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Tips, advice, and information for South African business owners

04 Feb

How To Get Customers To WANT To Pay You More

I admit it: I’m a chocoholic.

In my reckless youth, any form of decent-quality chocolate would do. Actually, skip the “youth” bit. It wasn’t that long ago, but it was reckless. A 200g slab in one sitting was normal.

Inexorably, my addiction led me to stronger stuff. The 70% cocoa variety soon wasn’t enough. Luckily, I got help before I down-spiralled into a life of crime to fund the habit. Looking back, I saw how it all started: it happened when I switched from 100g slabs to the 200g units.

I also knew that a key to sustaining my recovery was to answer, “What made me upsize?” In hindsight it was obvious: gram for gram, 200g slabs were cheaper than the 100g slabs.

And that, quite simply, is how to get customers to pay you more.

I don’t mean the addiction part – killing your customers is not a good business model for anyone, really. Rather, offer more and charge a little more.

But check your assumptions: introducing an upsized “economy” pack won’t get customers buying the bigger pack unless customers actually want a bigger pack.

Maybe your price point is too high if it excludes a market segment that wants what you’ve got, just in smaller doses. Here, upsizing might even shrink your customer base. But a smaller, slightly cheaper pack might bring in customers you currently don’t have. As we emphasise in our Small Business Marketing Essentials course, the first step in good marketing is good research: always validate your assumptions.

The pack-price mix is not only about tangible things – it applies equally to services, just like my pack-price range for business coaching. Most of my clients readily commit to a batch of sessions at a lower rate rather than the premium rate for ad hoc sessions. Some, though, need only one session and save on the cost of sessions they don’t need. Either way, it’s a win for both buyer and seller.

A well-known case study of how to grow revenue with varied price points is that of Starbucks. Since starting in 1971, Starbucks has built up 25,000 locations worldwide and a brand renowned for good coffee. There are many factors behind its success, but two tactics are key in healthy revenues year after year. First, Starbucks created a concept coffee shop with pleasant decor, music, and personal service. This set it apart from almost all other coffee shops that focused more on the products that they sold, with little concern for the customer experience. For Starbucks, selling good coffee wasn’t enough.

The second tactic is product diversification. It wasn’t too long ago when the coffee menu had only three options of black, with milk, and cappuccino. By contrast, Starbucks regularly updated its menu to stay abreast of popular preferences. This product innovation emphasised Starbucks’ point of difference over other coffee shops, which raised its pricing leverage. Starbucks coffee is priced at a premium because customers value it.

And it’s this perceived value that has customers pay more for slightly bigger sizes. Because small portions are only slightly cheaper than large portions and, because customers value the product, the higher price point is seen to have more value for customers over the cheaper portion. Starbucks not only earns more revenue per sale of “large” over “small” menu options, but importantly, keeps more gross profit because the extra volume costs less to produce than the extra price.

So ponder this: if you want to make more money, what changes to your pack sizes and price points will attract more customers?

Now, who moved my chocolate?

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