Price Ain’t Nuthin But A Number Baby Part 2
A good pricing strategy guides you in defining the price point for your product or service; it allows you to minimise production costs, maximise margins and increase profits. The Holy Grail!
You will need to consider three significant factors before exploring your pricing strategy, which I covered in part 1 — have a look here.
It goes without saying, people won’t buy things that are ‘too expensive’ and you won’t make money if what you’re selling is ‘too cheap’… as so, here are a few pricing strategies I have encountered:
The “It’s free to use/download, but if you actually need the features of this thing, please hit the buy now button” pricing strategy
Freemium pricing, as it’s often referred to, is regularly used in digital products or services where there is an option to upgrade to a paid version of the product. It’s a great way for a customer to experience your product or service and then upgrade to a paid version.
Freemium pricing, as it’s often referred to, is regularly used in digital products or services where there is an option to upgrade to a paid version of the product.
Giving away free samples or offering free “consultations” with the intention of directing potential customers to a paid option is another way of adopting the freemium model, but this can be difficult as it’s likely you will find you’re losing money before you’ve even begun. However, if you have a solid product or service, can build the initial financial loss into your strategy and minimise the loss by controlling the “promotion” you can enter the market quite powerfully.
Disclaimer: This is not, (I repeat, NOT) the same as giving away your products and services to people for free in return for “exposure”. Exposure is NOT a currency. We do not do things for exposure. If you’re investing by distributing your goods and services to online influencers in return for them marketing your goods to their wider network, then this is okay as a marketing strategy, though it still needs some in-depth thought and analysis. If someone asks you for free products/services and you cannot almost immediately convert that person (and his or her network/audience) into being paying customers then it’s likely to be a waste of time, energy and money.
(This is a sensitive subject for me and another blog post, so I shall save my rant until then. Anyway, back to our scheduled programming…)
The “Ahhh great, you’ve got a Groupon” pricing strategy
Similarly, this is about pricing specifically for immediate market penetration. Your product or service is not free, but it is priced at a much lower level than your competitors to draw attention to your business and allow your potential customers to “try before they buy” without too much investment. It also means they’re likely to refer you to other people they know to try you out too. Again, this might mean making a loss in your first few months of trading, but the low price point means you get into the wider market quickly and the increased awareness for your business can translate into much higher sales volumes. Once your brand is known, you can look towards implementing an alternative pricing strategy which increases your price based on your position in the market.
The “if you just need it to do what it says on the tin without the bells and whistles, this is for you” pricing strategy
Economy pricing works well for the more frugal customer who “loves a bargain” or has a specific budget. Your products will be simple, inexpensive and “no frills”. Your operating discipline is meticulously streamlined to reduce production and marketing costs as far as possible so you can keep that pricing rock bottom. Once again, this strategy attracts attention to your business, but you need to sell your products or services in exceptionally high volumes in order to make a profit. An example of where this works well is in larger supermarket chains and discount goods stores such as PoundLand.
The “if you buy this Fiesta I’ll throw in a set of mirror dice and an air freshening tree” pricing strategy
This is where you bundle your products or services together, so the combined price of the offering is lower than if you were selling each product individually. It’s a great way of getting rid of items that are older or difficult to sell, and it makes your customers think they are getting a great bargain or even something for free.
Buy this manicure and get a complimentary 15-minute arm massage…
It works if you sell more than one product and your additional products are complementary, i.e. buy this manicure and get a complimentary 15-minute arm massage, or, buy these boots and get the suede cleaner and cloth thrown in too (do people even wear suede anymore? What year am I in?). It goes without saying that the profit that you make on that bundle needs to cover the loss you might make from giving away the add-ons, but again it can make your product appear as though it’s much better value than if it were purchased from a competitor and you’re more likely to win the sales.
The “Buy this new electric toaster for £29.99” pricing technique
This also falls into the realm of “marketing” so you might double this up with an existing pricing strategy. Psychological pricing is where you can appeal to both the emotional and logical sides of a customer’s thought process. As we all know seeing the cost of something at £99 instead of £100 instigates a different purchase rationale in our mind as a buyer. It’s said that reducing the first number visible on your price tag triggers a positive psychological reaction, especially in price-conscious consumers. In theory, it makes the customer instantly (and in some cases subconsciously) feel that they are getting a better deal, even though in truth there’s only a pound in it. Similarly, with something being £4.99 rather than £5.00 — the difference is a penny, but it communicates better value to the consumer because four is less than 5, right? Moreover, it works, because we humans are simple creatures, really. This is super easy to implement so if it feels like a good fit for your business give it a whirl.
The “OMG all the really cool/popular/stylish people are using/wearing this, and you should probably queue for it at 4 in the morning too!” pricing strategy
Also known as “price skimming”, this is where you set the prices high when you release a product, then gradually reduce them as your competitors release similar products into the market or trends change. Tech and fashion products are often priced this way. Building ‘hype’ is essential to this strategy.
You know the drill; when something is launched, it is “state of the art” or “on trend” and as such the cost is high, but as time goes on and the demand lessens, the price is lowered.
Apple are brilliant at this, and if you have a following of “early adopters” who like to get their hands on the latest products before anyone else (and queue for it at ridiculous o’clock for a ridiculous amount of time), then this is an excellent way to maximise your profits in the first instance. It means you can quickly recoup your production and marketing costs during the hype, while also giving the impression that your product is “exclusive” and “must-have”, which then translates into a build-up of excitement for your next product. As long as you keep launching new and improved products, the profit cycle continues. It does mean that anything you don’t sell during the hype might have to be heavily discounted in order to shift it, but from a business perspective, the high revenue launches should offset this.
The “This….this is the luxury edition…ooooohhh…*twinkle, twinkle sparkle, sparkle*” pricing strategy
This usually works if you sell something either of high value and/or unique or limited-edition, such as jewellery or art. It works equally well if you are producing almost anything using high-quality raw materials or selling into a niche market with a larger disposable income. It’s important to note that by setting the cost of your product higher than your competitors you can give the impression that your product or service must be of a higher quality, which can be a very lucrative game plan…it’s that “value perception” thing at work again. If you do decide to put a luxury product on the market, you need to work harder to showcase your offering at a higher level, which will include sourcing higher quality raw materials, luxury visual branding and a specialised marketing strategy. The upfront costs for a strategy like this can be high, but when you do this successfully your margins are likely to be much bigger and you only need to sell a few of your products to make a profit. Winning.
It’s important to remember that your pricing strategy is not set in stone (rarely is anything set in stone in business, nor should it be), it may well change over time, based on other factors in your organisation so don’t overthink it — get out there and start selling.