Master the Art of Business
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When you change the price of an offer, the effects aren’t limited to your current target market. Often, you’ll experience a sudden shift in the target market your offer appeals to: a Price Transition Shock.
A change in prices can change your typical prospect overnight.
As you test different pricing strategies, you’ll notice certain thresholds where you stop appealing to certain types of customers and start appealing to customers with very different characteristics.
When you change the price of an offer, the effects aren’t limited to your current target market. Often, you’ll experience a sudden shift in the target market your offer appeals to: a Price Transition Shock. A change in prices can change your typical prospect overnight.
Most people who are new to business assume that the best way to increase sales is to reduce prices. That’s not necessarily true. Often, raising your prices is an effective way to attract more customers.
Discounts attract customers when the offer is a commodity. If there’s no difference between the gasoline you can buy at one gas station vs. another, reducing gas prices may bring in more customers. Since most service stations make more money from their convenience stores than they make selling gasoline, a gas discounting strategy may lead to higher profits.
In introductory economics courses, this idea is called “price elasticity.” Offers with high price elasticity experience major changes in demand when prices go up or down. Offers with low price elasticity experience little fluctuation in demand when prices change. Economists love to draw downward sloping pricing curves that show demand increasing as prices decrease.
The trouble with the traditional pricing curve is that it can be misleading when the offer isn’t a commodity. In practice, raising your prices can increase demand by appealing to a more attractive type of customer.
Automobiles are a classic example of this type of price sensitivity: some cars are desirable because they’re expensive. The typical customer that purchases a Bentley Continental GT is very different than the type of customer who purchases a Toyota Camry.
As you test different pricing strategies, you’ll notice certain thresholds where you stop appealing to certain types of customers and start appealing to customers with very different characteristics. These Price Transition Shocks can completely change the experience of operating your business, and you shouldn’t take them lightly.
There are two major considerations when setting your prices with Price Transition Shock in mind: (1) potential profitability, and (2) ideal customer characteristics. The best strategy is to set your prices in a way that appeals to the prospects that will ensure you work with your most desirable customers in a way that results in the highest profits.
The ideal balance depends on your target market. In some markets, it’s easy to serve customers who are attracted to low prices; in others, discount customers can be challenging and rude. Likewise, prospects that don’t blink at high prices can be pleasant and cordial, or demanding and snooty. The experience depends on the industry and the prospect’s expectations.
One of the businesses I’ve been involved with over the years succeeded in doubling their average order value by eliminating low-priced offers. As a result, profits increased. As an Unintended Consequence, the company’s typical customer changed for the worse: prospects made unreasonable demands more often, and acted in disrespectful ways when those demands weren’t met. The short-term financial result was positive, but the change placed extraordinary stress on the staff.
On the other hand, a service business I advise decided to quadruple their typical service price, and found that their new positioning appealed to their ideal customer: people who valued the firm’s work and took the project seriously. Non-ideal customers were turned off by the hike in prices, so they went away. As a result, the company filled their client roster with excellent customers and increased profits by more than 500%. The staff is thrilled with the change: they’re doing more work for better clients, and getting paid more for their expertise.
As you change your prices, the prospects attracted to your offer will also change. So long as you maintain Sufficiency, you can choose to appeal to any type of customer you please.
"If you want to grow old as a pilot, you’ve got to know when to push it, and when to back off."Chuck Yeager, first pilot to break the sound barrier
Master the Art of Business