Whenever you go shopping, does it seem like there’s always a sale going on? It’s as if marketers believe that by offering a high value item for a lower price, it becomes a more attractive item to purchase. I have a term for this – the electronic red pen.
What the heck is an “electronic red pen”? Well, it all started 35 years ago…
My mother told me before I got married that when I go shopping that I should “always carry cash and a red pen.”
My mother has always had fascination with clothes, but my father didn’t understand why she would spend so much on clothing. To avoid upsetting him, she decided to carry cash and a red pen whenever she shopped.
Let’s say she came across a dress she liked (never mind the fact that she just bought one last week). She would pay for it half in cash and half in credit. Then, she would take out her red pen and mark through the tag price, adjusting the price to 50% off. This was an easy way to convince my dad every time she shopped that she had found a good deal. What was once a $100 dress was now a $50 dress and my mother looked like a savvy bargain hunter.
Which begs the question…
If it’s always on sale, is it ever truly on sale?
Have you ever walked into a department store that constantly has a sale? You were in there two weeks ago, and they had a 70% off sale for a “limited time only.” Believe it or not, this electronic red pen strategy happens a lot! Consumers are constantly sucked in from company pricing strategies.
So if it’s always on sale, is it ever on sale? As financial leaders, we’re faced with this predicament with consumers being so trained to fall for this technique as well as the emergence of consumers realizing that this is just a marketing plea for business.
The Electronic Red Pen
The Electronic Red Pen is a strategic pricing theory that I define as “a large amount of value for a small amount of dollars.” For example, we sell the Strategic Pricing Model tool at only $59. A company can benefit from this tool by considering all costs before they settle on a price, improving communication with the sales team, and increasing financial performance. This value, from a financial standpoint, is worth much more to a company than just $59.
So why do we sell such a high-value tool for only $59? While the consumer is getting a great value for just a few bucks, we’ve made sure that our target price will still yield a profit.
To effectively use the Electronic Red Pen strategic pricing theory, you must first price your product or service to result in a profit. (For an easy way to get started, check out our free Pricing for Profit Inspection Guide.)
On the other hand, some companies choose to not use the Electronic Red Pen…
The Anti-Electronic Red Pen
Some businesses adopt an “anti electronic red pen” pricing strategy. Often seen with the pricing of luxury items, perceived value is the focus rather than a “bargain basement” mentality.
The anti-electronic red pen pricing strategy creates a feeling of exclusivity, a barrier-to-entry which intimates that the product is only meant for the select few who can afford it. For example, a BMW vehicle or a diamond is priced at what it’s perceived to be worth. Owning one of these exclusive items makes the consumer feel as though they’ve achieved a certain level of wealth and demonstrates to others that they can afford such luxuries… which is value in and of itself.
Example of Apple
If I were to take a guess, about 50% of those reading this post have an iPhone. Apple has pioneered the cell phone industry, with Windows and Android following closely behind. This company avoids the strategic pricing theory of the electronic red pen as if it were the plague.
By utilizing the anti-electronic red pen strategic pricing theory, Apple has created a a level of prestige that people aspire to be a part of. They do this by having the capability to manufacture an iPhone for roughly $200 (we’re just guesstimating that for now), yet they put a dollar value on the phone of around $800!!! That’s a $600 or 75% margin per individual phone.
How do they get away with it? Apple has created that perceived value… And people buy it.
[box]Looking for how to price for profit? Click here to download our free Pricing for Profit Inspection Guide![/box]
Unless you have a brand that can demand a high dollar amount for a high perceived value, you might be in a better position to utilize the electronic red pen strategic pricing theory. Here are 3 ways to start implementing the electronic red pen in your business…
3 Ways to Implement the Electronic Red Pen with Strategic Pricing Techniques
The number one way to implement the electronic red pen is to simply communicate that the product/service has a higher value than its price. The value of a product may be $1000 but is being offered $750. Be sure that when you are bracketing, you are still creating value for yourself. Don’t just focus on sales… make sure that you’re using your electronic red pen wisely to return a profit.
If you’re not sure where to start, download our Pricing for Profit Inspection Guide.
We all love to find things on sale. We want to know that we are getting a good deal! My mother overcame my father’s objections about her spending by showing him what a bargain hunter she was.
Evaluate how your market is psychologically moved from a potential customer to a sale. Utilize those tactics as you implement the electronic red pen pricing theory.
It may not always be on sale. This marketing tactic has been proven time and time again. Do you find emails in your inbox for webinars with limited space or sales that are only happening on Labor Day? You may not be one to take the bait, but someone out there is bound to get reeled in.
This goes back to communicating that there is a value, but this time, it’s is crucial to communicate the urgency of the sale. Try to include tags like “Limited Time,” “Sale is Closing Soon,” or “Annual Sale.”
I can’t stress enough the importance of strategically pricing your product or service. You can only cut so much below the line before you cut out the floor below your feet.
For more tips on implementing the electronic red pen strategic pricing theory, check out our Pricing for Profit Inspection Guide here.
[box]Strategic CFO Lab Member Extra
Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]