Avy Punwasee is a partner at Revenue Management Labs. RML helps companies develop and execute pricing solutions to maximize profits.
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From Black Friday to New Year, consumers change their purchasing strategies and companies are switching to seasonal sales tactics, resulting in drastic shifts in demand and profitability.
The holidays can be stressful for businesses unprepared to keep up with the high demand for promotions and intense competition. So let’s dig a little deeper into holiday pricing strategies and best practices companies can use each year to stay competitive and keep profits healthy.
Holiday pricing strategies
1. Offer bundles and additional sales.
Companies often offer vacation packages where they bundle a core product and associated accessories. The result is that the value of the deal is perceived by consumers as higher than the sum of the individually priced products.
Bundling or additional sales can be a win-win strategy for buyers and sellers. Buyers may experience a “consumer surplus,” meaning a customer pays less for a product than the price they were willing to pay. Consumers who spend less than their budgeted amount think they got a good deal. At the same time, companies can increase transaction size and capture a significant percentage of consumer surplus while giving the customer a discount. Bundling can also help increase sales of additional items that are otherwise under-sold.
You may think that your product or service is not necessarily suitable for seasonal bundling, but remember that you even see gift boxes with deodorant.
2. Offer premium products and upsell.
In my experience, many buyers are willing to pay higher prices during the holiday season. Why is this? First, I’ve seen some who are more willing to pay for something that is unique and stands out among the myriad of options. For them, higher prices correlate with an expensive gift, which in theory yields more value.
Another factor is the cheers and excitement around the holidays – something you can’t put a price on. Therefore, customers are more likely to buy premium offers that are normally ignored. Make sure you have these offers available and communicate about them as well.
3. Test price increases.
When buying for others, I have noticed that some consumers have a much lower price sensitivity than when they buy for themselves. For brands, this can be translated into price increases 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 prices for certain products from November to December. They will then evaluate post-season performance and hold prices where volume was unaffected and adjust the rest downwards. While you don’t need to practice this across the portfolio, it never hurts to try a few offerings during this time.
4. Set an anchor price.
The idea behind this strategy is to anchor the consumer in an initial price they see and from there create the perception that a more expensive or lower priced offering is of better value. Initially show a high-priced product or service, and all subsequent items you show appear to be discounted. Think of a restaurant’s drinks menu: Drinks are often sorted from highest to lowest price, giving the customer the impression that any item under the premium offering is a good deal.
Best practices in developing a strategy
1. Learn from the past.
Let’s say you sell a scooter on Amazon. You have over 15 competitors, prices change daily and there are seemingly endless promotions for consumers to choose from. How do you outperform the competition in a sea of choices? While you can offer coupons and lightning deals to make your product stand out, the crucial question is, what price and promotion mix makes sense and how can you make sure you’re well positioned from a competitive perspective?
To predict what your competitors will do for the coming season, a good indicator is simply looking back. In my experience you will often find that 90% of the activity will be the same. Be sure to use historical lessons to build your pricing and promotion strategies to outperform your competition.
2. Evaluate the value proposition and establish your seasonal pricing strategy.
Perfect product pricing around the holidays means understanding your product’s value proposition. So a company has to go through a multi-step process. This process can start with defining market segments and creating value maps.
Market segmentation involves identifying and subdividing 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 based on their needs. Value maps are a visual representation of consumers’ trade-offs between price and value against competitors’ offerings. These maps can provide insights such as key drivers of a product’s perceived value, its price position in the market, and a competitor’s differentiation strategy. Once you’ve segmented your market and created a value map, you can do a scenario analysis and consider implementing tools to monitor and verify.
Know your value proposition before launching your strategy, and your seasonal results will thank you later.
3. Embrace flexibility to control the supply chain.
Flexibility in low and high season pricing is essential to take advantage of a peak in the holiday season or improve yields in the low season. Add in a pandemic or recession and we find ourselves in a world of the unknown. Fortune favors companies that can mitigate such risks, but accept that supply chain volatility cannot be eliminated.
So flex prices. Soften the demand curve by pricing lower during the off-season and gradually increasing prices during the holiday season.
The holidays are unlike any other time of the year. As you prepare your business for the season, re-evaluate your pricing strategy by following a few best practices.
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