At the start of each year, most commercial teams are looking to get a running start on strategic initiatives with price and profit improvement. However, before pursuing quick wins, you should ask your commercial teams these key questions: how effective will this strategy be in the long-term when economic cycles shift, are sales teams well-equipped to communicate these changes in a way that is fair to customers, and what would the impact of these changes be on long-term customer satisfaction? Adnan Akbari is Senior Director of Pricing at Holden Advisors. He is leading a workshop entitled “How to Optimize Pricing through Sales Activation” at the PPS Conference in Dallas on Wednesday, May 3. He can be reached at aakbari@holdenadvisors.com.

The Pricing Advisor, April 2023

At the start of each year, most commercial teams are looking to get a running start on strategic initiatives with price and profit improvement. As a pricing firm, we often get questions on best practices in fairly specific scenarios with the goal of generating a quick pricing win. Some recent examples include:

1. We’re thinking about adding a “service fee” to account for miscellaneous costs incurred (for professional services). How should we do it?
2. Our executive team requested rounding our prices up to the dollar. How much does this impact customer buying decisions?
3. We want to increase our “rush fee” for professional services. How much would this impact our profitability?

As you might imagine, the answer to each of these questions can vary depending on the nuances of each business. A mature product in a highly competitive market will have limited pricing power vs. a product in a growth stage. A highly centralized organization can more easily enforce deviation from list prices. And so on. The easy answer for each of these is “It depends on a range of factors,” but we’re here for quick wins so let’s dive into each of these.

Service fee best practices

In the B2C world, many of us have made a purchase decision at a certain price only to find the price had increased by 20% upon checkout for a range of unexplained fees (I see you Ticketmaster). A drip pricing strategy feels like a bait and switch and is a common source of customer frustration for obvious reasons. That said, it generates profits at the expense of customer satisfaction in the highly commoditized ticketing industry as customers begin their purchasing journey based on the lowest initial displayed price.

In a B2B world where the buying decision is made by a range of individuals weighing multiple options, a drip pricing strategy is less palatable. That’s not to say a service fee is not justified. It can be if it’s communicated in a way that’s transparent, viewed as fair by the customer, and is easily explainable to the buyer.

Common reasons for using a fee like this (rather than simply increasing the price of the service) can include ease of tracking, aligning with standard industry price presentation practices, and an increased ability to justify price to the customer.

Recommendation: To minimize customer backlash, service fees can be implemented when viewed as a fair pass-through cost by customers.

Rounding up to the nearest dollar 

Depending on the list price of a product, rounding up to the nearest dollar can be a quick-win but should not be implemented in a silo. Let’s assume the list price of a product is $100.11. By rounding-up to the nearest dollar, price would increase to $101 generating an incremental 0.88% in profits assuming full realization. More than likely this change would be inconsequential to a customer and generate some quick albeit small profits.

In another example, let’s assume list price is $3.10. By rounding to the nearest dollar, the price would change to $4.00 generating an additional 29% in profits. It’s fair to assume an increase of this magnitude would garner attention. If the increase works with minimal resistance, it begs the question of whether the increase could have been more aggressive.

The bottom line is that this strategy could work but realistically ends up being a price test with little to no market justification. It certainly can generate profits if the increase is small, but the profit impact would also be small. Most, if not all, organizations would be better off aligning prices to value to gain real profit impact.

Recommendation: Before pursuing a rounding strategy, spend resources aligning price to value. Rounding will more than likely be a low-effort, low-benefit pricing tactic.

Increasing or implementing use of a rush fee

When I hear the word “rush,” phrases like “emergency,” “drop everything,” and “poor planning” come to mind. Each of these phrases suggests buyers need rush services because they are in a bind. Speed of delivery is a key determining factor of value. Moreover, the company responsible for delivery often has to operate in a way that is inefficient, costly, and potentially unfair to other customers.

The point being that rush fees should be designed in such a way to disincentivize use unless absolutely necessary. I’ve seen clients gloss over the tremendous value this “drop everything” approach generates for their customers frequently leaving money on the table in price negotiations.

I’m not suggesting companies be overly egregious or take advantage of customers in dire circumstances. I’m simply saying rush delivery should be the exception rather than the norm, and pricing these services should be designed as such.

Recommendation: When applicable in an industry, rush-fees can be a powerful way to capitalize the value customers place on speed while also disincentivizing behavior that causes inefficiencies.

What next?

Each of these strategies on their own can be pricing quick wins, but what we find is these and other “quick wins” need to be part of a broader pricing strategy aligned with the vision of the company. The absence of a broader strategy limits the ability to have a lasting profit impact. Additionally, gaining organizational buy-in for a series of quick wins can be an uphill battle. It’s typically best to paint a picture of the broader pricing vision by aligning price to value and then communicate the right pricing tactics aligned with that vision.

Quick pricing wins can be achieved under the right circumstances, but customers don’t want to be nickel and dimed, so it’s important to consider whether your persona should be more like Southwest’s “Transfarency” all-inclusive prices or like Frontier’s a la carte. The short-term benefit may not be worth the cost to you in the long-term.

Before pursuing quick wins, ask your commercial teams these key questions: 

1. How effective will this strategy be in the long-term when economic cycles shift?
2. Are sales teams well-equipped to communicate these changes in a way that is fair to customers?
3. What would the impact of these changes be on long-term customer satisfaction?