Oscar Wilde said that a cynic is a man
“who knows the price of everything but the value of nothing.”
If you’re not a cynic, though, and you’ve created some real value, and you intend to capture some of it, particularly directly, then pricing will be everything to you.
And it’s almost everything to your customer too. If it’s not a product they buy regularly, they will have very little reference point to what it should cost. In such situations, a low price might indicate that it’s not good quality, and isn’t worth much. Your pricing goal is to achieve a balance where people are encouraged to believe in its quality (high price) while not discouraged from buying because it’s too expensive for them.
How do we arrive at such a perfect price-point?
1. Cost plus.
It’s the most basic pricing strategy, but if you haven’t got anywhere else to start, this is where. Value capture means the price needs to be more than your costs. All of them: the raw materials, rent, electricity, transport, tax, you… everything. Add it all up and add a bit more. This will tell you what you NEED to charge as a minimum.
2. Market Pricing
It’s the second most basic pricing strategy, finding out what the most similar thing to you in the market is charging, and then charging that. If it’s more than your cost plus pricing, then that’s a good place to move to. If the market price is lower than your desired cost-plus, it sounds like you might be in a tough market.
Consider what you can do to differentiate your product from any other around it: a better experience, a better look and feel, something that customers will value.
Example: Toms shoes are cheap shoes that shouldn’t sell for anything more than a few dollars. By connecting them to helping poor people get shoes, Blake Mycowskie added an emotional value to the shoes that was unpriceable by customers, and changed the business.
3. Premium pricing
When we don’t know much about a product, as a customer we often naturally assume that an expensive item costs a lot to make, so it must be worth the price.
Robert Cialdini in his book “Influence” famously tells the story of a store that accidentally re-priced some affordable jewelry as being twice as expensive as previously, and it sold faster. The previous low price had suggested to customers that it was junk, while the higher price implied quality.
4. Discount To Market Pricing
If there’s a nice gap between the market price and your desired cost-plus pricing, then you could try applying a discount to that market price. You could do that just by having a lower price, or you could do through a number of different discounting strategies which will help segment your market between people who are willing to pay more and people who aren’t.
a) High-low discounting
High-low discount pricing is essentially the process of having a sale. That’s it. Originally designed and still a very useful way of clearing out old and unsold inventory, it stands in its own right as a way of separating customers between those who must buy something immediately they see it, and those prepared to wait until its price is cut in a promotion.
The danger of this structure is risking that you educate all of your customers to wait for “The Sale”, but this can be managed by a combination of making sure you sell out of popular items, and have a mix of immediate need items in your regular sales.
b) Every Day Low Prices
Every Day Low Price (or EDLP) is the opposite, never having a sale but keeping your prices as low as you possibly can to ensure your attract the widest market to your business. This is good if you have very low cost of supply and will really benefit from scale, but is risky in case competitors copy you, leaving very narrow margins left for capture.
Psychologically, too, customers like the feel of getting a bargain, which EDLP feels like to start with, but then vanishes over time, becoming a “new normal”.
c) Skimming
Skimming is a way of arriving at a best price level, starting out high, and then incrementally discounting until you arrive at a level of sales that optimises your margin (value capture per item) and volume.
You hope to add more sales as you cut price than you lose in margin, increasing your total value capture. At some point this will stop, as the value capture per unit gets too small for the volume to make up for it. This will help you find the right price.
d) Segmentation.
Some people can’t afford to pay as much as other people. You want the people who can afford to pay more to do so, while the people who can’t pay less, so you can capture more of the market.
That’s achieved over time by a “High-Low” pricing, but can be achieved in other ways too. Creating vouchers is one way: customers who don’t need the vouchers might buy without looking for them, while customers who need them look. You can create goodwill by giving vouchers to special interest groups, like the elderly or teachers and nurses.
Segment your business any way you can to encourage people who are being resistant to the higher price to feel like they are getting a bargain.
Try deploying all of these strategies to see which your market responds to best, but you’ll also want to learn how psychology tactics can be priceless to your strategy.
This is just the beginning. Jump to Priceless Psychology to get more tips and tricks on what pricing means to your customers.