Nick Devlin, Chief Executive Officer at Naked Wines.
In today’s digital age, I don’t believe businesses can continue to afford to be product-centric. Customers are more demanding than ever before, and they expect the best deal they can find every time they shop.
So, if you want to shift from being a product-centric business to a customer-centric one, you need to stop using product-centric pricing. Before we dive into what a customer-centric model looks like, though, it can be helpful to understand the history of pricing more generally. In introducing these pricing models, I’ll be using many examples from the wine industry, which I am intimately familiar with.
Product-Centric Pricing
Product-centric pricing, which often specifically references the cost-plus model of the early 20th century, is when prices are set based on their inextricable link to the cost of production. This approach to pricing ignores the value that your products or services create for your customers. As a result, particularly in increasingly competitive markets, product-centric pricing can lead to a mismatch between price and a customer’s purchasing willingness.
Value-Based Pricing
Attempting to solve the issues of product-centric pricing, value-based pricing is when prices are set based on the value that your products or services create for your customers. This approach to pricing considers the customer’s needs, wants and budget. While value-based pricing has become the default for industries like wine, and Napa in particular, it’s often coded to mean “charge customers the most they will possibly bear.”
Demand-Based Pricing
Perhaps the farthest swing from the cost-plus model, demand-based pricing moves strategy away from boardroom executives to the newly minted analysts of the internet age. The world of e-commerce has shifted many businesses into utilizing more sophisticated pricing algorithms, many of which work off real-time analyses of supply and demand. South of Napa in San Francisco, I see the most vehement demand-based pricing advocates take the strategy to its endpoint: Surge pricing.
Surge pricing has not been lost on the wine industry. Allocation-only bottles at $250-plus, $100 ‘strictly limited’ tasting appointments, and breaking into a symbolic 4 digits a bottle from ‘cult’ producers all take cue from infamous post-concert rideshare price surges.
Moving To A Customer-Centric Pricing Model
I believe that the future of pricing is customer powered. Below are some ways that my own company employs this pricing model, which I hope you can use as examples and inspiration for your own business and industry.
• Create two prices: fair or free. When a customer doesn’t enjoy my company’s wine, we credit the total cost of the bottle.
• Take care of your best customers. When prices fall within a certain time frame, I automatically refund the difference for those who paid a higher price.
• Consider “supply” your job. If demand is increased, rather than increasing prices, I adjust our supply considerations. Loyal customers who drove demand increases get a great deal—in turn, they stay customers for longer.
Traditional pricing focuses on maximizing profits on each individual transaction. In the long run, this approach can damage customer relationships and lead to lost sales, especially if customers feel you’re blindly taking any chance to exploit them.
Customer-powered pricing takes a different approach. Instead of focusing on profits on each individual transaction, it prioritizes building long-term relationships with customers over short-term yield. This approach involves pricing products or services in a way that is fair to both the business and the customer.
I admit that it’s not always easy to implement; this model requires your business to have a deep understanding of your customers and their needs. However, I’ve found that businesses that are truly able to center their customers can reap significant rewards.
Here are some of the benefits I’ve found to customer-powered pricing:
• Increased customer loyalty. When customers feel like they are getting a fair deal, they are more likely to be loyal to your business. This can lead to repeat business and positive word-of-mouth referrals.
• Higher profits. By charging prices that are fair to both you and your customers, you can increase your profits over the long term. The increased retention of customer-powered pricing tends to lead to a stronger lifetime value (LTV) and more successful acquisition campaigns.
• Stronger competitive advantage. In a competitive, often saturated market, businesses that offer customer-powered pricing retain an advantage because they can successfully attract and retain customers who are looking for fair and transparent pricing. Rather than getting caught up in a cycle of deal hunters and value vultures, customer-powered pricing increases customer trust, a critical factor in a digital age where price is only one factor of competition.
If you are serious about building long-term relationships with your customers, then I believe that customer-powered pricing is the right approach for you. By committing to adding real value for your customers and pricing your products or services in a way that is fair to both you and them, you can increase customer loyalty, boost profits and strengthen your competitive position.
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