Price Positioning Strategies for your Service Company Part 2
Good-Better-Best Pricing: Good-Better-Best price positioning, also known as price lining, is a marketing strategy that offers several related products or services for sale of varying quality (good, better, best). This is not the same as product bundling, where many different items are combined into one package; good-better-best pricing sells each level separately as individual product or service lines. Each line then varies in type, offerings, quality, and price. The number of product or service lines sold by the company is known as the width of the product mix. The total number of all offerings of all the lines is known as the length of the product mix. Take a look at the picture below and note the length of the offering. Adding a new service or product to any one line is known as a line extension. Adding a lower quality item is known as trading down; this often results in a reduction of brand equity as long-term sales suffer from the gain of short-term sales. The method of good-better-best pricing first originated in the five and dime stores. Everything in the store cost either five cents or ten cents. These were set price points for a wide variety of products, broken down by quality and perceived value to the customers.
It is very common to see good, better, best pricing strategies executed by residential installation companies like HVAC, water softener, pool, alarm and security and home improvement companies. The benefit of a good-better-best pricing strategy is if executed correctly you can accelerate the buying cycle by offering a homeowner or prospect with several pricing options. This also helps in eliminating the need for a competitive proposal since the homeowner already has three options to choose from. Let's say you own an HVAC company and you'd like to implement a good, better, best pricing strategy for an air conditioning installation. There are several ways you can do this:
1) Create three packages - Put together a package or kit containing the same AC model. The good model is the base package with basic installation, one zone with a basic thermostat. Your best package contains all of the bells and whistles with variable-speed indoor air handlers and programmable thermostats. The better package should be the value package and contain the most margin since it is where your prospects will gravitate to.
2) Position three competing models - As an AC contractor you could very easily sell three different AC units with varying SEER levels. This strategy would work well for those states where an air conditioning system is running most of the year. Homeowners would be more inclined to purchase efficiency over value. The benefit to this pricing strategy is that you could position three different accessory packages. This second tier pricing would maximize the sales opportunity and increase your average ticket. The downside - it requires a skilled sales professional that is knowledge in proving ROI and payback periods of the initial investment.
Unit Pricing: Unit pricing is a concept that most people are familiar with. It is a valuation method that sets the cost of purchasing goods in bulk under a sales contract. This can be seen regularly at grocery stores, where bulk packaging is quite prevalent. Most people believe that purchasing items in larger sizes will always save money over purchasing multiple smaller sized containers. This is not always the case and this is where unit price analysis comes into play. The unit price clearly states the cost of the item per unit (pound, quart, ounces, volume, etc.). Comparing the unit cost to the retail cost, or the total cost, can show you where the better value lies. However, it is important to note that it is not always best to purchase more of something simply because it is a lower price. If you cannot properly store the item, you will end up with excess waste, which in the long run may cost more per item. Purchasing in bulk may also mean that you will need to purchase or rent a storage space, which can also negatively affect your bottom line.
The process of developing a pricing strategy is crucial for any type of business in any industry. You will need to thoroughly research your field to gain a firm understanding of the overall market situation, your company's placement, the competition, and how you should approach branding. Always take a good deal of time deciding on your pricing strategy, including any discount programs and positioning methods. Spending more time initially on the process will result in more customers, a larger share of the market, higher revenue, and an increased profit margin.
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