Adjusting your pricing strategy just a little bit can have a profound impact on the bottom line. In his book, The 1% Windfall, economist Rafi Mohammed shines a spotlight on a number of effective tactics, most of which can be seen in action all around us.
Netflix already knows this stuff
When fellow Fool Rick Munarriz caught Netflix
That's all Netflix is doing here -- running a controlled set of pricing tests to see just how far its customers will stretch before dropping the service by the busload. Rick warns the company to "tread carefully here," and I believe that's exactly what the company is doing. Instead of simply rolling out new pricing plans across the whole customer list at once, there's preliminary research going on. If it turns out that Netflix would increase its churn significantly with even a small change, I don't think we'll see any price boosts at all on a national level -- for the time being.
By contrast, I don't think the old management team of Netflix rival Blockbuster bothered to run through this sort of careful planning stage when the Total Access plan was a hot tamale. No matter how many new customers the stunt brought in, Blockbuster lost money on each one while also gutting its store shelves of vital disc inventories. Even a cursory test run would quickly have shown how monumentally unsustainable Total Access was as a day-to-day business model. We all know how that story ended.
Are you awake, Steve?
Steve Jobs might want to read Rafi's book as well, because Apple
Traditionally known as a high-priced but flat-out better alternative to gray Windows boxes or hard-to-handle Android phones, Apple has always enjoyed strong selling margins. If you know that you want an Apple gadget, you will pay extra to get it. But that's changing now. Jobs now contends that Apple's strategy is "all about making the best products at aggressive prices, and that's what we will do." But thanks to low prices and expensive components inside the iPad and recent iPhones, Apple's profit margins are coming under siege. A hasty buildout of Apple's retail store network doesn't help much, either: Retail is an expensive business to run.
Mohammed uses traditional retailer Wal-Mart Stores
Look out, cable guys!
And then there are entire industries in dire need of pulling their heads out of the sand and take some appropriate pricing action before they make a laughingstock out of America at large. I'm talking about broadband Internet service providers.
If we could buy network connections on a global market with open competition, Verizon
In Sweden, a single provider can give you a choice of getting 100 megabits via cable modem for $44 a month with no long-term service contract or $10 a month for a plain Ethernet connection if your neighborhood is properly equipped. 3G data plans from the same company top out at 16 megabits, or about 60% faster than the peak bandwidth of Sprint Nextel's
And if you don't like what that company is selling, you have at least two competitors available with similar product portfolios. Any cable operator, telecom giant, or wireless upstart that would offer one of these options at anything like European prices would steal millions of customers from its so-called competitors. But nobody has done the cost-to-risk analysis to see if this strategy would be worth it. Could somebody please give this book to Dan Hesse and Ivan Seidenberg, pronto?
Highly recommended for investors and business leaders alike!
All things considered, pricing strategies can make an enormous difference to the success of a business, from lemonade stands to multinational conglomerates. If you buy The 1% Windfall from Amazon.com
Fool contributor Anders Bylund holds no position in any of the companies discussed here. Sprint Nextel, and Wal-Mart are Motley Fool Inside Value recommendations. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor selections. The Fool owns shares of Apple and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.