Operations

Premium Pricing
Premium Pricing Jonathan Poland

Premium pricing is a pricing strategy in which a company charges a high price for its products or services in order to maintain the exclusivity and perceived value of its brand, business, product, or service. The idea behind premium pricing is that by charging a high price, a company can limit the number of customers who are able to access its products or services, and can therefore maintain a certain level of exclusivity and prestige.

This approach is often used by luxury brands, which seek to preserve their high-end image by charging premium prices for their products. By charging a high price, a company can potentially increase its revenue and profits, even if its sales volumes are lower compared to companies that charge lower prices. Premium pricing can also be used to differentiate a company’s products from those of its competitors and to create a perception of value among its customers.

Some examples of premium pricing in action include:

  • A luxury car manufacturer charging a high price for its top-of-the-line model in order to maintain the exclusivity and prestige of its brand
  • A high-end fashion retailer charging a premium price for its designer clothes in order to differentiate them from lower-priced clothing sold by other retailers
  • A luxury hotel chain charging a high price for its top-level rooms and suites in order to create a perception of exclusivity and value among its customers
  • A high-end restaurant charging a premium price for its menu items in order to create a perception of exclusivity and quality
  • A luxury skincare brand charging a high price for its products in order to differentiate them from lower-priced skincare products
  • A luxury watch manufacturer charging a premium price for its watches in order to maintain brand position

In each of these cases, the company is charging a high price for its products or services in order to preserve the status and perceived value of its brand. By doing so, it can potentially increase its revenue and profits, even if its sales volumes are lower compared to companies that charge lower prices. Premium pricing can be an effective way for businesses to differentiate their products and to create a perception of value among their customers.

Subscription Model
Subscription Model Jonathan Poland

A subscription model is a pricing and revenue strategy in which customers pay a recurring fee for access to a product or service. This model is attractive to businesses because it provides a predictable stream of income and can help to increase customer lifetime value by encouraging customers to continue using the product or service over a longer period of time. Subscription models are common in a wide range of industries, including media, software, and fitness. By offering their products or services on a subscription basis, businesses can more effectively capture the value that customers derive from their products, and can potentially increase their revenue and profits.

Examples of the subscription model in action:

  • A media company offering a subscription service that gives customers access to its online content, including articles, videos, and podcasts
  • A software company offering a subscription-based service that gives customers access to its software products, including updates and new features
  • A fitness company offering a subscription service that gives customers access to its gym facilities and classes

In each of these cases, the business is offering its product or service on a subscription basis, allowing customers to pay a recurring fee in exchange for ongoing access. This model can be attractive to both businesses and customers, as it provides a predictable stream of revenue for the business and a convenient way for customers to access the product or service.

Variable Pricing
Variable Pricing Jonathan Poland

Variable pricing is a pricing strategy in which prices are set based on real-time data and can vary depending on a wide range of factors, such as market conditions, customer behavior, and competition. This approach allows businesses to quickly and accurately adjust their prices in response to changes in the market, and can help them maximize their revenue and profits. Variable pricing is the basis for a number of pricing techniques, such as revenue management, dynamic pricing, and yield management.

By using data to set fine-grained prices, businesses can more effectively respond to changes in the market and can better align their prices with customer needs and preferences. Some examples of variable pricing in action:

  • An airline using yield management to adjust the prices of its plane tickets based on factors such as the time of day, the number of seats available on a particular flight, and the historical demand for that route
  • An online retailer using dynamic pricing to adjust the prices of its products based on factors such as the competition, the availability of the product, and the customer’s purchase history
  • A ride-hailing company using algorithms to adjust the prices of its services based on factors such as the demand for rides in a particular area, the availability of drivers, and the time of day

In each of these cases, the prices of the products or services are being adjusted in real time based on data inputs, allowing the businesses to more effectively respond to changes in the market and maximize their revenue and profits. The following are common ideas on how to use variable pricing.

Price Discrimination

Price discrimination is any pricing strategy that attempts to sell both to customers who are price sensitive and those who are relatively insensitive to price. For example, a manufacturer of sunglasses may set a low price for unpopular colors. Customers who are price sensitive may be tempted to buy a color that is on sale. Customers who aren’t price sensitive will buy the color they prefer.

Inventory

Lowering a price based on inventory levels to clear items. Alternatively, a price may go up when an item is selling fast and you’ll soon run out of stock.

Competition

Basing prices on competitive intelligence. For example, lowering a price when a competitor launches a new product that is a threat to your market position.

Forecasting

Setting prices based on supply & demand forecasts. This can be done at a fine-grained level such as a seat on a flight. If you forecast that a particular seat might not sell you might offer it at a low price.

Dynamic Pricing

Dynamic pricing is a term for variable pricing that occurs in real time. For example, an ecommerce site that uses algorithms to set prices based on data such as inventory levels.

Peak Pricing

Setting higher prices during peak hours for infrastructure with fixed capacity such as roads.

Sustainability

Pricing can be used by cities and nations to meet sustainability goals such as air quality levels. For example, vehicle registration and license fees based on the emissions of the vehicle.

Yield Management

Yield management is the science of pricing inventory that occurs at a point in time such as a seat on a flight or a hotel room. Such inventory is limited in supply and may generate high prices when demand is high. Alternatively, such inventory goes to waste if it is not sold and is often discounted.

Value Pricing
Value Pricing Jonathan Poland

Value pricing is a pricing strategy in which a company sets its prices based on the perceived value that its products or services offer to customers, rather than on the prices of competitors or the company’s own costs. This approach involves estimating how valuable a product or service is to a customer and then setting the price based on that estimate. Value pricing is based on the idea that customers are willing to pay more for products or services that they perceive as being valuable, and that the value of a product or service is not determined solely by its cost or the prices set by competitors. By focusing on the value that its products or services offer to customers, a company can set prices that are more in line with customer needs and preferences, and that can potentially maximize its revenue and profits.

Services

A restaurant prices all appetizers below $10, including those that contain more expensive ingredients than several main dishes that cost $25. This is done because in the restaurant’s experience, customers value appetizers less than main dishes and are unwilling to pay more than $10.

Fast Moving Consumer Goods

A fast moving consumer goods firm prices hair treatment higher than hair conditioner despite the costs of the two being more or less the same.

Art

Art is typically priced based on its perceived value.

Capital Goods

A capital good such as an industrial robot may be priced based on its ability to generate revenue for customers. For example, if an industrial robot can improve customer profits by $1,000,000 a price of $500,000 would allow the customer to achieve a return on investment of 100%.

Niche Markets

A book is of very high value to geologists but of little interest to anyone else. In this case, the author has incentive to charge an unusually high price because the few people who want it place a high value on it.

Consulting

A highly specialized IT consultant finds that clients often have big problems when they need her services. As such, they are generally willing to pay high prices.

Medicine

People value their lives and are often willing to pay a high price for medical treatments far beyond their cost. This can raise situations whereby a high price is charged for a treatment that has a low cost. In many cases, a public healthcare system prevents this type of pricing.

Superior Goods

Luxury items such as a fashion brand with high social status may price items based on customer perceptions of value. For example, a particular brand may find that they can charge $500 for shoes but can’t charge more than $100 for an umbrella. In theory, the umbrella could be more expensive to manufacture.

Veblen Goods

Veblen goods are products and services such as a wedding where people feel they should spend a high price and may actively avoid lower cost options. For example, a wedding venue may charge a similar price for seafood, meat and vegetarian selections despite large differences in cost.

Price Umbrella
Price Umbrella Jonathan Poland

A price umbrella is a pricing strategy in which a company sets a high price for a premium product or service, and then uses that high price as a reference point to offer lower prices for other, less expensive products or services. The idea is that the high price of the premium offering creates a “price umbrella” that makes the lower prices for the other products or services seem more appealing by comparison. For example, a luxury car manufacturer might set a high price for its top-of-the-line model, and then use that high price as a reference point to offer lower prices for its other models, making them seem like a better value by comparison. This strategy can be effective in helping a company differentiate its products and create a perception of value among its customers.

Some examples of the price umbrella strategy in action include:

  • A high-end clothing retailer offering a $1,000 designer dress and then using that high price as a reference point to offer a $200 blouse and a $100 pair of jeans, making them seem like a better value by comparison
  • A luxury hotel chain offering a suite with a starting price of $1,000 per night and then using that high price as a reference point to offer standard rooms for $200 per night, making them seem like a better value by comparison
  • A premium smartphone manufacturer offering a top-of-the-line model for $1,000 and then using that high price as a reference point to offer lower-priced models for $500 and $300, making them seem like a better value by comparison

In each of these cases, the high price of the premium offering serves as a reference point that makes the lower prices for the other products or services seem more attractive by comparison. This can help the company differentiate its products and create a perception of value among its customers.

Channel Pricing
Channel Pricing Jonathan Poland

Channel pricing refers to the practice of setting different prices for a product or service depending on the sales channel through which it is sold. For example, a business might set a higher price for a product when it is sold through a brick-and-mortar retail store compared to when it is sold online through the company’s website. Channel pricing can be a useful way for businesses to differentiate their products and to adjust their prices to reflect the costs and benefits of different sales channels. For example, a company might set higher prices for products sold through brick-and-mortar stores to reflect the higher overhead costs associated with operating a physical retail location.

Some examples of channel pricing in action include:

  • A clothing manufacturer setting higher prices for its products when they are sold in department stores compared to when they are sold in the company’s own outlet stores
  • A software company offering a lower price for its products when they are purchased through its website compared to when they are purchased through a third-party retailer
  • A restaurant offering different prices for its menu items depending on whether they are ordered in the restaurant, for takeout, or for delivery

In each of these cases, the business is using different prices to reflect the differences in the costs and benefits associated with different sales channels. By doing so, they can better align their pricing with their overall business objectives and can potentially maximize their revenue and profits.

Pricing Strategies
Pricing Strategies Jonathan Poland

Pricing strategy involves deciding on the right prices for a company’s products or services in order to achieve specific business goals. This can include objectives such as maximizing revenue, penetrating a particular market, positioning a product or brand in a certain way, managing inventory, and competing with other businesses. In order to develop an effective pricing strategy, companies must consider a range of factors, such as the cost of production, market demand, competition, and the value that customers place on the product or service. By carefully structuring and setting prices, businesses can maximize their profits and achieve their desired objectives.

The following are common pricing strategies.

  • Algorithmic Pricing
  • Channel Pricing
  • Decoy Effect
  • Dynamic Pricing
  • Everyday Low Price
  • High-Low Pricing
  • Loss Leader
  • Market Price
  • Penetration Pricing
  • Predatory Pricing
  • Premium Pricing
  • Price Discrimination
  • Price Leadership
  • Price Points
  • Price Signal
  • Price Skimming
  • Price Umbrella
  • Price War
  • Pricing Objectives
  • Subscription Model
  • Value Pricing
  • Variable Pricing

Sales Metrics
Sales Metrics Jonathan Poland

Sales metrics are commonly used to assess the performance of a sales team or individual salesperson. These metrics can be used to evaluate performance at the product, channel, customer, team, or individual level. Some examples of sales metrics include the number of sales made, the value of those sales, the conversion rate of leads to customers, and the average size of a sale. Sales metrics are often used to guide sales efforts, plan and evaluate strategy, identify successes and areas for improvement, manage performance and compensation, and generally measure the effectiveness of a sales team. Here are some types of sales metrics.

Account Penetration
Account penetration is a measure of how much a business is able to capture of a customer’s overall spend on a particular product or service. It is calculated by dividing the sales made to a customer by their total spend on competing products and services. This metric is often used to evaluate the effectiveness of sales techniques such as upselling, cross-selling, and customer relationship management. It can also be used to measure the success of efforts to improve the customer experience and increase brand engagement. In general, a high account penetration ratio indicates that a business is successful in maximizing its share of a customer’s spend.

Annual Contract Value
Annual contract value, or ACV, is a measure of the value of a customer that includes both recurring revenue and one-time fees normalized to a yearly revenue figure.

Annual Recurring Revenue
Annual recurring revenue, or ARR, is a measure of the value of a customer contract or subscription based on recurring payments normalized to a one year term.

Attach Rate
Attach rate is the ratio of sales of a primary product to a related secondary product. It is a common marketing and sales metric that can be used to measure strategies and performance.

Customer Churn
Customer churn rate is the percentage of customers that a business loses over a period of time. It is a common marketing metric for service subscriptions that is measured by cancellations expressed as a percentage of total customers.

Contribution Margin
Contribution margin is revenue minus variable costs per unit. It is a commonly used financial metric that is used to evaluate the profitability of sales deals and to perform break-even analysis.

Conversion Rate
A conversion rate is the percentage of customer visits that result in a purchase or other marketing goal such as a lead. It is a common metric for designing, tuning, testing, optimizing and evaluating marketing initiatives such as advertising or sales.

Cost Per Lead
Cost per lead, or CPL, is a marketing metric based on the average cost for generating a sales lead. It is commonly used to measure the effectiveness of promotions. In some cases, firms purchase leads at a cost per lead or run digital advertising campaigns based on cost per lead pricing.

Customer Acquisition Cost
Customer acquisition cost are the total business expenditures a company incurs to make a sale to a new customer. It is calculated using comprehensive costs such as advertising, marketing, sales commissions and the cost of retail locations.

Customer Lifetime Value
Customer lifetime value (CLV) is a measure of the total value that a customer is expected to bring to a business over the course of their relationship with the company. It is calculated by predicting the future cash flows associated with a customer’s purchases and discounting those future cash flows to their present value. CLV can be represented as an average across all customers or as a prediction for a specific customer or account. It can also be modeled based on factors such as demographics or customer segments. However, CLV is not always accurate, as it can be affected by estimation error, business risks, and the general unpredictability of the future.

Customer Profitability
Customer profitability is the gross profit associated with a customer or group of customers.

Gross Margin
A gross margin is the difference between the price and cost of a sale expressed as a percentage of the price. This is essentially the portion of the price that is profit before overhead expenses.

Market Share
Market share is the percentage of a market for a product or service that is captured by a firm.

Penetration Rate
Penetration rate is the percentage of your target market that you reach with a product, service or brand in a period of time.

Price Premium
Price premium is the percentage by which your average selling price exceeds or falls short of a benchmark price. It is a common metric that can be used to judge the competitiveness of products, promotion, price strategy and sales.

Sales Conversion Rate
Sales conversion rate is the percentage of visitors, leads or opportunities that achieve a goal such as a sale.

Sales Efficiency
Sales efficiency is the revenue of a sales department, team or process relative to its cost. It is a basic financial metric based on the efficiency formula that can be used to benchmark sales efforts against a competitor.

Sales Volume
Sales volume is a sales metric that counts or measures the products or services sold in a period.

Share Of Wallet
Share of wallet is the percentage of a customer’s total spend that is captured by a business.

Win Rate
A win rate is the percentage of proposals or bids that result in a win. This is commonly used to measure sales and marketing efforts.

Over Planning
Over Planning Jonathan Poland

Over planning refers to the practice of spending excessive amounts of time planning without implementing any of the plans. This can be a wasteful and inefficient approach to problem-solving, as it can lead to plans that are overly complex and difficult to execute.

In some cases, over planning may be necessary for the development of extremely complex products or projects, such as a new airliner. In these situations, a high level of planning is required in order to ensure that the project is completed successfully. However, for most business operations, over planning can be a hindrance rather than a help.

Instead of over planning, it is often more effective to develop a clear and concise plan that focuses on the key objectives and priorities. This can help to ensure that resources are used efficiently and that progress is made in a timely manner. By avoiding over planning, businesses can avoid wasting time and effort on unnecessary activities, and instead focus on implementing their plans and achieving their goals. The following are alternatives that allow for less planning overhead, reduced project risk and a faster response to change.

Last Responsible Moment

Last responsible moment is the practice of delaying decisions and planning until they absolutely need to be done. This allows you to respond to change and reduce wasted planning effort.

Integrated Product Team

Small multidisciplinary teams that are responsible for requirements, development and operations for a single product or process. This prevents the heavy politics of having departments dealing with departments. It also simulates the structure of small firms that tend to do things far more efficiently than larger firms.

Ranking Priorities

A common way that projects get big is that stakeholders are asked to prioritize their requirements and they rate everything as “must have.” This can be prevented with a mandate that they rank priorities from 1…n.

Agile

Agile is the practice of implementing work in chunks no longer than a few weeks in duration. This typically restricts the planning phase for a release to a single day. Agile also allows for longer term planning to occur in the background away from the critical path of releasing work often.

Time to Market

Prioritizing time to market as a business metric forces planning cycles to be short as changes need to be shipped quickly. In other words, executives that aggressively evaluate teams on time to market will force teams to minimize planning.

Continuous Improvement

Continuous improvement is the process of measuring results, improving and measuring again. This works well with agile whereby you improve in quick releases that can be adapted quickly based on real world results.

Process Streamlining

Minimizing bureaucratic processes that make planning bigger such as budget approvals or reviews by multiple departments. It is easier to justify minimal processes for small changes. This is yet another benefit of agile.

Planning Culture

Implementing habits, routines and norms that shorten planning such as standing meetings where nobody gets to sit down.

Structural Minimization

The less people that are involved in a change the less planning will be required. Likewise, changes that involve vendors or multiple departments may be orders of magnitude slower. As such, a basic principle of planning reduction is to put everyone with the authority to complete the change on the same small team. This can be described as designing your organizational structure to minimize the footprint of change.

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