Pricing the future

Every entrepreneur worth their salt will be having a long, hard think about pricing in the coming months and there is plenty to consider.

• How long should discounts continue?
• When will fragile consumers accept price increases?
• How can the US dollar be used to improve pricing and/or margins?
• When should SMEs think about passing on carbon tax-related price increases?

Many pricing models are being tested by the internet, either in sectors where competition from cheaper overseas competitors is putting pressure on pricing or via new online platforms such as group buying.

That model, which allows businesses get their name in front of potentially thousands of new customers by offering goods or services at big discounts, has exploded in Australia and the US in the past 12 months and has become an important marketing option, particularly for SMEs.

The group buying phenomenon is all about tapping into local communities and giving businesses the chance to target their offers to customers in a city, a region or even a neighbourhood.

The model underlines some really important pricing questions.

How far are you prepared to discount to introduce new customers to your business? Can you return to full pricing after one of these deals? Will these new customers ever return and pay full price?

A fascinating profile of Groupon and founder Andrew Mason in Vanity Fair discusses some of those questions.

Mason says in the profile that merchants typically don’t get a return on their initial Groupon offer and instead reap the rewards when new customers become repeat customers.

The article says “a recent study at Rice University found that about 4% of Groupon users returned as full-paying customers after two weeks”.

Whether a business would be happy with that 4% figure of return customers would depend very much on individual businesses but it is worth saying that one of the big criticisms of group buying sites is that consumers take a cheap deal and are never seen again.

Proving to SMEs that they can get a sustainable return from a deal is probably the group buying sector’s biggest challenge other than surviving in markets crowded with players all doing roughly the same thing.

What was perhaps most interesting about the Vanity Fair article was the discussion of Mason’s new “baby” called Groupon Now.

The service, only available in the US, allows users to nominate an activity they are looking to do at that moment – eating or entertainment being obvious– and then Groupon will send them matching offers.

The article cites the example of a pizza shop owner who refused to use traditional Groupon discount offers because he already has high foot traffic but who is using Groupon Now to fill seats during quiet parts of the day.

If business slackens on a Tuesday at 2pm he can log on to his Groupon Now account and post a deal instantaneously, offering 30% off pizza until 5:30pm.
 
Customers in the area have access to the deal within seconds via the Groupon Now app on their smartphones and can redeem the offer, which typically expires within hours. The pizza shop keeps around 75%.

That is really interesting. The idea of making very short term, very local offers would have instant appeal to many businesses looking to smooth out the ups and downs of trading patterns.

It stands to reason that those offers used in the right way shouldn’t harm price points too much – it should be much easier to return to full price after a few hours than after a traditional group buying offer.

It will be interesting to see if that model makes it to Australia but those are the type of pricing models that entrepreneurs should be ready to experiment with.