Avy Punwasee is a Partner at Revenue Management Labs. RML helps companies develop and execute pricing solutions to maximize profits.
Starting from Black Friday through New Year’s, consumers shift their purchase strategies and businesses shift to seasonal selling tactics, resulting in drastic shifts in demand and profitability.
The holiday season can be stressful for businesses that aren’t prepared to keep up with the high demand for promotions and intense competitive rivalry. So, let’s dig a little deeper into holiday pricing strategies and best practices that businesses can leverage every year to stay competitive and keep the bottom line healthy.
Holiday Pricing Strategies
1. Offer bundles and add-on sales.
Businesses often offer holiday-package deals where they bundle a core product and ancillaries. The result is that the deal’s value is perceived as higher by consumers than the sum of individually priced products.
Bundling or add-on sales can be a win-win strategy for buyers and sellers. Buyers can experience a “consumer surplus,” which refers to when a customer pays less for a product than the price they were willing to pay. Consumers who spend less than their budgeted amount believe they got a good deal. At the same time, companies can increase transaction size and thus capture a significant percentage of consumer surplus while providing a discount to the customer. Bundling can also help increase sales of otherwise low-sell complementary items.
You might think your product or service doesn’t necessarily lend itself to seasonal bundling, but keep in mind you even see gift packs of deodorant.
2. Provide premium products, and upsell.
In my experience, many buyers are willing to pay higher prices during the holiday season. Why is this? For one, I’ve observed some who are more willing to pay for something that’s unique and stands out among the myriad options. To them, higher prices correlate to an expensive gift, which, theoretically, delivers more value.
Another factor is the cheer and excitement around the holiday season—something on which you cannot put a price. Hence, customers might be more likely to purchase premium-priced offers that are normally ignored. Make sure you have these offers available and that you communicate about them as well.
3. Test price increases.
When buying for others, I’ve found that some consumers have a much lower price sensitivity than when buying for themselves. For brands, this can be translated to increases in prices with minimal impact on sales. The end product is the same, but the value perception is much higher.
This makes the holidays a great time to experiment with price increases. I’ve seen some brands routinely increase all pricing on certain products from November through December. They will then evaluate performance after the season and hold prices where volume was unimpacted and adjust the rest downward. While you do not need to practice this across the portfolio, it never hurts to try a few offers during this time.
4. Set an anchor price.
The idea behind this strategy is to get the consumer anchored on an initial price that they see and, from there on, create a perception that a higher-priced or lower-priced offering is of better value. Initially, show a product or service with a high price, and then all subsequent items that you show will appear to be discounted. Think of a restaurant’s drink menu: Beverages are often sorted from highest to lowest price, which gives the customer the perception that every item below the premium offer is a good deal.
Best Practices When Setting A Strategy
1. Learn from the past.
Let’s say you’re selling a scooter on Amazon. You have more than 15 competitors, prices are changing daily and there are seemingly endless promotions from which consumers can choose. How do you outperform the competition in a sea of choices? While you can offer coupons and lightning deals to help your product stand out, the critical question is: What price and promotional mix make sense, and how can you make sure you will be well-positioned from a competitive perspective?
To predict what your competitors will do for the upcoming season, a great gauge is just looking back. In my experience, you’ll often find that 90% of the activity will be the same. Make sure to leverage historical lessons to build your pricing and promotional strategies to outperform your competition.
2. Evaluate the value proposition, and set your price strategy before the season.
The perfect product pricing around the holidays involves understanding your product’s value proposition. Thus, a business must undertake a multi-step process. This process can start with defining market segments and creating value maps.
Market segmentation involves identifying and bucketing your different customer segments and their unique needs, expectations and opportunities. Segmentation can help you determine your high-margin customer segments and prioritize product features to their needs. Value maps are a visual representation of consumers’ trade-offs between price and value relative to the competitor offerings. These maps can yield insights such as the key drivers of a product’s perceived value, the price position in the marketplace and a competitor’s differentiation strategy. Once you segment your market and create a value map, you can conduct a scenario analysis and consider implementing tools to monitor and verify.
Know your value proposition before you launch your strategy, and your seasonal bottom line will thank you later.
3. Embrace flexibility to control the supply chain.
Flexibility in pricing during low and high seasons is key to benefiting from a holiday season surge or improving yield in the low season. Throw in a pandemic or recession, and we are in a world of the unknown. Fortune favors the businesses that can mitigate such risks but accept that supply chain volatility can’t be eliminated.
So, flex prices. Smoothen the demand curve by pricing lower during the low season and gradually raising prices over the holidays.
The holidays are unlike any time of the year. As you prepare your business for the season, make sure you re-evaluate your pricing strategy by following a few best practices.
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