Pricing is one of the toughest things for a business to get right. Price too high, and you'll scare off customers. Price too low, and you'll lose money.
When trying to determine the best prices for their products and services, few small businesses take a scientific approach; instead, they rely on trial and error or the owner’s "gut feeling." But putting your unscientific pricing experiments to the test can easily cost you thousands of dollars a month in lost profits.
Until recently, only very large companies could afford the technology and brainpower needed to set better prices in a way that would maximize profits. Now, with the rise of server virtualization, cloud storage and other innovative technologies, even small companies can store, process and analyze massive amounts of information (aka big data) at a price they can afford.
Google BigQuery, for example, charges less than 3 cents per month to store 1 GB of data, 1 cent to insert 100,000 rows of information into your database, and nothing to process the first terabyte (1,000 GB) of data each month. DigitalOcean can deploy a high-performance, solid-state drive cloud server in less than 60 seconds; pricing starts at just $5 per month.
Powerful analytic programs that crunch the numbers for you now start at just a few hundred to a few thousand dollars per year. Cost is no longer an excuse for implementing poor pricing strategies.
Getting Technical About Pricing
Once you start capturing big data, you can use any of the following three pricing strategies to help boost your profits:
1. Experiment with differential pricing. Big data can provide the information you need to identify trends among different types of buyers. These trends can then be used to optimize your pricing by group.
Offering different prices to different groups—commonly referred to as "differential pricing"—has been used since at least the 1930s as an effective pricing strategy. You've most likely experienced it yourself without even realizing it: For instance, every time you buy an airline ticket, you're subject to differential pricing. That's because two passengers on the same flight often pay wildly different prices based on when, why and how they bought their ticket.
Offering lower prices with high volume purchases is another great example of differential pricing. With big data collection, you can track an almost unlimited number of variables about your customers, then crunch that information to create groups among like-minded buyers in order to set the best price for them.
2. Target the “browse and bail” crowd. E-commerce shopping cart abandonment rates are one of the biggest challenges online sellers face. On average, 68 percent of users who add something to a website shopping cart don’t complete their purchase.
But some companies have found a way to improve this depressing statistic. Freshplum, for instance, offers online retailers a solution that can help increase the number of browsing visitors who complete a purchase. Using big data, it can identify users who are about to abandon a purchase with 99 percent accuracy and offer them a special discount—just for them—to increase the odds they’ll make a purchase. According to several case studies, the company has boosted profit margins by as much as 13 percent for some clients.
3. Use versioning to help your customers pay you more. Big data can also help you determine if there's a market for different versions of your core product or service. Maybe there are potential customers who simply won’t, or can’t, pay for your main offering but who would be willing to purchase a stripped-down version at a lower price. Or maybe some customers would be willing to pay more for a premium version.
To find out if you should be branching out, use customer reviews, ratings, social media comments and feedback to detect opportunities for both more and less expensive versions. Look for patterns in customer feedback for feature requests—these additional features can be added to a premium version. Separately, you should ask customers for feedback on what features they don't use. If possible, track usage automatically. Then take out the features your customers don't use or want, lower the price and create an entry-level version. By offering several options, you create multiple opportunities for customers to find a fit between their needs and what you’re selling.
While big data has been a buzzword for more than a year now, it’s just beginning to trickle down to the world of small business in the form of affordable products and services. Whatever you do, don’t ignore it—it’s not a fad. This is one of the most important trends in technology, one that can help you earn thousands of dollars more per month.
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