Nowadays many wedding businesses ranging from wedding photographers and videographers, to officiants, planners, photo booths and DJs act in in a super competitive arena and often they are forced to cut prices to secure deals.
According to Howard Shultz, CEO and founder of Starbucks, "Cutting prices or putting things on sale is not sustainable business strategy. The other side of it is that you can't cut enough costs to save your way to prosperity."
Still, there are companies that enjoy pricing power. This article deals with the concept of pricing power, why it is important and how to gain it.
Pricing Pressure is Intense
A study done in 2019 by the price consulting firm Simon-Kucher and Partners shows that worldwide 65% of the 1,650 of the firms surveyed experienced price pressure and 57% are involved in a price war. Only 28% of the price increases initiatives are materialized while the rest of 72% are foregone for the fear of losing business.
About 50% of the business simply want to raise prices to adjust for inflation. Only 13% of the companies try to raise their prices above the inflation level. Most companies don't even plan for price increases.
The interesting fact is that in 2017, the same survey showed that only 47% of companies were engaged in a price war so the price is becoming the new battleground worldwide.
While in 2017 about 77% of respondents believed their competitors started the price wars, in 2019 only 44% were sure it was their competitor's fault. Even more, 33% of pricing experts confessed they started those wars.
All in all, it pricing is becoming the new marketing weapon of mass distraction and we see this in the wedding industry where discounts are the new normal.
In the wedding industry, 61% of companies feel the pricing pressure increased in the last two years.
Lower Prices Are Not the Answer
Dropping prices paves the road to poverty as the wedding professionals cannot survive indefinitely when their profit margins are razor edge slim.
There are also other leavers that small business can employ to drive growth. Among them sales is considered the most important by 63% of the executives and cost cutting is a far distant with only 22% of respondents using it as a tool. Only 12% of the decision makers see pricing as a growth driver, which makes it one of the most underutilized success factor.
The New Normal in the Wedding Industry
No matter if you are a photographer, an officiant, an event space or a a photo booth company, you are hit by the same reality. Costs are increasing while our couples want everything for nothing. We need to back over backwards, give them free time and products to gain their business and that is often not enough. We are often see situations when the competitors drop prices or have perpetual promotions that puts pressure on the market prices.
Even worse, raising prices has been more difficult than ever!
Pricing and Digitization as Drivers of Growth
The most natural course of action for most companies is to use pricing as a tool to increase profits. In that arena, pricing innovation and creativity, which is so present in this industry are crucial.
Digitization (conversion of the products and service information onto data that computers can use) is becoming very important in preserving and increasing profits. According to the same global study, 49% of respondents agreed that digitization is a significant contributor to the revenue. That is impressive, considering that only two years before only 23% of respondents saw digitization having a positive impact on the revenue line.
In North America digitization is still not considered important with only 61% of companies investing in such initiatives, compared to 90% in Chile, 88% in Denmark and 87% in China.
Service industries worldwide lag behind production when it comes to digitization initiatives. While digitization could be the answer to the stabilization and growth of the industry, pricing power is the key to a healthy firm.
What is Pricing Power?
Warren Buffet was one of the pioneers of this concept and to explain it, we are using a quote by him:
"The single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference."
Pricing power is present in industries with inelastic demand. In other words a company that enjoys price power has a customer base that is not price sensitive so they can raise prices without worries of declining volume. Because the wedding industry is a perfect market (in the economic sense - many buyers of sellers) couples are extremely price sensitive unless the wedding professionals are able to build a powerful brand that can withstand pricing pressures.
Another definition is giving by Simon-Kutcher and Partners: "Pricing power is the ability of a company to get the price it deserves for the value it delivers."
Characteristics of Pricing Power
To achieve pricing power, the company has to have the following characteristics:
Differentiate Its Offering and Charge a Premium
If the wedding professional is able to differentiate or create the perception of differentiation, he or she will be able to charge a rate higher than the competition at the same quality levels.
Capability to Raise Prices Without Losing Business
This is in fact the essence of pricing power defined above and the companies who are able to capture incremental share of the customer wallets without losing them to competitors hold the key to success. Of course, we are talking about price increases above the inflation rate.
Capability to Be a Pricing Leader or Influencer
Many markets have pricing giants who can stabilize the pricing levels or if they move, to create pricing tsunamis. If your company is one of those, you are on the right track to acquiring pricing power.
Innovation is one of the main differentiators that allows the wedding professional to charge higher rates. Sadly, innovation in itself is not enough if it is not properly marketed and followed by price increases to capture the additional value created for the couples.
Immunity to Competitive Intensity
While the wedding industry is extremely competitive, with low barriers to entry and high exit barriers, we all know that many professionals enjoy privileged positions where they are not only able to withstand the intense competition, but also thrive regardless of conditions.
Operate Under Favorable Market Conditions
The market conditions are favorable and conducive to pricing power when:
- customers appreciate value
- the company innovates on the constant basis and disrupts the market
- the vendor uncovers new couples' needs and finds a way to capture and monetize them
- the market demand is stable and ideally growing
- couples notice when an innovative product and service is launched and value innovation
- quality vendors do charge a premium price
- the vendor enjoys brand loyalty
- the industry does not change and innovations have a massive impact
- the industry capacity cannot keep up with demand
Pricing Power is not the Power of Pricing
While the pricing power captures the ability of companies to raise prices without losing business volume, the power of pricing is different. Price has a massive power to increase profits. According to McKinsey, a 1% price increase results in 8% profit increase. Sadly, in the wedding industry we see vendors casually drop the prices by 10-30% as it is nothing. Truth be told, a 30% price drop means one of the following: either the original price was not properly constructed or the professional will not make any profit on the wedding.
A 5% price reduction across the board needs a 18% increase in volume to maintain the same profit amount. Often wedding photographers are desperate to sign up a client and don't even think if they are making money or not.
Pricing Power Impacts
The companies enjoying pricing power are unicorns that make good headlines and media outlets want to cover their story. That is free publicity and starts a virtuous cycle that become a self fulfilling prophecy. More and more magazines, newspapers, TV and radio stations talk about the miraculous growth of company X and customers gravitate towards them.
The Most Common Scenario
Here is the most common scenario we see every day in our wedding adventures. Let's consider a female wedding photographer (the same happens with men as well). Once a happy couple sends an inquiry to confirm pricing an availability, the photographer bends over backwards to win their business. She presents her packages and before even showing the albums and the couple opens their binder with offers from competitors. The poor artist is informed that another competitor offers free engagements, free large prints and includes an album for the same price. Our photographer has to match the offer without even seeing the competitor's work. In many cases brides like the competitor's price and don't mention the work is probably sub par.
Instead of matching competitor's prices, a better alternative would be to simply switch the discussion towards the quality of her work and convince the bride and groom her work is outstanding and deserves a premium over her competitors. However, in order to have a solid pricing discipline, the photographer has to have a solid pricing strategy and a good knowledge of the market.
Pricing Knowledge at Three Levels
The tragedy is that most players in the wedding industry have no idea of the rates charged by competitors. To set up and implement a solid pricing strategy, the professional has to have knowledge of pricing at three levels. First, the industry level pricing is crucial. Is the industry in a significant decline or is experiencing a healthy streak.
The second level and very important is the product level knowledge. This is the area in which the vendor operates: wedding photography, videography, planning, DJ, limousine, etc.
The third and last level is the transaction level. Right here and now, what is the market price and how much should I charge? In the summer, when everyone is booked solid, it does not make any sense to drop prices to book another client, yet this is exactly what many of our colleagues are doing. It is sad, but very true!
The Winners in a Pricing War
Unfortunately, in a pricing war there are no winners. In that respect, this is like a nuclear war where there are no winners. Even the customers lose in the aftermath of the pricing war when many companies are wiped out. If the company who starts the pricing gains a temporary advantage, that is immediately lost when the competitors match prices. The result of this sad trend in the wedding industry is a devastated group of survivors with no money for training, who don't care much about the client and just go through the motions and couples who cannot find quality no matter at what price point.
Pricing Power Assessment and Implementation
If you believe you are on the right track to gain pricing power, please google pricing power assessment tool That will help you decide if you are in a power position so that you can increase your prices and reap the benefits of premium rates.
Though rate, the most successful companies have the power to raise prices and capture additional profits despite the competition in the market place and other adverse factors. They enjoy healthy financial positions and are able to survive and thrive in severe downturns.
The Power of Prices - McKinsey, February 1, 2003
Deriving the pricing power of product features by mining consumer reviews - Management Science
Do you have a pricing problem? The Pricing Advisor
Liozu, S. M. (2015). The pricing journey: The organizational transformation toward pricing excellence. Stanford, CA: Stanford University Press
Howard Schultz on How to Lead a Turnaround - Inc. Magazine, April 2011