Pricing a product or a service is more than slapping a price tag or writing a number on a website. It’s an essential task for any business owner whether they are just starting their company or scaling it.
Choosing your pricing strategy is a complex process. It affects the overall profitability and success of your firm and it’s important for ensuring your business’ competitive advantage. If you charge too little, you might not be able to cover your operational costs. It may also imply your product is cheap and not worth it. If you charge too much, without providing premium value, you might not sell anything at all.
While the amount you want your customers to pay is incredibly important, so is how you determine it. There’s no one-price-fits-all formula or strategy. You have to evaluate your resources, assets and costs. You have to know your market and understand how it performs. And you have to ensure that what you charge is compatible with your business model, so you can yield a healthy profit.
In this article, we will share with you the key aspects of choosing the best pricing strategy for your business. We will walk you through the process and examine different pricing options to help you identify the most appropriate one for you.
1. Know Your Ideal Customer and What They Can Afford
The success of your pricing strategy is closely linked to the value added to your customers and their ability and willingness to pay it.
In order to understand your target audience, you need to analyze your ideal customer. For instance, if you want to target high-end customers, you need to offer them high-end benefits that they would be willing to pay a premium for. Similarly, if you want to sell to corporate clients you should know that they look for stability and strength. So you have to show them that you are a proven vendor with value-adding technology.
It’s important that you clearly present to your clients the benefits you offer. Show your audience that you are a credible, trustworthy brand with a high quality products and services portfolio. Let them know that they will receive good value for the time that they invest in your business. You should also foster an emotional connection with them so they identify with your company.
The more features and benefits your products and services have, the more you can charge for them. So concentrate on providing both emotional and tangible value and match your price to it.
IKEA is an amazing example of a company that is doing wonderfully when it comes to delighting their customers. The company puts its clients first by offering them a wide range of well-designed and functional furniture at low prices.
What is more, in addition to the unique in-store experience they already provide, they offer a mobile app with augmented reality that gives customers a virtual preview of products.
IKEA is successfully leveraging technology to redefine its shoppers’ experience in a way that no other furniture company has.
2. Understand Your Competitive Positioning
Regardless if you’re just starting out or if you’ve been in the industry for a long time, conducting a competitor analysis is crucial.
Even if your business is open to a global audience, you should also be aware of the local players in your niche. This will allow you to better perceive how your products and services are similar and different to your competitors’. Keep in mind that even if you add more value, you may not be able to charge more for very long, because your competition may copy you.
Take into account the industry and look for customers who are willing to switch between vendors and pay more for the added value that’s offered to them.
If the industry is in an emerging stage, it means that your customers are just now forming relationships with brands. So, you should be flexible with your pricing strategy and ensure that you balance price with product/service market fit.
If the industry is in a mature stage, it means that the relationships between your competitors and your potential customers are already formed. Hence, you should evaluate what unique benefits your business can provide and what your customers think about the price you’ve set for them.
Additionally, consider how competitors could respond and what are their resources. If you are going to compete with big brands you may not want to enter the market with prices so low that you barely cover your costs. Instead, you can think about how to differentiate yourself in a cost effective way and target a specific market segment.
The Dollar Shave Club (DSC) entered the market of men’s shaving razors by competing with big brands like Gillete on price. The company, as the name suggests, is aimed at providing consumers with a lower cost on these everyday items, while also competing in quality.
3. Set Your Key Differentiating Indicator
If you want to gain loyal customers willing to pay for the unique benefits you offer, you should set a unique differentiating factor.
Your pricing strategy should reinforce your unique value and retain customers by looking for a long-term advantage that can help you defend your selling point.
So, think about how you want your brand to be perceived. Do you want to be known for offering premium or affordable products/services? For your personalized experience?Or would you rather be known for your special expertise in solving a specific problem?
LUSH successfully competes with big brands like Sephora and Etsy, offering hand-made products that are sustainable and ethical at a premium price. The company’s target audience is environmentally conscious individuals who value social and corporate responsibility over a luxurious image. Hence, the brand’s differentiating factor is providing unique value to its customers through ethically sourced and produced products.
4. Assess Your Costs and Adjust Your Prices Smartly
To ensure sustainable and healthy profits it’s important that you are well-aware of all associated costs.
Start by identifying your fixed and variable costs. Fixed are the costs that your business has to take care of regardless of what’s going on in the market. These include employee salaries, office rent and bills, the cost of hosting your website and so on. Variable are the costs that depend on market changes, like fluctuations in demand or in the stability of the economy.
Keeping track of your direct and indirect expenses like costs of materials and production overhead, costs of operations, marketing, sales, administration and financing. This will help you set a starting benchmark where your products shouldn’t go below a set price. Here you should take your time and do a thorough examination.
Additionally, understanding the link between your pricing and your expenses is crucial for a profitable business model. An optimized pricing strategy can help you set a solid foundation for growth. This is essential if you want to be efficient and scale your products and/or services.
Netflix started as a DVD rental company that allowed people to rent DVDs online and have them delivered to their door. They updated their strategy by adopting a subscription business model where people could pay a fixed price per month to rent DVDs online. Later on, thanks to the advancing technology and changing customer trends this gave way to on-demand streaming, Netflix then changed their model to the one they have today: viewers can stream as much content as they like at any time from any device by paying a fixed monthly subscription fee. To add additional value, the company offers plenty of exclusive content created using data-based decisions with the consumers’ preferences in mind.
5. A/B Test Your Pricing Strategy
Not many companies and entrepreneurs get the pricing strategy right the first time. So while you’re figuring it out, be careful not to make too many long-term commitments before you’ve found a strategy that works for you.
You can use A/B testing on your website to examine how different pricing structures perform. Then pick the one that generates the best results.
In general, there are two main ways to conduct price strategy A/B testing:
- Create two separate landing pages with different pricing. Direct equal traffic to each one of them. Then analyze which page has the best conversion rate.
- Use products of a similar nature and price point to test a few pricing strategies. Track the sales and see which one performed best.
6. Try Different Types of Pricing Strategies
Here are a few pricing strategies that you can try:
- Premium Pricing: Set a higher price to reflect the quality or exclusivity of your product. Make sure you support it with a marketing strategy that conveys the premium quality of your product/service and justifies the higher price
- Freemium Pricing: Offer your product/service for free for a limited time with full features and see if customers find it valuable enough to pay to keep using it.
- Penetration Pricing: Set a low price to increase sales and market share. This is a popular approach to enter the market, but beware: If the cost to switch is equally low for your customers this strategy may not work.
- Price Skimming: Set a high initial price and then slowly lower it to make the product available to a wider market. This is best if you’ve got a built-in audience, your product/service is unique, there’s little competition, or you’re building a high-end brand marketed toward customers who are not price sensitive.
- Value-based Pricing: Apply a price depending on your customers’ perceived value of your product/service. To understand what drives value for customers, focus on a specific customer segment rather than trying to appeal to all customers.
- Hourly-based Pricing: Also known as rate-base pricing. It’s essentially trading time for money, often used by consultants, freelancers, contractors.
- Project-based Pricing: Charging a flat fee per project, also called fixed pricing, again often used by consultants, freelancers, contractors, may be estimated based on the value of the project deliverables
- Bundle Pricing: Offer two or more complementary products/services together and sell them for a single price. This is a great way to add value to those customers who are willing to pay extra upfront.
Select the pricing strategy that would best fit the industry you’re in, then test a few against one another on your site. Finally, analyse the sales data and make your choice.
7. Consistently Review Your Pricing Strategy
When it comes to pricing products and services you shouldn’t have a set-it-and-forget-it attitude. As a business owner you have to periodically assess your data, metrics and pricing strategy to ensure you’re making a positive return on your investment.
Review and update your pricing at scheduled times to see how they are performing over time. For example, at the end of every annual quarter.
Make sure you also review it at unscheduled times when certain events that can affect your pricing. For example, changes in your costs, shifts in the economy, changes in competitor prices, when you want to launch a new product, have a high-performing product or enter a new market.
Setting the right price of your product/services is not as straightforward as crunching some numbers and ending up with a surplus of cash. It’s a dynamically strategic process that can be challenging for both new and veteran entrepreneurs.
There are many factors to consider prior to making your decision. You have to do your research so that you understand your market, competition and target audience. You also need to continuously analyze your performance and periodically update your approach. Doing it right ensures long-term profitability as well as satisfied and loyal customers.