M a r k e t i n g t i p
Determining your pricing model as part of your overall marketing plan
Part one of a two-part series on pricing your lease financing proposals
If someone asked you to name the components of marketing, you may answer with lead generation, direct mail, Internet ads, print ads, Web sites, and brochures. It's easy to forget about pricing as part of a marketing strategy. But as we all know from being consumers ourselves and from running business operations, product pricing is a big factor in sales, revenue and ultimately a business's profit.
Your marketing plan is driven by your company strategy. For instance do you want to be the biggest brokerage, increase your profitability or gain market share? Once you have your company strategy and then distill from it your marketing plan, you want to consider your pricing as part of the plan. As a broker, you have at least three ways to influence pricing: the funding sources you choose, the commission you include, and any additional fees you charge.
There are multiple pricing strategies you can employ as part of your marketing plan. To determine your pricing strategy, you must erase a common misconception, which is that pricing is a straight line from low to high and you must pick your point on that line. Economists and marketers alike have extensive models to illustrate various pricing schemes and their impacts.
Once you have derived your marketing plan based on your company strategy, here are several pricing models to consider:
Economy: Quite simply, be the low-cost provider. Usually this is best achieved by removing all the frills and value-added services and pricing your product or service below most of the competition. Profitability is maximized through increasing volume of sales. Examples include discount airlines or online services that replace brick-and-mortar companies, like do-it-yourself financial investing.
Premium: If you have a significant competitive advantage, you can charge a premium for it. However, doing so will attract competition quickly.
Transactional or cost-based: Usually the simplest method to employ because this pricing model requires only a basic formula. What is your desired gross margin? How much will it cost you to complete the sale (including fixed and variable costs)? Add your margin to your cost and you have your price. The downside to this approach is that it adds little to your marketing efforts - there is no persuasiveness inherent in it.
Market penetration: If your marketing plan calls for winning more vendors and/or more repeat end-users, this is a good approach. You initially set your prices low to gain as many relationships as possible, and then turn up prices to achieve greater profitability as desired. Many large retail chains use this method to enter new markets and win loyalty, then later increase their prices. Note that we did not call this a loss-leader, as that approach is probably not a good fit for a leasing broker.
Cherry-picking: Many brokerages do not aspire to become the next mega-broker. If you are a small shop and want to stay that way while also increasing profit, this is one method of doing so. Set your prices high and only work on the most profitable deals. This minimizes your transactional (variable) expenses while increasing your per-deal income. So you end up working the same number of deals, but increase your profitability.
Bundling: This is a particularly effective pricing scheme if one client (vendor or end-user) may "buy" more than one product from you. It's the old buy-one-get-one-half-price approach. If you assume your per-deal expenses are reduced because you only have to attract and manage one relationship, you can likely afford to reduce your per-deal income because you are completing more than one deal. So for instance, you could offer a low price on equipment leasing if (and only if) the customer also completes a factoring transaction with you.
Value: Arguably the most powerful pricing model - if you can do it effectively. If you can establish the value of your product to the "buyer," then theoretically you can set your price just below that established value. This can be tricky though because it requires a lot of discovery and presentation skills. You have to know what value your prospect places on your product, make sure you are both in agreement, and then show him or her why your product is a bargain because it costs less than the value it delivers. IT services like to use this approach to sales. They find out how much your current process costs you in manpower, expenses and mistakes, and then show you how buying their product will save you money.
Psychological: The magic in psychological pricing is to hit your income target while the creating the perception for the customer that he or she is gaining a pricing advantage. This is why consumer financing companies often use rates ending in nine-tenths of a percent, like 5.9 percent instead of 6.0 percent. You can take this concept further by twisting the knobs on up-front amount versus monthly payment. If you know what the customer is more concerned about - up-front or monthly payment - you can artificially lower one while raising the other.
This sampling of pricing methods should get you started on considering pricing as an important - and available - part of your marketing plan. Aligning your pricing model with your marketing plan will give you greater overall results. As always, you can experiment with different approaches to determine the best fit. Try offering multiple options to customers and see which they tend to choose.
