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| Issue: #6-SB |
October/2008 |
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Greetings!
It goes without saying that these are incredibly challenging times. You are probably scrambling to keep your current customers, and the thought of raising prices in this cost-conscious era can seem like business suicide. But the truth is this: your costs are increasing (as are everyone else's) and your margins are shrinking. To stay viable in the long run, you either need to cut your costs or raise your prices. In this article, we look at a way to creatively raise your prices while offering your customers what they need. |
UNBUNDLING- CREATIVE PRICING IN CHALLENGING TIMES
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Think about how much time, money, and effort it takes to acquire a customer. You want to keep them for as long as possible, but they are clamoring for discounts or pressuring you to reduce your prices. Meanwhile, you are looking at your shrinking profits and wondering where else you can cut costs to accommodate customer demands. Instead of discounting, one solution is to unbundle your product or service.
Unbundling your product or service allows you to pass along a price increase to customers in smaller increments. When you unbundle products or services, you break down your offerings, special packages, or product sets into smaller "pieces" for your customers and charge a small premium for doing so.
A word of warning: you cannot effectively and profitably unbundle services without having a solid understanding of the underlying costs of each of the services you are offering. Even when you add a price premium to an unbundled service, if you are guessing what your costs are, then you may unintentionally sell an unbundled service for a loss.
So you must have a handle on your cost structure. The key to unbundling is not so much in what you unbundle, but in how you do it.
A Lesson from the Airlines-How NOT to Do It
The airlines have attempted to unbundle their services and charge for benefits previously included in the price of the ticket. New fees for checked baggage, meals, and "specialty" seating (i.e., window or aisle seats) have caused an uproar with customers who feel like the airlines are nickel-and-diming them. (See the New York Times article "Airline Travelers Need to Pack More Money.")
In the airlines' new pricing strategy, there are some lessons to be learned:
- Look at it from your customer's perspective: Unbundling only works if your customers understand what you are doing-and why. With rising fuel costs and growing losses, the airlines found that they had to pass a price increase on to their customers. We all understand why they increased fares, but how they did it came across terribly. Part of the problem was that consumers were used to having all the perks included in the price of their ticket. Instead of charging $25 fees for each service on top of the ticket price, wouldn't it have made sense to raise the prices of all the tickets and then discount for pared-back services? Airfare passengers would feel like they had options. Maybe they would forego the second checked bag or bring their own beverage on board if they felt they were getting a deal.
- Empower your consumers: By allowing your consumers to choose what level of service they need, they will feel more in control. Just as passengers can choose whether they want to fly first class or coach, they can make a conscious choice of whether to pay for the additional perks or not. An across-the-board price increase takes the power out of the consumers' hands. But if you say, "I am raising my prices for the deluxe service, but if you forego X, Y, and Z, the price will be considerably less," it softens the blow. Businesses and consumers all understand that energy, health care, and the cost of credit are rising, but if you put them in the driver's seat regarding how they can manage a price increase from you, you will appear customer centered and be more likely to retain them and build loyalty.
- Demonstrate how unbundled services improve the value that you provide: The key to unbundling services, in addition to allowing your consumers to have more control, is that you can retain customers that are price sensitive while catering to those who want all the bells and whistles. Unbundling is an exercise in positioning; you have to be very careful not to appear as if you are nickel-and-diming your customers-rather, you are catering to their needs. In the case of the airlines, they had an uphill battle for two reasons: (1) their passengers were accustomed to having services such as beverages and bag checking included in their airfare and (2) the new fees were seen as large price increases and were not received well-either by consumers or the media. If the airlines were able to show how consumers could customize their flying experience by selecting only those services that were important to them, they would have been able to retain their non-price-sensitive customers (e.g., business travelers and first-class passengers) by still offering all the services that these customers were accustomed to while catering to the cost-conscious family traveler.
- Stop, look, and listen: Unbundle services and watch what starts happening with your business. Want powerful market research without having to pay for it? See what happens when you put your consumers in the driver's seat. You will gain incredible amounts of insight in to how your products and services are valued in the marketplace.
Are there added costs with unbundling services? Often, yes. But if done properly, and only with a keen understanding of the underlying costs of each unbundled service, this strategy could prove to be very effective in retaining customers in these troubling economic times. You may even be able to maintain or improve profit margins. Unbundling adds complexity to pricing and administrative tasks, but it also allows you to become more customer oriented and it differentiates you from the competition.
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