TO USE THE BUSINESS MODEL CANVAS

  1. Start by filling out the Business Model Canvas for your company as it exists today.
  2. If you are just starting a business, this is your opportunity to create your business model from scratch. Explore how others are operating in each of these model segments and see if you can do things differently. A slightly different Customer Segment or a slightly different Value Proposition, for example, can be the differentiating factor you need.
  3. Have others in your organization fill out the Business Model Canvas and see how their version is similar or different than yours.
  4. Compile a company-wide canvas that everyone can agree on and get excited about.
  5. Use the same Business Model Canvas to do competitive analysis and see what other people in your industry are doing well (and where you can create a competitive advantage).
  6. Create metrics for each section and measure team performance on their contribution to those metrics. For example, did they improve customer relationships? Did they increase revenue streams? Etc.
  7. Periodically, examine ways to innovate in your business by choosing one of the sections and asking yourself questions like: “How can we do this section more effectively?” and “How does our competition excel at this section?”
  8. Combine the Business Model Canvas with another tool like Blue Ocean Strategy. Use these 9 Business Model Canvas sections as 9 elements for Blue Ocean Strategy.
  9. Use the Business Model Canvas to inform your development of your sales funnel – Customer Segments and Value Proposition help you know who to talk to and what to say, while Customer Relationships and Channels help you know how to move your Customer Segments through the sales funnel. Key Activities and Key Resources are used (usually at delivery but also at other times in the sales funnel).

To use the Business Model Canvas, visit BusinessModelGeneration.com where you can download a free PDF of the Business Model Canvas for yourself, as well as access their foundry and app store.

Use the 7S strategy framework to optimize your sales funnel

Running a successful, profitable business means always tuning your sales funnel to keep it in peak condition.

7S in your sales funnel
7S Framework from MindTools.com
One of the ways to analyze your sales funnel and find opportunities for improvement is to use the McKinsey 7S Framework.

The McKinsey 7S Framework (displayed to the left) is a series of 7 spheres or elements that make up a business: Shared Values, Strategy, Structures, Systems, Skills, Staff, Style. The 7S tool has been a beloved strategic management tool for years. Each of these elements represents some aspect of your business and it gives you a way to make sure that everything is aligned and working together. (By using it as a framework to analyze your business, for example, it can reveal that not every aspect of your business shares the same values or that the staff of one aspect of the business aren’t adequate to do the job).

You can use the same tool to analyze your sales funnel. Divide your sales funnel into stages (I like to use Audience, Leads, Prospects, Customers, and Evangelists but you might want to use different stages) and look at each stage through the “lens” of the 7S framework.

So, I might look at my Audience stage and ask the following questions:

  • Shared Values: Does my communication in the Audience stage of my sales funnel share the values of my business?
  • Strategy: Do I have a strategy for the Audience stage? Does the strategy in my Audience stage match the strategy of the rest of my business?
  • Structures: Do I have structures for the Audience stage of my sales funnel? Do my Audience contacts know what to do next?
  • Systems: Do I have systems for the Audience stage of my sales funnel? Does the Audience stage of my sales funnel rely on me or does it run automatically?
  • Staff: Do I have the staff to manage the Audience stage of my sales funnel? Am I missing anyone?
  • Skills: Do I (or my staff) have the skills necessary to achieve success in the Audience stage?
  • Style: Does my style reflect what I want to achieve in the Audience stage of my sales funnel? Does my style of leadership adequately communicate to my staff when empowering them to work in this stage of the sales funnel?

Then, repeat this process for each stage of the sales funnel.

By using the 7S Framework as a lens, you’ll be able to look at your sales funnel in the context of your larger business and you’ll create a list of ways you can optimize your sales funnel and to ensure that it is aligned with your business.