After receiving the ‘OK’ from your key stakeholders, you need to switch your focus to fine-tuning the most essential part of any successful product: a watertight pricing strategy. Striking a happy medium when pricing is a challenge and will play a significant role in the overall success of your product. If the price point is too low, you’ll run the risk of negating the effort you and your team have put in during the build-up to your eagerly awaited product launch. On the other hand, if you price your product too high, this could drive your customers into the arms of a competitor and increase your churn rate. Let’s take a look at the ways you can avoid such pitfalls and incorporate a pricing strategy that’s mutually beneficial for you and your prospective buyers. Let’s take it back to basics.
A pricing strategy is a model and/or method a company uses to price its product or service suitably and optimize its sales volume and market share. The process helps companies generate maximum profits, whilst simultaneously taking into account the buyer, as well as trends within the market. Pricing strategies differ depending on the nature of the company and circumstances, which makes teaching it somewhat tricky because there really is no such thing as a one-size-fits-all solution. It’s important to do your market research and choose the right pricing strategy because your target audience is going to respond differently to different costs, depending on their circumstances (whether they can afford a premium price), and how other business owners on the market choose to price their products, too.
Grab your copy of Putting a Tag On It: The Product Pricing Playbook to look deeper at the main six steps you should take when pricing your product.
Companies have one thing in common: they all want to make a profit. There’s no doubt a suitable product selling price plays a crucial role in helping them achieve these objectives. After all, a new customer might see your price compared to competitors on the market and decide to remain a customer, improving your retention rates and, when they continue to return to your business, your overall sales.
In his presentation, How to Price for Growth and Profitability, Yannick Kpodar, Global Director of Product Marketing at PayFit, outlined his step-by-step process to identify the best pricing strategy for company growth and profitability.
Phill Agnew, Senior Product Marketing Manager at Hotjar said:
“Pricing principle number one is to base your price on customer value. Too many companies fall into the trap of simply taking their cost, adding a margin, and just going with that as the price.
“Your customers shouldn't care about how much your product costs to produce. They should pay based on the value they gain. Take this example.
“Example one: Coffee
“These are two cups of coffee that really cost about the same to produce. They use similar beans. They're roasted in a similar way, they use the same milk.
“Yet Costa coffee, a high street chain charges almost twice as much as Wild Bean a gas station coffee shop, Costa could have matched or even undercut Wild Bean by simply taking their costs and adding a smaller margin, but they'd be leaving money on the table.
“The nicely designed cafe that they create, the smiling barista, and the premium brand all add to the value that customers are happy to pay extra for. Similar studies in different scenarios have revealed the effect that customers pay for value, not for simply cost essentially.
“Example two: Perfume
“One study offered luxury perfumes at a London store, and consumers were asked to sample the perfume and rate their likelihood of purchase.
“However, halfway through the experiment, the researchers switched the labels on the test perfume, doubling the price from $40, which it was before to twice that - $80.
“What was incredible is that after seeing the higher price, participants were more than twice as likely to rate the product highly. At the low price, only 33% of the users rated the product as being seven out of 10 in terms of smell or higher.
“Whereas at $80, 78% of the potential consumers rated at seven out of 10 or above. The price anchored consumers and changed their perception of the underlying product.
“Charging what the customer values rather than simply the cost plus your margin can increase sales and really double down on revenue. But it's not all just about charging more, charging on customer value can mean you can come up with some innovative methods of pricing your product.
“In other words, the price is based on what the user actually values, the data, and the contacts they consume and use. So if price is based on value, you can actually start to get more revenue, more margin, and get out of this loop of just pricing based on cost plus margin.
“Principle number two is customers must see what they're paying for. All too many companies hide the value of what the customer will get instead of hoping for simplicity, that it will be easy to understand.
“But the science tells us that adding more descriptive elements to the items we're selling helps increase the intent to buy. I'll give an example to explain what I mean.
“Example one: Menus
“I spoke to Professor Sibyl Yang on my podcast, she was a professor at San Francisco University. She gave a great example of how adding tangible descriptive lines to menu dishes can increase the likelihood that customers will buy.
“In her study, hungry restaurant customers were given one of two menus - one which simply had the name of the dish being sold, cod fillet for example, and the other which had more descriptive elements around the dish that was being sold, pan-fried cod on a bed of rocket with balsamic glaze or whatever it might be.
“Perhaps unsurprisingly, the more descriptive version increases the money spent at the restaurant, increased the number of customers visiting, and even increased the actual enjoyment of the meal they then ate.
“Yet, so many marketers fail to add descriptive elements to their products and services.
“Example two: Tower of London
“Take this site, it's selling tickets for the prestigious Tower of London. It's a World Heritage Site listed by UNESCO. It's hosted Royals, famous executions, and of course holds the British Crown Jewels rumored to be worth 22 million pounds.
“There are so many great reasons to visit this place and yet the page that is selling the tickets struggles to get this across. There's a small section on the terms of the tickets, the price is at the bottom, and just those three bullet points explaining what you'll get entry to.
“It hardly gets the imagination racing. B2B companies and B2C companies across the world fall into a really similar mistake. They showcase the product that they're selling but don't give enough tangible reasons to buy it.
“They don't show a tangible value, whether that's the data you might get, the features you might consume, or whether you'll be purchasing a great day out if you're going to the Tower of London.”
As we said, there are many different strategies you can use when pricing your products. But irrespective of which one you choose, there is something you need to take into consideration - the price elasticity of demand.
“What on earth is the price elasticity of demand?” we hear you say.
Price elasticity of demand is used to determine how a change in price can have an impact on consumer demand.
There are some products consumers continue to purchase, even if prices increase. For example, milk. If the price of milk increased by 10%, it’s unlikely there’d be a huge change in the demand.
Other products, however, suffer when their price fluctuates. These are known as elastic goods. For example, Coca-Cola. If the price goes up, there are other, cheaper sodas available and the buyer can get their sweet, fizzy fix elsewhere.
It’s time to pop your math hat on, ‘cos we’re throwing a formula for calculating price elasticity your way:
We’ve outlined a select few of the pricing strategies available, but ultimately, there’s no definitive answer when choosing a solution for your company - it all boils down to one thing.
That’s right: personal circumstance.
Businesses need to utilize a pricing strategy to drive cash flow. To do so, you’ve got to be crystal clear on:
Pricing needs to take every one of these principles into account to drive optimum profit. Who knows? You may even have to go through your business plan with a fine-tooth comb and consider factors such as brand development, team restructuring, etc. before you can draw a definitive conclusion.
Remember, your pricing strategies are by no means definitive. You should continually assess your plan and make changes whenever something isn’t working as you anticipate. Your decision-making process can be dictated by simple metrics such as sales figures and churn rates.
Silvia Kiely Frucci, Senior Product Marketing Manager at Castor, shared five pricing lessons from her career so far:
Check out each principle in further detail. 👇
There are also instances when you may need to increase your prices, and this can prove a challenge in itself.
Phill Agnew, Senior Product Marketing Manager at Hotjar outlined two tactics you can use: hyperbolic pricing, and the decoy effect.
“The first tactic I want to focus on which will help you increase your price without losing customers is something called hyperbolic discounting.
“It's a fancy word for something we all know. It's the feeling that when you have a mountain of work piling up, and you know you need to get it done within the next couple of days but you just can't find the motivation to do it.
“You put it off and instead watch Netflix and convince yourself that tomorrow you'll get all that work done. In that scenario, you have fallen victim to something called hyperbolic discounting.
“Hyperbolic discounting is a cognitive bias where people choose smaller immediate rewards, so watching Netflix and feeling a bit of satisfaction, rather than larger rewards in the future, essentially getting all that work done and feeling real relief.
“The problem: immediate gratification
“Now, initial studies into this effect showed that subjects when offered $15 immediately, $30 in three months, or $60 after a year, always take basically the wrong amount. In the right scenario, if we were all smart, rational consumers, we would all take the $60 - that's worth the most it's the best package we could get.
“But most of us pick the $15 immediately, the salience of gaining something quickly and immediately beats having to wait.
“Interestingly, when consumers asked the same question with the same intervals, but a year in the future, so what do you want in one year? What do you want in one year and three months? What do you want in two years? We choose the largest $60 dollar reward.
“This reveals that we just clearly are impatient, we prefer immediate rewards in the short term, we just want it now. We prefer those immediate short-term rewards, but we're also more patient in the long term as well.
“For individuals, this creates a lot of problems I won't get into today, things like not saving for retirement but one of the ways that you can get around this and one of the ways you can convince your prospects that doing something may be difficult in the short term is worthwhile is by breaking down big goals into smaller manageable chunks.
“The solution: chunk it
“The problem with things like saving for retirement is that saving is a huge challenge, the amount an American needs to save is about $1.7 million for their retirement. Obviously saving that much takes a lot of money and almost a lifetime to achieve. With huge goals like that, it's much better to break it down into smaller tasks with a reward coming after each chunk.
“That way, the reward is no longer a far-off possibility, but something that is more immediate and guaranteed. This works not just for people trying to save for retirement, but for big brands and product marketers who are trying to justify their high prices.
“Let's pretend you're selling a high-value Mercedes Benz, you could show the full cost for $40,000 today, or you could show the cost broken down perhaps by using a bit of this hyperbolic discounting insight.
“You could say it's broken down to $32 per week, or $4.75 a day over the course of two years, but which would look most attractive to the user?
“One study actually analyzed this to reveal conclusively which was seen as the most attractive price, the researchers presented one of three numbers at random to over 500 participants and the results revealed the shorter the timeframe, the smaller the cost, the more appealing the deal.
“In fact, when the prices were shown as daily figures, they were five times more likely to be rated as a great deal than when they were shown annually.
“For SaaS marketers, for product marketers, this is a really interesting insight. We're quite good at doing this, we often break our pricing down per month, or maybe even per week, maybe there is an opportunity to break it down even further and really benefit from hyperbolic discounting.
“Where possible in the future, we should purse the extra bill, the cost of paying off into the future, we shouldn't encourage consumers to spend 40 grand now instead, we should get them to make small commitments like $4 a day.
“Now that's one way you can reframe your products to push for a higher price. It works because you have to remove that immediate pain of payment. But it's not the only way you can reframe your price.
“I'll finish by highlighting one of the tactics that a lot of SaaS marketers use, but not one that the majority of us particularly understand. It's the decoy effect.
“Example one: Popcorn
“To explain the decoy effect, I'll give a bit of a story about myself and I'm weirdly habitual when I go and watch movies at the cinema. Every time I go and watch a movie, I buy a ridiculously large amount of popcorn.
“After the movie, I always regret how much I've eaten, I'm usually full after a couple of handfuls, but I always plow through to the bottom and I always eat this popcorn.
Nevertheless, next time I go, I'll also buy it again. I keep getting into a habitual loop and I feel awful every time, but I can't get out of it. Now when looking at the price of popcorn, I start to realize why I keep falling into this trap.
“This is the actual price of popcorn at my local cinema in London, it's a lot of money I know. There's something really interesting about these prices, right? The extra-large is obviously too much, £7, that will be about $10 in America, that's almost the price of the actual cinema ticket.
“I'd never spend that much but the next option down which is just 50 pence more than the smallest option, the large option at £4 looks like a much better deal. You get so much more, you get a large for just 50 pence more than the small option.
With this pricing, I can't help but pick this middle option, it looks like such a good deal. The reason it looks like such a good deal is due to something called the decoy effect. I'll come back to this example at the end.
“Example two: The Economist
“But let me explain the decoy effect by bringing in the famous study which was cited by Dan Ariely in his book, Predictably Irrational. So Dan, being a professor at Princeton University, spotted the decoy effect, not in the cinema, but while flicking through The Economist.
“He found that The Economist had these three pricing options that they were publishing, they had that online-only subscription at the top, which was $59, the print-only subscription $125, and then the print and web subscription for also $125. That's quite weird, right?
“With this third option, you get both the print and online versions, but it's the same price as the print option by itself. The Economists were doing that same pricing and Dan thought this is a really strange phenomenon. Also, why would anyone buy the print-only option? After all, it's the same price as the print and web options.
“Basically, Dan predicted that The Economist was using this strange pricing strategy to create a decoy and encourage more consumers to spend $125, rather than the $59 for the online-only subscription.
“To test this hypothesis, he tested it out on his students, he showed one set of his students the actual pricing with the decoy included, and the other set of students an edited version with the decoy - the print-only option - removed.
“He wanted to see if removing the decoy price changed what people thought about the product and change what people wanted to buy. Turns out removing that decoy had a huge effect.
“When students were shown the decoy effect option, which was the one that The Economist had on their site, they would, on average pick the most expensive print and web subscription, it looks like such a good deal because it was the same price as the print subscription and yet it had the web subscription included as well.
“Yet, when Dan showed his students the edited version, without the print subscription included, suddenly students were far more likely to pick the online subscription only, the majority of students only spent $59.
“That's really interesting. Just the way that The Economist has priced their products, the way they frame their pricing, the way they built their options, dramatically changes what consumers want.”
Charley Gale, Copywriter here at Product Marketing Alliance, covered some important topics around prestige product pricing to help you gain a better understanding of the strategy in this article:
When your prices increase, you can’t keep every single one of your customers happy, particularly customers who are more economically minded.
While a degree of customer churn is inevitable, you can improve your customer retention by introducing discounts to your customers to negate the price increase.
Your customers with one eye on their spending will be more than happy to use a discount code, while customers who aren’t necessarily too fussed about a slight price increase will pay your new price anyway.
Either way, a significant proportion of your customers will be paying full price. However, there are still things you need to keep in mind when discounting a product.
For example, why are you discounting? Discounting can sometimes have a negative effect on your sales, especially if your consumer is someone who is always looking to spend more money to show more value with their product.
Reducing the price is going to convey to this particular base that it’s worth less, so it would deter them from making a purchase. Which could then, in turn, damage your profits.
So, you need to have a solid understanding of why you’re making this move, how you believe your customer is going to react to this change, and whether it’s worth it depending on the estimated outcome (e.g. sales and profits).
If you want to learn more about discounts, along with all other things within product pricing, we have just the thing for you. 👇
Pricing strategies have the power to make or break your product - set the bar too high, and you’ll price your customers out of the market, set your price point too low, and you’re running the risk of undermining the quality of your product.
Our Pricing Certified: Masters course has been designed so you can delve into the intricacies of pricing, and get the essential knowledge and tools needed to price your products competitive.
Led by Tamara Grominsky, VP of Product Marketing and Lifecycle at Kajabi, this course will help you to confidently:
💰 Understand pricing strategies.
💰 Be able to change your pricing confidently.
💰 Understand how to conduct a pricing analysis.
💰 Identify how pricing strategies vary, depending on the industry.
💰 Know how to segment your pricing.
💰 Understand how discounting works.
So, what are you waiting for?
Whether you've got a pricing project on the horizon or just want to brush up your knowledge and learn from the best for when the time does come, here's a selection of presentations, templates, and guides to help you through all things pricing.
Part 1: Presentations
Part 2: Templates
There's plenty more where this came from. 👆
Unlock it all in here. 👇
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