Raising Price as a Viable Marketing Strategy

I get this question a lot from people that I mentor and other business clients. I answered this particular question on LinkedIn that I think deserves blog coverage here.

The question:

"Raising your prices - a viable marketing strategy?"

In traditional marketing we worked with the 4 P's. Price, Product, Place and Promotion. The only P creating income and margin is Price, the rest create costs. Still, product and service providers generally compete on prices and suffer lower margins. You do it differently and raise your prices this year with 10%. At the same time you compensate with value-added services. What will be the result of this strategy?

Here was my answer:

Errol, You ask an excellent question. Often entrepreneurs enter markets and compete on price to obtain share. Pricing is the first communication to... see more customers of the value they should expect from your product. If you price at or just below your competitor, you may get share, but you will always be expected to price at or near your competitor. That way, the competition indirectly dictates your pricing strategy.

Price your products and services based on where you should be positioned versus your competition. If you are superior, then price at a premium. Your brand strategy should support a premium position (i.e. some value added services), but you should not be afraid to price at a premium if your product is better. Gear your organization to appealing to a customer who will value your premium product. Then, you will be defining your own pricing and branding strategy, and your competitors will have to follow you.

I have implemented this strategy several times in the past with excellent results. On the product side, Prodigen (TM), a nutritional supplement, I priced 80% higher than any competitive products because of the benefit our customers will receive. Windhawk Nutritionals uses better ingredients, better process, and this product has a dual benefit. The product is flying off the shelves--and my lower priced competitors are scrambling to keep pace.

On the service side, at The Windhawk Center we used to price our memberships at $59/month to compete with other fitness centers. I realized however, that we have such specialized services that gyms didn't offer, that we were leaving money on the table. Now our memberships are tiered with the lowest price at $179/month and the highest at $599/month. Our business has soared since the pricing changes with our client list growing faster than ever. Clients are paying for the perceived benefit, outstanding customer service, and the overall experience.

To drive the point further home, our location has a much lower demographic profile than our customer and they travel 10 miles or more to come to The Windhawk Center. We realized that our core customers were affluent and were willing to travel a great distance for our specialized services. Pricing to reflect the level of our service was the key change to our strategy and it made a monumental shift in our business.

The overall message from this response is to understand your pricing sensitivity based on the product you provide. Consistency is the key element to branding and perceived value. Ensure that the entire organization is ready to deliver on that brand promise.

My REAL Business Education

OK, despite my Big 4 consulting background, Wharton undergrad degree, and the fact that I had started two businesses prior to MBA school, my true venture education didn’t begin until after b-school when I and two partners tried to launch an online disease management website called easydiabetes.com. Our timing left much to be desired, but typical of idealistic freshly-minted MBAs, my bravado led me to believe I could not only beat the odds, but I could succeed right after the April 2000 dotcom bust. I’m actually featured in the Summer 2000 issue of UCLA Magazine—with John “The Wizard of Westwood” Wooden on the cover talking about how I can succeed in the face of impending doom. You can guess how our venture turned out.

The experience, however, was better than any class. Writing and pitching a business plan, building investment grade financials, and getting commitment for over $250,000 in funding developed skills I had never known. Arguing over equity, risk management, company direction, and intellectual property ownership issues with my partners were the least comfortable situations I’ve had to endure professionally. Although I don’t speak to my former partners today, I feel better about paying back the $25,000 I leveraged to launch that business than I do paying Sallie Mae.

With emerging venture PatientsLikeMe growing successfully, the experience in failure has led to budding success. Knock on wood....

Why "The Third Power"?

Why “The Third Power”? I have a thing about exponents. They’re my favorite mathematical property. When else can you see numbers multiply in such an accelerated fashion?

My interest in social networking brings exponents into play. How do these companies get so huge so quickly? The concept boggles the mind, yet is exceedingly simple to understand. The true test of “power”, however, is understanding how to use it. This tenet proves true in so many arenas that it’s cliché. Too bad so many forget that….

And lastly, as the third of my DSW family line, The Third Power takes its true meaning. Both my father and grandfather have distinguished themselves, my grandfather as the founding minister of Bethel AME Church in St. Croix. My father has been in public service almost all of his career, most notably as Commissioner of the Public Works Department for the City of Chicago and most recently, while a resident of New Orleans, as a member of a contracting company working with FEMA to help the city recover from the devastation caused by Hurricane Katrina. It’s my path to help others as part of my ventures as a social entrepreneur.

Welcome to The Third Power.