How to fail in your differentiated pricing strategy


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Coupons are one of the many ways that retailers differentiate pricing. But to do so successfully, they must erect barriers (or hurdles) to prevent all customers from taking advantage of the coupon. That’s the reason why coupons must be clipped and presented in order to get the differentiated price. It’s a laborious process and it’s meant to be so. If not, then everyone–both budget-minded customers and those who are prepared to pay full price–would be able to take advantage of the offer. Sounds good in theory, but sometimes the real-life experience can be quite different.

Recently, I was shopping in one of the large New York City department stores. I picked the store because (a) I desperately needed to buy some summer shorts and shirts, and (b) it was on located on Fifth Avenue right on the way as I walked to Penn Station to catch a train home for the day. After finding the items I needed (and some that I probably didn’t), I proceeded to the cash register to pay for the items. After the cashier had rung everything up and just as I was giving her my American Express Card for payment, she applied a 25% discount to the price by applying a coupon that was in effect for that day only. I certainly appreciated the thought; I was unaware of the coupon and it saved me over $30 on my purchase. And I’m pretty sure that the cashier felt good that she had personally saved one of her customers $30 dollars because she was beaming from ear to ear. But did her employer; the store owner feel good? Probably not.

Here’ s why. I was fully prepared full price for my purchase had the cashier not applied the discount. And the department store in question was also counting on customers like me (who either weren’t aware of the coupon or didn’t take the time to clip and present the coupon) paying full price. That’s why they erected the barrier of having to find, clip and present the coupon in the first place. The coupon was only targeted at those customers (who on the margin) wouldn’t have made a purchase that day without taking advantage of the discount. What they didn’t count on was their employees lowering those barriers and undermining their differentiated pricing strategy by trying to be generous to customers. I’m pretty sure the cashier wasn’t being malicious and wasn’t trying to undermine the store’s pricing strategy, but it happened just the same.

The solution is pretty easy. Ensure that all employees who touch pricing (especially cashiers and customer service representatives who deal with returns and refunds) are made aware of the pricing goals. Make sure that they understand the basic concept of differentiated pricing and how many of their actions–while seemingly innocent at the time–undermine the profitability of the store. You can still empower them to serve the customer, but they need to know the best way to do so.

Here’s the takeaway: Differentiated pricing is only as good as the weakest link in your pricing process. And many times, that weak link is with your cashiers and customer service representatives who (unknowingly) lower the barriers necessary for differentiated pricing success.

Republished with author's permission from original post.

Patrick Lefler
Patrick Lefler is the founder of The Spruance Group -- a management consultancy that helps growing companies grow faster by providing unique value at the product level: specifically product marketing, pricing, and innovation. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.


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