Buckle up boys and girls. This is going to be an epic deep dive into the different ways you can price your products or services. Pricing is an interesting topic and there's a ton of advice out here on the internet. The funny thing is that "other advice" doesn't really do a good job of setting up the frameworks so that you can compare how different pricing strategies work or can even change over time given the conditions in your market.
When it comes to driving your business’ success, how you price plays a major role. Your prices communicate your value, can illustrate your quality amongst your competitors, and even influence what the market is willing and able to pay for what you’re offering. The problem with finding what the “right” price is for your business is that there is no magic formula. That’s where this article comes in. This article is going to outline some of the bigger objectives of pricing right and then offer you pricing strategies you can implement today. Your job is to figure out where your business model falls within the objectives and then pick a pricing strategy to run with.
Let’s lay some foundation points first:
Buyers are intrinsically motivated to get the most value for their dollar based on cultural, social, personal, and psychological influence. Buyers need to know, like and trust you. So work on understanding your target audience to best communicate your value to them.
Most buyers will go through this process:
Identifying their problem.
Doing some kind of research (yes even simple chats with friends count).
Evaluate their solution choices.
Make a purchase decision.
Have a post purchase response (think in terms of buyers remorse vs raving advocate).
As a seller you need to have the mindset that you are trading some kind of value for dollars. You are motivating buyers by fulfilling some kind of specific need. Those needs can range from being the low cost provider to offering the highest quality product.
Guessing is the worst thing you can do in your business when it comes to pricing.
Prices don’t have to be set in stone forever. They can change over time but remember your prices strongly communicate how your business is doing so change with purpose.
What Motivates a Seller
Below you will find some of the biggest motivations that drive seller behavior. The best advice I can give is to read each of these motivations with your business model in mind. Think about where in the market you want your business to compete and where you think you’ll have the biggest chance at finding success. Every seller will hit each of these points with varying levels of intensity. The important thing is to understand what should motivate you and to look at what you are doing in your business to bring those motivations to actions and outcomes.
Maximizing profit. This can be a long or a short term goal and it has to do with how you have aligned your costs and production process. Every business should want to maximize profits. The special sauce here is understanding that high prices do not always translate to higher profit.
Maximizing unit sales. This can be for both a maker and a do’er. As a seller you should always be striving to work at delivering the best work you can in the time you are allowing yourself to do it. Once you're comfortable a level of production work on continuing to build your capability and grow your capacity.
Capture market share. More market share leads to more advocacy, more sales, more authority, and a growing community. You don’t have to be the biggest business on the block to be the most popular.
Create barriers to entry. When you think of pricing and profits the more profitable your business the more incentives you will give businesses to try to jump in and steal your Kool-Aid. Finding your competitive advantage and holding on to it is going to make it hard for that to happen.
Best quality or be exclusive. Creating a culture around your business and brand will help keep your customers or clients from making snap judgements based on price alone. You need to be aware of the low-price-low-quality stigma and if you are low price be prepared to combat it with a flurry of “innovation” based support.
Using the loss leader strategy carefully. It can be tempting to start slashing prices to get traffic to your site or store front. Be careful about the message that sends and how often you use this tactic.
Trial purchases. As a seller you might want to encourage your customers to give a trial a shot. The guys over at Fizzle did an awesome job of communicating and executing this concept. The best thing I can do is tell you to check out their splash page.
There are probably a few motivations that I missed but those are the biggest and most prevalent ones that sellers have to try to juggle when figuring out how to price their products/services and even running their business. You have to care about all of these things not just about what your profit or revenue looks like all the time. It’s ok if one or two resonate with you a little more than the others. Use what drives you most as you start to think about how you are going to price going forward.
Now that you’ve reflected and mastered what motivates you as a seller it’s time to find the pricing strategy that fits best with what motivates you and your business model.
Cost-Plus Pricing - *Full Disclosure: Not my favorite because most people use this wrong* Cost-plus is a pretty straight forward approach in terms of pricing and it’s also one that lots of people default to. Just because it’s easy does not mean it’s right or right for you! All you do is figure out what the per unit cost of what your good is or of what your equivalent service is and add a fixed percentage to it as profit. So, if you are selling something that costs $100 to make and sell and you want to make 15% profit on each unit your selling price is now $115. This really only works in super niche, unique or noncompetitive markets. It’s not my favorite because as a seller you aren’t really doing any of the work you need to do to align your prices with the needs and wants of the buyer. It also doesn’t lend to the seller working to deliver more efficiency because the profit just gets tacked on to whatever the cost to market is.
Price Skimming - This is a fun problem to have. As you sell more and more of your stuff you’ll need more and more inventory or resources to deliver. As you continue to build capacity and your capabilities you are going to find efficiencies. As a seller you get to translate those efficiencies into lower prices for your consumers. This works really well with manufacturing and technology typically because you are playing with classic economies of scale. You are lowering your prices (lowering profit per unit) with the goal of moving more units than your competition. If you are a service provider or are selling an information based product this probably isn’t the strategy for you because continuing to skim prices over time might lead to unwanted perceptions of your brand and product. To make this work well you need to make sure that your quality is always staying the same or increasing (you might hear the buzzword: value innovation). When customers feel like they are getting cheaper prices and cheaper quality it doesn't go over so well.
Penetration Pricing - This is great for new businesses and it’s a pretty straight forward strategy. You enter the market at a lower price than your competitors and then increase prices over time. This is your typical trial offer. You entice buyers or users with a low cost of entry and then do your best to deliver as much value as possible with the hopes that those customers will stick around and continue to engage. Also works well when there are subsequent offers or upsells as part of your customer experience. The best success happens when your business is tied to a very specific experience or problem. I love this approach because you are communicating to your potential customers that you are so confident they will find success/be happy they will continue to come back and engage with you. Plus, if it was one of the few times that it’s not a good fit your customers only paid a discounted price so they are less inclined to be as upset (even less vocal) because the stakes were so low for them to try you out.
Prestige Pricing - Malcolm Gladwell does an amazing job explaining this concept in terms of Grey Poupon in one of his TED Talks that I linked here. With this strategy your goal is to create the perception of quality and exclusiveness. Higher prices here will imply higher value but there’s a catch. The price alone isn’t going to impress the average buyer. The packaging, copy, branding, and experience around the good/service needs to align with the higher price you are demanding. You have to create a prestigious experience for the buyer. This is a great strategy for service providers and information products because you are delivering a very specific solution or specific information that will solve your customer's pain points. The more specific your service the more expertise or experience is needed to deliver that information and in terms can command a higher price.
Bait and Hook. This sounds like what happens in the bar scene on the weekends but it really is a pricing strategy. With this strategy you are charging a low price for the initial purchase or interaction and then much higher prices for either replacement parts or supplemental services/products. The razor blade industry does amazing here. Think about the last time you bought a razor and what that price was. When you went back for more blades did you notice how much more expensive they were compared to the initial razor purchase. That is a classic bait and hook. The same goes for the average ink-jet printer. This works well if you can be fairly sure that your initial customers will continue to interact with you after the shock of learning about the higher prices the next time they engage with you. As a seller you need to be able to communicate the value of those subsequent purchases. If you fail to do that you’ll end up with customers like me that see the higher prices of the replacement razors, skip that purchase, and just buy another new razor start up kit.
Price Promotions. This is when you temporarily give out coupons or rebates to reduce your prices when you: introduce new offerings, are trying to attract buyers from other businesses, or you have extra inventory that you are trying to get rid of. These promotions work really well when you create mini campaigns around them for special occasions. This strategy is like a kinder gentler bait and hook. You have to be careful with price promotions - customers will only tolerate them for so long. If you coupon too often or too steeply your customers might think that your work doesn’t deliver the value your price says it should. Think of this as a strategic tool in your pricing tool kit.
Phew! I hope you are still with me :) So up until now you’ve been thinking about what motivates you as a seller and some different approaches to pricing. The last piece of the puzzle is talking about the customer’s perceived value.
Customer’s Perceived Value
This conversation wouldn’t be complete without touching on perceived value. As a seller, maker, do’er or marketer you need to understand a little more about what drives customers. There is a pretty easy measuring stick for this and it’s one that will also help you work on your copy when you are communicating your what makes you so awesome to your audience.
The metric is figuring out what the price or cost of the best alternative is and adding the difference in value that your work brings to the customer. If it sounds a little fuzzy it’s because it is. Unfortunately though, it’s one of the best ways you can work to differentiate yourself and figure out how your customers perceive the value that you offer. Another way to think about it is to think about what your customers are missing out on if they choose to go with your best competition...actually that’s an easier way to think about it. Use this metric as a way to take your markets temperature on what you are offering and comparing that perceived value to what’s out there.
It’s important to understand what you’re really good at (competitive advantage) and to be able to communicate that in a way that will best serve your target audience. Perceived Value is not just buzzword fluff and it’s not something that you should just skim over. When you are thinking about how your business stacks up against your competitors or how you are looking to be different start at your core. Your core capabilities are the things you have to do every day to get your work in the hands of the people that need it most. Think carefully about how where you are special or unique throughout that process and why that matters to your customers. Take me for example. There are lots of Professors, Small Agencies, Management Consultant Firms, and Freelancers out there that do what I do. We all have access to the same kind of information and tools (relatively). What sets me apart is my process and how I do my best to deconstruct concepts and problems so the business I work with can take action right away. That’s my competitive advantage - plus I hate when similar professionals hide behind academia or corporate boardrooms because they think they are the only ones that can decipher and implement strategy.
Phew (again)! If you are still with me then you have a solid set of tools to start really thinking about what sets you apart, what motivates you and how you can start to tinker with your pricing model. This stuff takes practice so just start! If you are looking for a little something extra to help you get started you can check out the free Disruptive Decision Framework down below.
Don’t forget to check back in with me too! I want to hear about your successes, struggles, and questions as you start to get objective and deliberate about your business.