Around one in ten B2B companies have a product pricing strategy in place, according to a study conducted by B2B International. If your business has a pricing strategy, you have a better chance of convincing customers that your product offers more value than its competitors. Setting up a pricing strategy is an excellent first step if you want your brand to get a leg up on the competition and generate more revenue for your business.
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How can creating a pricing strategy impact your sales?
The lack of a pricing strategy can result in potential unrealized profits. According to estimates performed by McKinsey & Co., the top 1200 global companies can bump their prices by just 1% and make around 11% more profits. Of course, that’s just one catch-all strategy.
By implementing a pricing strategy specific to your product or industry, you can strengthen your market development strategy and dramatically increase your revenue, whether it’s through higher sales volumes or high prices.
Six pricing strategies – and where they’re most useful
Most product pricing strategies are based on two critical factors:
- How your product compares to the rest of the competition
- The demand for your product
While the first factor is influenced heavily by your product’s features, the second depends on your market’s psychological state. Your pricing strategies will depend heavily on how your customers feel about your brand and how you convince them that your product is worth your suggested price.
1. Price skimming
What do Ferrari, Rolex, and Apple have in common?
They’re all brands that offer high-end products. Their product pricing also exudes exclusivity.
Their products are all high quality, but the main element that keeps them elevated above the competition is their price. Each brand places its products at the extreme high-end price bracket, especially compared to other brands in the same category. At the same time, though, they leverage their exclusivity to sell mid-tier products at upper-tier prices.
Let’s look at the Apple Watch example. Compared to its competitors, such as the Samsung Galaxy Watch, Apple offers practically the same product but at a significantly higher price point. So how does Apple manage to bump up its prices while staying on top of the market for smartwatches?
Apple Watch prices are a result of price skimming. Its latest watch, the Series 6, sells at $379.The SE model, a renamed version of an old model, costs $269. An even older model, the Series 3, comes at the bargain-basement price of $199.
Thanks to price skimming, Apple was able to cater to different market segments. At the same time, it stayed a top-shelf brand.
The example above shows the power of having a high-value brand. Your new product pricing strategies can be set at the higher end and sell older models at a lower price. This tactic will help you cover two market segments: consumers willing to spend on high-end products and those who cannot afford the same custom products but still desire the cachet of a luxury brand.
2. Time-based pricing
Time-based pricing covers price points entirely dependent on the time of day, month, or year.
To make time-based pricing work for your business, you must track changing factors and adapt your prices based on these changes to generate a market advantage.
Hotel rooms are an excellent example of time-based pricing. Hotels often charge higher prices during peak times and holidays, capitalizing on the demand for accommodation during these seasons.
Companies like Amazon also use time-based pricing for deliveries. Their one-day delivery service, called Amazon Prime, has become a separate brand. Your business can use this pricing model to generate greater profits based on the willingness of customers to pay more for quicker delivery or a shorter waiting time.
3. Price discrimination
Price discrimination concerns a business charging different prices for the same product or service and comes under three different types.
The first product pricing formula is first-degree price discrimination. It entails a business product line pricing based on the customer’s willingness to pay. This can often be a laborious process for the business but often results in the highest profit level for each purchase.
A great example of first-degree price discrimination is an online auction site, such as eBay. Products sold on eBay go through a bidding process, and the price of each product is determined by what each potential buyer is willing to bid in an attempt to complete the sale.
Next, there is second-degree price discrimination. Here, businesses use customer preferences to determine prices.
A strong example is selling products in bulk, such as a wholesaler. Buying items in bulk is generally cheaper than buying the same number of items by the piece. Businesses using second-price discrimination techniques often use this tactic to attract consumers looking for a good deal.
Finally, third-degree price discrimination concerns different prices based on the demographics or type of customer. Businesses discriminate against customers based on their age or other social factors. It happens a lot more often than you would think!
When was the last time you saw a “Kids Eat Free” sign outside a restaurant or saw senior citizens get discounted tickets for events based purely on their age? The food, ambiance, and service will be just the same for them as it will be for you, but the pricing model differs due to their demographics.
You can also see price discrimination in the SaaS niche, especially for vendors who are eager to increase awareness of software products. Slack, for example, offers a hefty 85% discount for students and professors with the end goal of establishing brand loyalty and creating lifelong customers.
4. Penetration pricing
Penetration pricing involves entering the market with a product or service at a deliberately low price to entice a broader range of customers. Rather than aiming for exclusivity, penetration pricing targets the opposite end of the scale by lowering the barriers to entry.
For example, you’ll always see milk, bread, and toilet paper in grocery stores. These items are staples that almost every customer stepping into a grocery store is likely to buy.
However, the store doesn’t make any profit from these products. But because the customer has already entered the store, they are also likely to buy other higher value items. The main aims are simple: get customers through the door, satisfy their basic needs, then offer other products that will make their experience a bit fancier.
These other products could be imported coffee beans, artisanal butter, or high-end peanut butter and strawberry jam in the supermarket example. They could also be non-edible items, such as coffee filters, mugs, or Mason jars for cold drinks.
Everybody loves free stuff. Freemium services are often the key to unlocking a large volume of customers, many of which had no intention of signing up to pay for your service in the first place.
Freemium services also differ significantly from websites and businesses that offer a free service to users. They provide free blogs and honest comparisons on web hosting services to their readers. Often, just knowing that they don’t have to sign up initially is what gets them interested, and then by this point, they’re already invested in your service.
A freemium service is generally a limited version of a paid service that customers can use at no cost. Businesses use freemium offers to entice customers into paying for full versions by giving them a glimpse into a product’s features, promising a better experience once they have signed up for an upgraded version.
For example, email marketing software Mailchimp allows users to send regular email updates and collect email list subscribers. The freemium service allows limited account access – you can have up to 2000 subscribers for free. However, many of the tools an email marketer will need, such as automation, are available only with a paid plan.
Mailchimp uses the hassle of switching over to a different service to its advantage. Changing services to avoid paying fees involves a lot of time and adjustment, so Mailchimp knows that their freemium users are more likely to stay – especially since it’s confident that the free version of its software already offers a lot of value.
Using a freemium service for your business is often a great way of getting customers to know your product. Getting them on board is a big step towards signing up and paying later.
6. Value-based pricing
What product line pricing would you use if you had a product that no one else could offer?
The wise answer would be to push the market price higher than production prices. You’re betting on the chances that people will be willing to pay more since they can’t find that product anywhere else. At this point, defining your unique value proposition will allow you to justify your pricing.
Software-as-a-service (SaaS) is an industry that heavily uses value-based pricing. Mailshake, a cloud-based sales software, is one such example. Mailshake offers a two-tiered pricing plan. The first plan is for marketers focusing mostly on email outreach, while the higher-priced plan contains all the features of the email outreach plan plus other features, like a phone dialer or a lead temperature tracker, that add even more value to the base product.
Value-based SaaS pricing allows your users to pay only for what they use. Once their subscription expires, they are more likely to sign up for a more advanced version of your product. Their familiarity with your product and its features can help you make a compelling case for them to upgrade their subscriptions.
- Price skimming: The initial price is high, then decreases as new products enter the market.
- Time-based pricing: The price changes according to the time of purchase.
- Price discrimination: The price depends on the customer’s willingness or ability to pay.
- Penetration pricing: The initial price is low, then rises according to demand.
- Freemium: The core product is free, but customers need to pay for added features.
- Value-based pricing: The user pays for the product’s perceived value.
How to determine product pricing strategy
So, with the knowledge of several product pricing examples that work, which product pricing model would you choose for your business? Fortunately, pricing products isn’t a one-time decision. Depending on how your business performs, you can adapt your prices and product pricing strategies over time. It is only natural for pricing to evolve, just as your business evolves.
Let’s base this on four key points.
1. Select the right pricing strategy
Choosing the correct product pricing strategy for your business entirely depends on the market that you’re in.
Competitor analysis is one of the tools you can use to choose the best product pricing strategies. Understanding your competitors’ strengths and weaknesses can help you determine how to price your products.
For example, you can monitor your competitors’ products and market and determine how they describe, present, and price their products. You can sign up for your competitors’ newsletters and know about promotions in advance, even before they’re announced on social media. In addition, you can look at your competitors’ reviews to see the products customers are talking about.
2. Understand the buyer persona
A customer persona is a general understanding as to what your perfect customer is like, based on data from actual market and product research about your consumers. This includes demographics and customer behavior.
Customer surveys, interviews, and user feedback are the best ways to gather this data. You could also evaluate your customer database, looking for trends in spending habits to get a well-rounded view of what your customers both want and like. Do they want product-bundle pricing, or do they prefer single product pricing models?
A consumer persona can help you to understand your customers better. This understanding, in turn, makes it easier for you to target your products towards them to increase sales and engagement with your business.
One of the best ways of understanding your customers is through surveys. People often speak their views without fear of being judged through surveys, giving honest answers that lead to valuable insights for your business. You may also analyze data from your customer relationship management (CMS) system to discover trends in your customers’ behavior.
3. Undertake competitor pricing
Competitor pricing is a product pricing formula that chooses specific price points to gain an advantage on a product or service based on the market relative to the competition.
When competing businesses offer similar products, your business can gain an advantage through varying the service you provide and offering a better deal than the competition.
For instance, you can promote your product as a considerable upgrade over the competitor’s offer and charge a premium price. You may also offer a similar set of features at a lower price. Finally, you can provide season-based discounts for days like Black Friday and Cyber Monday or special occasions like company anniversaries.
Staying one step ahead of your competitors is one of the best ways of making your business a success – especially when it comes to pricing your products.
Now that we’ve discussed six pricing strategies and how to implement them, what are the things we’ve learned so far? Here are some do’s and don’ts when choosing a pricing strategy for your new product:
- Learn about different strategies: The more strategies you know, the more you can experiment with different prices until you achieve one that maximizes your profit.
- Study your customer first: When you’re familiar with your target market, you’ll know what convinces them to buy your product, regardless of the price.
- Be flexible with your pricing: You need to know how to adjust your prices to account for customer demand and market forces.
- Be overconfident about your pricing: Artificially high prices have ruined many good products by putting them out of reach of their target market.
- Try to undercut the competition: Prices way lower than the market average can damage your reputation and significantly cut your profit margins, especially if your competitor has a more diverse product line that can absorb the impact of low prices.
- Insist on your pricing model: Sticking to a pricing strategy despite unfavorable data can ruin your product and your business.
By following the guidelines above, you can ensure that your pricing strategy follows industry best practices, maximizes your revenue, and keeps your business safe from the effects of incorrect pricing.
Ultimately, learning how to price your products effectively can make or break the success of your business. Taking the time to think all of the factors through and then deciding based on these factors can mean the difference between an optimal price and one that fails to increase your revenue.
Once you’ve taken all of the factors into account, it’s time to select your pricing strategies. You can use one or more methods depending on the nature of the product and your target market. You shouldn’t be afraid to pivot your product pricing model if you believe it’s not generating as much income as it should.
Nico is a content marketing consultant and the founder of Launch Space, an agency working with enterprise SaaS companies. The company works with clients from Fortune 500 companies to scale-ups, providing SEO support that boosts rankings and aids customer acquisition. You can connect with him on LinkedIn.