Pricing for profit - are you Apple or Wal-Mart?

I read SHN's article about pricing strategy over the weekend. In three businesses now, I've spent a good deal of time studying pricing of different services and, with all due respect to Dana Wollschlager, the thesis of the article is all wrong.

Actually, the thesis is wrong if what you want to do is maximize profit. It's spot on if you want to be the low-cost, value option in your markets. The point Dana makes (or rather made at a speaking gig last week) is that you need to know your costs before you can set your prices. This is a rational and common pricing strategy: tabulate your costs and then add your desired profit margin to arrive at the price you quote to the market. At this point, the teaching goes, you can work to lower your costs or adjust your margins to offer more competitive pricing.

The problem is that when your focus is all on cost-plus-margin, you tend to view that margin or the underlying cost (in the case of senior housing, the staff and services you provide) as "levers" you can pull to control pricing. This is exactly how Wal-Mart competes: they aggregate buying power and compensate employees in such a way as to deliver their goods at the lowest price to customers. Amazon wrings costs out of their business in the distribution and logistics of their business. But if you shop at Wal-Mart or use Amazon, you can feel that the experience is entirely unlike that of Whole Foods or Apple. 

Apple does not price their iPhone or Macbook as a multiple of the cost of the device. Rather, they convey to customers an experience or a lifestyle that conveys to you when you buy and use their products. No one "shops around" for a smartphone, looking for the best price. You are either interested in the features and social cache of an iPhone or you're not. Everyone knows, however, that if you want the lowest price on Tide detergent or paper towels, Wal-Mart is a good place to check. Apple's operating most recently reported operating margin: 28%. Wal-Mart's: 5%. Which would you prefer?

Here's an analogy about pricing I like: if I stopped by a local florist and bought a bouquet of flowers for my wife, I would pay an amount most likely set precisely as Dana outlines: the wholesale cost plus an allowance for overhead and profit. But when my wife was planning our wedding, we almost certainly paid significantly more for the exact same variety of flowers that she carried as a processional bouquet. Why? It's because in the emotional context of a wedding, my wife wasn't shopping for the cheapest flowers. She was shopping for the flowers that fit the message and image she wanted for a once-in-a-lifetime event. It's the context of the purchase, not the cost of the florist's business that set our pricing mentality.

My point is that the cost-plus strategy is likely a race to the bottom, competing on the thinnest margin you can to win the marginal resident over a few dollars a month in rent. If you offer the market something other than low rent, maybe something aspirational or hard to price (lifelong learning, social purpose, meaningful friendships, better educated staff, a concierge service, customized care modeling....) you can sell something other than price. And probably charge a lot more for the same product.

Now affordability of senior care is a looming crisis that we have to deal with as an industry. Good work is being done but we aren't close to having that solved. There is absolutely a place for value-based, low-price senior housing. A huge place actually.

But the article is written broadly, presumably to promote the sponsor's software, and implies it is the best way to price your offering. It is one way, but a way that likely leads to be the cheapest option, but not the most profitable.