Prior to this year’s ICEF Berlin, the Association of Language Travel Organisations (ALTO), a leading B2B forum for those in the language travel industry, invited Mr Marco Bertini to give a presentation on pricing strategies, methods and mistakes to avoid.
As a professor of marketing at the London Business School, Bertini helped ALTO members learn about the value of an informed pricing strategy. Drawing upon examples from various industries, he urged the audience to consider their pricing methods more carefully, and then showed them how. We present the highlights below, as well as a short video clip with Bertini.
The importance of pricing
According to Bertini, the areas of a business that affect profit can be divided into three rough categories: costs (including fixed and variable costs), volume (including production, sales, advertising), and pricing.
In their attempts to create profit, most companies focus on reducing costs and increasing volume, rather than pursuing a pricing-oriented strategy. Despite the powerful effect it can have on profit, many companies have yet to master their pricing strategy.
Bertini pointed out that often in the language travel industry, providers will set prices once a year or even make spontaneous decisions based largely on the prices of competitors. But according to many marketing experts:
“There’s a lot of room for profit improvement through better pricing strategies.”
Furthermore, new research by global consultants Simon-Kucher & Partners suggests that companies that emphasise price management tend to be substantially more profitable than companies that rely on managing costs or volume. In addition, companies whose C-level executives take an active role in pricing are 35% more likely to have high pricing power, and 30% more likely to expect strong EBITDA growth (earnings before interest, taxes, depreciation, and amortisation) over the next three years.
Asking questions about why you price the way you do
To get a better idea of the reasoning behind your pricing strategy, and the extent to which that strategy is effective, Bertini recommends the following:
- Ask yourself what you charge customers for. Many companies are not aware of why they charge the prices they do. These prices may be determined by the costs incurred to offer the product, or the prices charged by the competition. Either way, the answers to this question are important for the next one.
- Ask how the price you charge relates to the benefits your customer receives. In many cases, there is no clear relationship between the price the company charges and the value that the customer obtains from the product. Price is often related to the costs incurred to offer the product (which are irrelevant for the customers’ purposes) or to the price charged by the competition (which encourages the customer to view your product as a commodity).
Don’t train your customer to view your product as a commodity
Many companies underestimate the effect that they have on customer perceptions of their products. By focusing on affordability, and by presenting their product as a commodity, companies train customers to think the same way.
And conversely, those companies who focus on the distinctive advantages of their product can train customers to stop thinking about the product as a commodity. As an example, Bertini pointed to Starbucks, who built an empire out of what appears to be an obvious commodity, coffee.
If coffee doesn’t have to be viewed as a commodity, why should language courses be treated as such? After all, factors such as location, teachers, school philosophy, and attending students necessarily make every language school a highly unique place.
Viewed from this perspective, the conception of language travel courses as interchangeable commodities seems like a highly artificial misrepresentation, which ignores the reality of a fundamentally diverse industry.
Charging for the benefit your product provides to the customer
To illustrate how companies could charge for value, Bertini described the case of an Australian dynamite manufacturer. This manufacturer had always charged for dynamite by the stick, essentially treating its product as a commodity.
Eventually, a competitor appeared who sold dynamite at a cheaper price. The Australians saw their profits tumble, and went back to the drawing board to revise their pricing strategy.
They decided that instead of charging by the stick, they would charge according to the effectiveness of the dynamite. This way, the company aligned its pricing with the value of the product to the customer; simultaneously, this pricing strategy educated customers about what they should look for in a stick of dynamite.
In the same way, Bertini argued, other companies should consider the benefits that they provide to a customer, and how they can bring their pricing in line with that value.
In the case of the language school industry, companies typically charge per hour or week of instruction, which reflects the costs of operation. Instead, they might consider charging for language proficiency, reflecting the value provided to students – and educating students about that value.
Avoiding price cuts
Price cuts may seem like an easy way to increase sales, but they have serious drawbacks. According to Bertoni,
“Nine out of ten managers strongly underestimate the volume gains necessary to compensate for a price decrease.”
These managers are also more likely to decide in favour of price cuts, making this habit especially risky for businesses, particularly because price cuts are difficult to reverse. As a rule of thumb, says Bertoni, “It takes five minutes to reduce your price and five years to raise it.”
Price cuts are also addictive, as Bertoni explained in this startling analogy: in order to get the same high, drug addicts must continuously increase the dose of the drug. In the same way, companies will often begin offering discounts because they provide an immediate reward in the shape of rising sales. However, in order to garner the same number of sales in the future, companies need to keep expanding the discount.
Moreover, price cuts perpetuate themselves – customers will expect companies that match prices once to continue matching prices in the future.
Finally, price cuts are contagious. Customers will come to expect discounts on other, similar products by the same company, as well as discounts on similar products offered by other companies. In this way, price cuts can contaminate an entire market, or even the industry as a whole.
Rather than selling discounts, providers are advised to sell on benefits; focus on your unique selling points (USPs) and the benefits learning a language can provide. For additional information, see our related article “Is tuition discounting an effective recruitment strategy?”
Deterring competitors from discounting
To discourage competitors from cutting prices, Bertini recommends using a credible threat, consisting of three elements:
- It should refute the competitor’s reason for offering the price cut. Bertini recommends price-matching. If we threaten our competition that we will always match their prices, we remove their incentive for cutting prices.
- The threat should be clearly communicated beforehand, in order to work as a deterrent.
- Most importantly, the threat should be credible (i.e. acted upon).
Using promotions wisely
Although price promotions do have many risks, they are sometimes essential. Bertini describes some ways we can approach price promotions to get the most out of them – whilst avoiding their pitfalls.
- Set specific goals and stick to them: to make sure promotions don’t slip out of your control, create clear goals for the promotion; once you’ve reached those goals, stop.
- Define your audience: use the appeal of the promotion to draw in a new type of customer that can help your business.
- Ask for something in return: never give a discount without asking for something in return. Use the extra leverage of the promotion to receive something from your customer that can help your business, whether it is a lead, a referral, or consumer information.
- Measure your promotion effectively: simply measuring your sales before and after the promotion is not accurate, because it doesn’t take into account other factors that may have influenced your sales. To increase the accuracy of your measurements, select a group that does not receive the promotion for comparison. For example, you could run the promotion in one market, and use another, similar market as a control group; or you could send the promotion to random people, and use those you don’t send the promotion to as a control group.
- Measure the strength of your brand: to do so, measure your sales at full price and at discount price; the proportion of people purchasing at full price indicates the strength of your brand.
Educating our industry
In this regard, ALTO certainly lead by example. Seminar participants left Bertini’s talk much enlightened about how to price, with one participant commenting, “We’ve all got homework to do.”
Bertini also received the impression that the language travel industry has much to gain from reconsidering its pricing strategies. He offers additional thoughts in this post-seminar summary from ALTO:
Marco Bertini interview from ALTO.