The Ultimate Pricing Strategy Guide To Optimize Your Profits
Major Points of the Article
A winning pricing strategy can increase your revenue by as much as 50%
There are 7 pricing strategies. Each work in different scenarios and industries
Your pricing strategy needs to be reviewed and optimized regularly
Too many businesses set their pricing without putting too much thought into it. However, this is a mistake as that can mean leaving millions of dollars on the table. In fact, did you know that small variations in your pricing structure can raise (or lower) your revenue by as much as 20-50%?
What would a 50% increase in your revenue mean for your business?
The good news is you can optimize your pricing strategy so that people are willing to pay more for what you offer, which can grow your profits and your business.
What are Pricing Strategies?
Firstly, let's build an understanding of what a "pricing strategy" actually is. In your case, a pricing strategy refers to the processes and methodologies your business uses to set prices for your products and/or services.
Say, for example, you sell products, then you would have a product pricing strategy that determines what amount it should be sold for. In fact, there are many different pricing strategies to choose from:
Value-based pricing
Competitive pricing
Price skimming
Cost-plus pricing
Penetration pricing
Economy pricing
Dynamic pricing
And, each will be explained in more detail further into the piece.
The importance of optimizing your pricing strategy
As mentioned earlier, a fully optimized pricing strategy can mean an increase in your revenue by as much as 50%, but it also means more for your business. A winning pricing strategy can help solidify your position by building trust with your customers while increasing brand awareness (as your customers will tell their network about what a great deal they got).
The Qualities of a Winning Pricing Strategy:
Conveys value: value and price are two different things. Price is the tangible dollars, someone exchangers, for your goods or services, while value is the intangible benefits. Something that is cheap with high value confuses the customers and can lead them to believe that product or service is poorly made or badly delivered. Your consumers expect cheap/budget with low-end products or services, while expensive is connected to luxury. Not only that, research into the size of the attainable market and its tiers can mean you could make more profits with a budget item over a luxury item.
Increases your sales volume: much like the story of Goldilocks and the Three Bears, a price that is too high or a price that is too low, can send a potential customer away. A price that is "just right" is the sweet spot you are looking for. It's the ideal price that convinces your potential buyer to consider your product or service over your competitors. For example, studies have shown in e-commerce that people love FREE shipping, even though when compared to a competitor that sells the same product, the buyer's total is higher than if they paid for shipping with the competitor. Now FREE features may not be of benefit in your pricing strategy, but optional extras can.
Goldilocks & The Three Bears
Increases buyer trust: much like as discussed above, pricing your products/services too low, will lead the consumer to believe it's of poor quality, while a higher price will lead them to believe it is a sound investment.
The Qualities of a Weak Pricing Strategy:
The value is confusing: often business owners believe a cheaper price means more customers will be able to afford it. While that might be true in some instances, for your business it could send them running to your competitors as the price may no longer be believable. In fact, one of our clients believed that their low price was why consumers came to her, however, with some evidence, we were able to show that doubling their price would not cause a drop off in their client list. In the end, it actually caused more clients to come to her business, creating a 4x growth within 1 year.
Can increase hesitation: when consumers are ready to buy, there is only a short period in which they are considering their options on who to buy from. A price that causes hesitation can lead them to buy from your competitors because it didn't match their thinking or beliefs of what you can do/supply.
Market positioning is wrong: the packaging of your product or service can greatly influence the perceived market position. Some potential customers will prefer a value offering while others, a luxury offering. You have to price your product/service to match the customers you are targeting in your marketing.
The Top 7 Pricing Strategies
Let's examine the seven pricing strategies mentioned earlier, in more detail.
Value-based pricing This is where you set your pricing based on what your consumers believe your product or service is worth. Often this can lead to large profit margins if you are able to convey the significant value your product/service will provide to them.
Competitive pricing When using this particular strategy, you are setting your prices based on what your competition is charging. Often, this occurs in industries where there are many players and it becomes a buyer's market, forcing the prices to be reduced so far that the profit margin becomes quite thin. If you are a new business, you most likely have thought to use this tactic, however, it doesn't leave much room to grow - say in marketing expenditure to attract more consumers/clients.
Price skimming Difficult to execute well and not for every product/service, it involves setting your prices as high as the market can tolerate, and then gradually lowering them over time. It is a tactic to create scarcity as only the high-end area of your market will be able to afford it, which can drive the demand to increase in the lower end of the market. Furthermore, when the product/service is launched, this tactic is used to gain as much profit as possible in its early days of release. Essentially, price skimming is focused on the psychology of "people want what they can't afford"... So the consumer either finds the money or has to wait, but due to the scarcity, demand, benefits, and more, the consumer often finds the money. A business that has used this tactic very well is Apple with its iPhone. With each new model, demand was huge, as it was the latest thing, and with time the price came down, but the demand stayed highest for the latest model. And, as for "finding the money" if they couldn't afford it... Not a problem, as there were monthly payment plans, which totalled sometimes more than twice what the iPhone cost to buy outright.
Cost-plus pricing One of the simplest strategies. It involves determining how much the product cost to make and adding a certain percentage on top. However, this strategy is not ideal for services or intangible products (e.g. eBook) as it can massively erode the potential profit margin you can achieve with other pricing strategies.
Penetration pricing It can be a little tricky, as it is often a tactic used in highly competitive markets when a new company is trying to establish itself. In this tactic the goal is to undercut your competitors for a short period of time, making them prefer your product or service. Note: Over time you may get more customers and decent sales volumes, but without a high level of customer loyalty, you will lose them as you increase your prices. One person that used this tactic very well was Richard Branson when he started Virgin Blue (now called Virgin Australia). In his pricing strategy, he undercut QANTAS to gain market share with his no-thrills airline. It became quite successful, so much so that QANTAS responded with its own airline, Jetstar, to try and hold its market share. Today Virgin has successfully increased its prices and maintained its customer loyalty.
Economy pricing A very popular pricing strategy for commodity goods. This involves pricing the product cheaper than the competition while making the money back with increased volumes. This is often seen in "generic" products.
Dynamic pricing Not suitable for all industries, dynamic pricing is where the price is constantly changing to match the current demand for the item. An example of where you might see this in the Hotel and BnB industry; prices go up during tourist peak times, and down when the tourist numbers drop.
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How to Create Your Winning Pricing Strategy
Step 1. Determine your value metrics - In performing this step, you will establish how much to charge per unit, per 10 units, per 1,000 units, etc... And, it is vital to do because it will allow you to make sure you are not charging a large customer the same amount as a small customer, or a stagnant amount as a customer grows. So if the customer ends up consuming less, they pay less. In fact, companies that use value metrics typically grow at twice the rate, with half the churn.
Step 2. Determine your customer avatars - This is your ideal customer, who are they, what do they do, what do they believe in, where do you find them, but most importantly:
What features do they value the most?
Which ones are the least?
Their willingness to pay?
Lifetime value?
Customer acquisition cost?
Which will lead you to establish the potential price point for each avatar.
Step 3. Question - The price point found in step 2, needs to be evaluated for its relevance. Questioned whether this is right for how the product or service is packaged, presented, and delivered to the customer. How can it be optimized?
How the Strategy can be Optimized
You should have localized pricing based on the region or country you are selling in because the demand will differ in these regions
Freemium, not for every business, is essentially where you offer your product or service for free to increase your potential customer acquisition. You will often see this as a free trial, free sample, or free software access that turns into revenue when the consumer wants more or more of the features.
Review the value proposition. When it aligns quite strongly with the consumer, the willingness to pay can increase by as much as 20%.
Don't discount over 20%. If you do, the customer is unlikely to stay with your products/services as they didn't see the value in the beginning.
If you are using contracts with time elements attached to them, discounts for longer periods can be of benefit. It will also allow the consumer to become familiar with you and your brand, decreasing the potential of them leaving for a competitor when it comes time to renew.
The digit the price ends on. Should it be 0, 7, or 9? Research has shown that 9 invokes the thoughts of a discount brand, while 0 invokes a luxury brand. 7 is thought to be almost midway.
The pricing will change. Demand for products and services can go up and down, but also consumer spending, inflation, technology, etc... as well. So pricing today will change in the future.
Social proof increases the willingness to pay. Under the umbrella of brand equity, social proof increases customer adoption as it inspires the consumer to trust your brand.
Design is everything. Not only does it convey quality, but it also shows that the brand is up-to-date and current.
Extras. The more extra features, services, or products within your line they are using, the more likely they are to stay with your brand.
As can be seen above, pricing strategy is everything and can increase your revenue by as much as 50% (or in the case of one of our clients 400%). So is your business pricing strategy optimized? Regardless, your pricing strategy should be reviewed regularly. In fact, Paradelta Strategy can do this, among other things, for you.
We are a business strategy and brand equity-building company that specialises in reviewing and improving your business. Over the years, we have helped businesses across Australia to grow and expand, nationally and internationally, and grow significantly in profits. To get assistance with your business, simply email us at hello@paradeltastrategy.com.au or schedule a no-obligation discovery call here.
