The previous blog on Pricing Strategy for Hardware Company, successfully laid the groundwork for entering the market with your product. We saw the case of a hardware company, and got the anchor for the pricing strategy of that product. Now, our AI-powered robotic solutions are ready to revolutionise warehouse logistics. But wait! Before you set sail towards market domination, there’s one more crucial element to consider. How to make it easier for your customers to come aboard? Can offering different financing alternatives for the customers as a part of strategic pricing help you in this cause?
We can understand this by an interesting scenario. Imagine, your ship is loaded with latest technology, your crew is ready, and the seas are calm. However, the docks are filled with potential customers who are hesitant due to the cost. What you need now are the right bridges—financing options that will make it easy for your customers to step onto your ship and sail towards success with you.
Right Price Structure
Welcome back to Startup Analytics! The previous blog on pricing, explored the depths of pricing strategies, focusing on the balance between growth and profitability. Now, it’s time to hoist the sails and steer towards the next critical step. Choosing the right financing options to attract and retain customers. Strategic Pricing is pricing with a plan of action in mind!
Financing options refer to the different financing alternatives that a customer can choose to finance the purchase of the product. The customer can finance the purchase with a suitcase full of cash, or by taking the product on loan, or he can take the take the product on rent paying out the periodic rental sum. These can be some of the financing alternatives possible, where each alternatives is preferred by different leagues of customers.
As we embark on this journey, remember the words from the series Dark: “The end is the beginning and the beginning is the end.” The end of determining your pricing strategy marks the beginning of exploring financing options. Understanding the right financing models will refine your pricing and sales approach, creating a continuous loop of improvement. The key lies in understanding our target market and the type of consumer we want to attract.
Get back to our Warehouse!
Returning to our example, suppose our hardware startup needs to charge Rs 1 Lakh per equipment. Recall the anchor price we got in the previous blogs of the series. This price per equipment is set up to recover its initial costs and desired margins.
But what if it has a potential client who cannot afford to pay Rs 1 Lakh upfront. This is because they are an early-stage company with negative cash flows? You might argue that the client could take on debt. But wouldn’t it be easier if the company provided the equipment on loan? This approach could save the client a lot of time and energy.
Now, consider another scenario. Say the company has a client who needs the equipment for a period shorter than its usable life. In this case, it might not make sense for the client to buy the equipment upfront or even on loan. What if the client could lease the equipment from the company, paying monthly or quarterly rents? This leasing option can be particularly beneficial for clients who lack initial cash flow or want the equipment for a duration lower than its usable life. It’s similar to how people with jobs that require frequent relocations prefer to rent apartments rather than purchase them.
The cheapest Option!
These alternative financing strategies vis a vis providing equipment on loan or offering leasing options, in addition to offering outright purchase can be game-changers. They make it easier for clients to access the equipment they need. Also, it expands the company’s customer base by catering to different financial situations and usage needs.
Of course, each of these strategic pricing alternatives has its own share of positives and negatives. For instance, purchasing equipment upfront is usually the cheapest option in the long run. But leads to a significant negative cash flow at the start. On the other hand, loan and lease options spread out the cash outflows over the contract duration. This avoids a large initial expense. However, these options are likely to be more expensive over time compared to an outright purchase. Additionally, buying the equipment either upfront or on loan makes you the owner, whereas leasing an equipment does not.
Lower than Sticker Price!
An interesting observation is that the actual cost to the customer of all three strategic pricing alternatives is often lower than their advertised sticker price. This sticker price is the one which the machinery automation company can use in its marketing. The big sticker price on that new machine isn’t the whole story. The government lets you lower your taxes by taking deductions for the machine’s wear and tear (depreciation). Even the interest on a loan or the entire lease payment. This means the machine actually costs you less in the long run. This makes the deal better than it seems at first glance.
Signing Off
Are you a company facing stagnant growth? Are you unable to convert your visitors to your customers? You could consider providing various strategic pricing options for its products that can significantly broaden a company’s customer base.
For instance, the automation machinery company in the example could offer an outright purchase, loan, and lease options of purchasing its equipment to its customer. In this way cater to different financial situations and usage needs of customers. This flexibility can attract a wider range of customers, including those with negative cash flows or those who need equipment for a shorter period. By providing these options, companies can increase their customer base and revenue while also offering more flexibility to their clients.
We will build upon this in the further blogs!!