What you need to consider when setting the price of your product.
Pricing strategies for your marketing.
The discussion about price.
There is a lot of talk in terms of psychological nuances and how to bring price into a conversation, especially in B2B environments, and this article is not about that. I may reference price perception in relation to product quality, but in terms of discussing the sales tactics for justifying the value on offer in terms of the price your product or service is available for, this article is not that.
Instead, what I hope to achieve by you reading this piece is that there is more to pricing your product than you may think. It is often the case that ‘cheaper wins’, or the strategic approach to pricing is ignored in lieu of just ‘getting busy’.
Truth is, pricing is a vital part of the marketing mix. Too high, too low, it can be a real minefield and you could be losing out on sales and profits if you pitch too far either side of just right.
PRICE AND PERCEPTION.
Does higher price mean higher quality?
It’s an old question that has so much debate around it, that it’s perhaps impossible to answer in one article. What I would ask however is, does the buyer feel it is good value?
I feel that with higher price comes higher expectation, but then in terms of your price being ‘higher’, who is it ‘higher’ than?
If you want to go to a live music event, you can. You can attend a live gig for as little as £5 (or even free!), but then why is it stadium shows and festivals are now charging an average of around £47. The stadium or arenas are full, the small venue charging £5 is empty. Why?
Because people don’t just want to go to a music gig. They want to go to that music gig. The specific one. It doesn’t matter what it costs.
By building a perception, trust, authority and reliability in your product, price becomes much less of an issue, as people will want your product.
Selling something cheap does not make a good business decision. As we will see, it can buy market share, but in the long run, this should be viewed as an exchange in getting trust within your market.
Higher price = higher expectation.
Take a look at British Gas and their customer reviews. The most expensive provider of boiler installations in the country that I know. Because they have charged so much for their service, the expectation is raised massively and any slight, tiny, issue is raised as a huge problem because the person paying the premium expects a premium service.
The opportunity for new entrants in a competitive space is to perhaps go in low on price but offer the levels of service usually only offered by larger, more expensive businesses. This will buy trust, rave reviews, and authority so when you start nudging up your prices, you have the backing of an army of fans to back it up!
Your Pricing Strategy Options.
To help guide your pricing strategy, I would encourage you to ask these questions of your business.
- What is the goal of your product?
- Max profits?
- Cash flow?
- Take market share or encourage trial?
- Build a brand image and perception?
(for more around pricing objectives, check out this great article from Smart Insights)
Pricing to maximise your profits.
If a product is nearing the end of its lifespan, you have excessive demand and are oversubscribed (a brilliant book by the way!), you could look to milk the product for all it’s worth.
You can also, like Starbucks, follow a maximising profits pricing strategy based on the activity and perceptions of your customer base. Starbucks raise their prices and deter the price sensitive customers, but keep happy those who are adamant to buy ‘quality’ and ‘branded’ coffee. The raise highlighted in the case study HERE shows that a 1% rise in prices can lead to a whopping 11% rise in profits!
Pricing to take market share or encourage trial
As I mentioned before with the British Gas example, with higher price, comes higher expectation. I talk a lot about the value of customer reviews and referral for any business – and how to attract them -, and for certain sectors, if your overheads remain low, you can afford to take a short term position in lower pricing which may well encourage people to trial the product. If you have in place a solid plan to wow the customer, giving them premium service and experience, service that equates to that of a much more premium priced product or service, your customer will be delighted so when asking for the review, it becomes easy for that customer to rave about you online!
It’s a great way of building long term reviews online and can really position you for longer-term price increases. This works well for new products and businesses to a busy marketplace.
Cost Plus Pricing
Do you know your product’s gross profit? Do you know your business overheads? What are your bills going to be this month, even if you sell nothing? Do you know what you want to have in the bank at the end of the month?
Cost-plus pricing is perhaps the easiest way to add a fixed margin to your product to help you better plan financially and forecast your business performance.
For example, if you have business overheads (shop rental, web services, salaries etc) of £3000 per month, and you sell a product at £50, but this product costs you £30 to make, your contribution to the overheads, per product sold, is £20.
Therefore you would need to sell 150 products that month to cover your fixed overheads.
If you sold the same product for £60 (a £30 margin) you would need to sell only 100.
Can you apply this to your business? What do the numbers say?
How to calculate the gross profit of your product
Brand perception and your pricing.
Think of Apple. Think of Microsoft. Think of Domino’s Pizza, and then think of your local Pizza outlet down the road. Who is likely to be more expensive? Would you expect Apple to trade on the cheap? Would Apple compete on price to the point that they undercut their Microsoft counterparts? Not a chance!
The perception of leading brands is, quite often, that they aren’t cheap. But it doesn’t stop us buying. There was a very famous campaign by Stella Artois which I always remember as a great example into pricing and positioning. The reassuringly expensive campaign clearly positions the brand as a premium offering. If you want to drink Stella, you will be paying for it. No discounting here. The price is directly associated to the perception of the product they are trying to sell. Could this work for your brand?
Are you positioned well enough in terms of your brand messaging, reputation, customer base, to pitch at a higher level in terms of your pricing?
This perception issue can work the other way too. In certain markets, if you offer your service at a lower price point, the market may wonder why you are so cheap! You have to consider the reaction to the market you are entering and how your price will be perceived by them but also, what the pricing expectations are from that market too.
Levi’s is another brand who closely align the price of their product with the perceived quality. You will not see Levi’s jeans on sale in the discounted retailers. Pricing is set at head office, discounting is a no go in order to maintain the levels of quality perception.
In my article about the 7 ways to create a winning communications plan, I reference the opportunity for sales promotions.I think it’s important here to remind you that any sales promotion should be a short term measure or only available to those who you want to remain loyal. They are great for offering repeat purchase, early mover action and to gain quick market share, but do not get lazy or complacent! A sales promotion is just that, a promotion. It is not a long term pricing strategy!
The Price is right!
Getting the price right for your product is about more than just sticking a rudimentary figure on something and assuming you have nailed it. Any business needs to spend some time thinking about the product range, the customer expectations and perception and the goals of the business and the business owner.
- What does your price say about you?
- What do you want to achieve?
- What are your competitors pricing at – and why?
- Which pricing strategy and price point is right for you?
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