PRICE word cloud, business concept
By Ed Avis
Reprographics companies charge different prices to different customers all the time, based on negotiation, volume, speed of delivery and other factors. However, do you segment your customers based on their shopping habits, and charge differently based on that?
During an APDSP webinar on August 10, presenter Craig Press provided loads on information on pricing strategies for reprographics firms (log into the Member Center to watch the recording or read a transcript of that event). One strategy that he described is called “customer-based pricing.”
As Press described it, customer-based pricing involves creating three groups: A customers, B customers, and C customers. The A customers are loyal to your business and rarely shop around. The B customers generally shop around among three printers, and often go with the low price, but are generally solid customers. The C customers always hunt for the lowest price and can be difficult to deal with.
Each category plays a role. The A customers are most valuable, of course, and bring in the bread and butter. The B customers are worth having, unless you don’t have capacity. C customers are often undesirable, unless you need to keep your staff and equipment busy during slow times. But, Press noted, customers in the C and B categories may eventually join the A category, so it’s probably still worthwhile to deal with them.
Now, here’s the kicker. The customer-based pricing model suggests that you should charge more to the A customers; slightly less to the B customers; and the least to C customers. Doing this will produce the most revenue.
Here’s an example Press gave during the webinar: If you have a standard 15 percent markup for all customers, in many cases you’ll get the first two but lose the third. If the job cost was $1,000 and you marked it up 15 percent (so $1,150), you would get $2,300 in this example, which includes $300 profit.
Now if you use the customer-based pricing model instead, you mark up the A customer’s bid by 25 percent (so it’s $1,250); the B customer 15 percent ($1,150); and the C customer just 5 percent ($1,050). In this case, you get all three jobs, bringing in a total of $3,450, including $450 profit.
Based on this example, it seems clear that you should use customer-based pricing. But are there risks involved? At the end of the webinar I asked Press if it was risky to do this, since presumably the A customers may learn that they’re being charged more and get upset.
Press replied: “Well, I'm not sure how many customers share their pricing, especially if they have a perceived value that they're getting something more out of you than maybe the guy they're talking to. So, I guess that's always a risk, but if you really are selling based on your value and your services, they may not want to someone else to know what they're paying. So yes, that could be a risk, but I think the chances of that happening or are very slim.”
I did a little research on the topic after the webinar and came across a book called Smart Pricing: How Google, Priceline and Leading Businesses Use Pricing Innovation for Profitability by Wharton professors and pricing experts Jagmohan Raju and Z. John Zhang. In the book, the authors advise against this type of pricing. They confirm that the method can bring in more profit in the short term, but could hurt a business in the long term. Here is an exceprt:
“In business-to-business markets, discriminatory pricing can also easily alienate a firm's best customers, with detrimental long-term consequences. The worst is that over time, discriminatory pricing can train the customers to become aggressive bargainers. In the industrial markets, a professional buyer fears a high relative price more than a high price. A high price is a problem for the industry. A high relative price is a problem for the buyer personally. No one wants to think of himself as a sucker, but for a professional buyer, the damage wrought by overpaying isn't only to his pride; it can also hurt his career. He may suffer professionally if he is exposed as less skillful than his peers.”
So what do you think? In the reprographics industry, is customer-based pricing normal and smart, or risky? Please share your comments using the Comment feature below.