Technology helps some businesses get creative with pricing
Many business owners struggle with pricing. Should their first concern be covering costs or figuring out what the market will bear? How do they determine what the market will pay without raising prices high enough that some customers flee? And can they offer discounts without damaging their price brand?
There may be no easy or universal answers to these questions, but new thinking and new technology has made it possible for some, like the airline and hotel industries, to use what is known as dynamic pricing to vary prices according to demand and fill seats and rooms more efficiently. Now, more small businesses are finding ways to adapt their strategies.
You can find consultants that charge for results rather than by the hour, restaurants that charge what is essentially a ticket price that varies according to how busy the restaurant is, and even some businesses that ask customers to pay what they wish. And Uber, a Silicon Valley company founded four years ago, has a mobile app that connects a small army of black cars with people who need rides in 70 cities worldwide and employs "surge pricing." Uber, which takes 20 percent of all fares, charges more when demand is high and the supply of cars low.
"You get far more cars on the road and they stay out longer when surge pricing is in effect," said Travis Kalanick, a co-founder. You also get some cranky customers. In the last few months, the company has received an onslaught of complaints when the cost of a ride rose to as much as seven times the normal rate during a snowstorm and on New Year's Eve.
"One of the things we've learned," Mr. Kalanick said, "is that the more crisply you deliver the message to the customer and the more you set expectations ahead of time, the more you get to a place where there's no issue with it."
Uber's prices are controlled by an algorithm — technology that is increasingly available to even the smallest enterprises. Craig Clark, for example, sells more than 2,600 items — vintage china, bras, house numbers — on a variety of online marketplaces. Two years ago, he was collecting $2,000 a month in revenue from his sale of house numbers on Amazon.com.
"Six months into it, my sales went down all of the sudden," he said. "Amazon went out and got a wholesale account and started selling the numbers themselves. So you're not just competing against other sellers, you're also competing against Amazon." Mr. Clark had been laid off from his job as an analyst for a telecom company outside Philadelphia, so his online retail ventures had become his only source of income.
Like many Amazon sellers, he started re-pricing items manually but found the process wildly time-consuming. And mistakenly pricing a Jenga game at $13.99, instead of $23.99, once cost him $1,200.
Then, he learned of FeedVisor, which makes re-pricing software. "You tell them what the item cost you, the commission you pay to Amazon, and your highest and lowest price," said Mr. Clark, whose annual revenue is approximately $500,000. "FeedVisor then algorithmically decides the best price within your parameters and what everyone else is selling at."
The company, one of many that sell re-pricing software, charges 1 percent of sales and provides a dashboard that lets sellers analyze sales and profits. Using FeedVisor last summer, Mr. Clark said his "sales on Coobie bras went up 25 percent almost overnight."
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FeedVisor reduced the price on the bras, which he was selling for between $19 and $23, by $2 or more to make them more competitive. That reduced his profit margin, Mr. Clark said, to 37 percent from 39 percent—but increased his volume. The software also produced sales increases on other items of from 15 to 40 percent, he said, and helped him unload stale inventory, such as a pallet of pots and pans. "I hadn't sold one in six months," said Mr. Clark, "and I got rid of them in four days."
Restaurants, too, are using innovative pricing strategies. In September 2012, Groupon acquired a restaurant reservation engine, Savored, and has since integrated it into a new high-end division called Groupon Reserve. Instead of offering customers, say, $50 off a meal as traditional daily deals do, Savored lets restaurants offer customers a percentage off an entire meal in return for dining at a specified time.
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Cacio e Vino, a Manhattan-based Sicilian restaurant, has been using the app for two years, said Christine Ehlert, the manager. "On Sunday, Monday, and Tuesday, we offer a certain number of tables for a 40 percent discount," she said. Wednesday and Thursday diners may get 30 percent off through the app and customers who make reservations for between 5 and 7 p.m. on Friday and Saturday get a 25 percent discount.
Ms. Ehlert said that she initially worried whether the discounting might damage her brand. "But since we only offer a limited amount of discounted tables at certain times," she said, "I feel that we can explain to people that it's a way to drive new business to us in off hours."
Cacio e Vino pays Groupon a flat fee of $2.50 per diner. "The nice thing is that if it seems we're going to be too busy," Ms. Ehlert said, "I can call our rep at Savored and close out the deal." Before using Savored, she said the restaurant typically had $800 in sales on Mondays and Tuesdays.
"Now, it's between $1,200 and $1,500," she said, with a profit margin on the discounted customers that is about half that of the full-price customers. She said slightly fewer than half of the restaurant's discounted customers come back, typically for another discounted meal.
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Frank and Rhonda Duffy run Duffy Realty of Atlanta, one of a growing number of real estate agencies trying new pricing strategies. The Duffys charge an upfront listing fee of $500 and one third of 1 percent when a house sells. According to Zillow, the agency has about 800 active listings and had more than 1,400 sales in the last 12 months. Mr. Duffy said the agency's 2013 revenue was $5.3 million.
For the reduced fee, the Duffys offer limited service. The firm adds homes to the local Multiple Listing Service, as well as on Zillow and Trulia, supplies sellers with a 60-point, do-it-yourself marketing guide, rents lockboxes for $100, and charges $94 for a home to be professionally photographed. One of the firm's four listing specialists is likely to come to take your information. Then, a team of specialists, including client services representatives, buyer's agents and contract negotiators, moves buyers and sellers through the sale process.
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To provide an incentive to agents from other firms to bring buyers, the Duffys encourage sellers to offer the buyer's agents commissions of 3 percent or even 4 percent. Most sellers do it, he said, because they still come out ahead. On the sale of a $300,000 home, for example, a traditional agent might split a 6 percent commission, or $18,000, with a buyer's agent. A seller listing with Duffy will pay a $1,520 commission ($500 plus one third of 1 percent, or $1,020), plus 3 percent ($9,000) or 4 percent ($12,000) for a buyer's agent, or a total of between $10,520 and $13,520.
The pricing model does not suit all sellers. "The danger is you're not getting the advice and guidance," said Frank S. Alexander, a real estate professor at Emory Law School. "What do you with inspection results, or during the due diligence period, or in a contract negotiation?"
For experienced sellers, or in a particularly hot market, that may not matter.
—By The New York Times' Donna Fenn