For many companies, pricing strategy is essentially guesswork: shooting in the dark and hoping to get prices that customers are willing and happy to pay. But that's not a way to do business.
Having said that, it is clear that setting an optimal price for a product or service is easier said than done. You need a solid understanding of the value of your offering, a clear picture of who is buying it, and an understanding of their interests and circumstances.
While the process is difficult to understand, there are certain "don'ts" that companies should avoid: common mistakes that companies often run into when pricing products.
Fortunately, many are fairly easy to identify and remedy. Here, we'll go over some of those common pricing issues businesses often face, and get some context on how to identify when you've made a mistake with your pricing strategy.
1. Pricing based solely on going lower than the competition
Pricing with a "look, we're cheaper than the competition" mentality is rarely a good bet. How you price your product determines how customers perceive its value and the legitimacy of your business as a whole.
If your entire appeal is based less on a strong value proposition and more on showing how much money customers can save, you may come across as sleazy or lacking. Lower prices can often be combined with lower quality, so if that's all your customers hear, your product or service may seem riskier or unreliable.
Keep in mind that this doesn't mean you can't offer lower prices than your competitors, it just means you shouldn't oversell yourself and lead with the discounts you offer, relative to your competition. Projects must be sold for value, and value does not necessarily mean "bargains."
2. Not segmenting customers
If your business offers a variety of products or services, your foundation may not fit into a single, uniform mold for everyone. Different types of customers have different interests and sensitivities when it comes to pricing, and it helps if your pricing strategy reflects this.
Companies often find themselves in trouble when they don't create or consider detailed buyer personas; that tendency can lead to more arbitrary and less effective pricing strategies. This is why you need to segment your customers.
Identify who is buying from your company, the specific products or services they typically buy, how they buy them, how they like to be sold to, and the budget constraints they are working with.
With that information in mind, you can begin to refine your pricing strategy to more effectively appeal to multiple types of buyers. That brings a new dimension of sophistication to your pricing strategy, allowing you to get the most out of your sales efforts.
3. Not trying enough price points
One of the biggest mistakes business owners can make is not offering enough price points—specifically, those that are high enough for high-end buyers.
Consider this study of Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone . The researchers ran tests using different beer prices, starting with just two prices and then moving to three.
First, they started with a "regular" beer, priced at €1.80, and a "premium" beer, priced at €2.50. From there, they measured the percentage of people who bought either of the two beers. This was the result of his first test. In their initial test, about 20% of the subjects chose the regular beer, while 80% chose the premium.
The researchers then decided to see what would happen when they introduced a third price point into the equation. In this case, the third price was a "bargain" price, priced at €1.60. In this case, 80% chose the regular beer, while 20% chose the premium.
Obviously, that trend is less than ideal. Adding the third price actually encouraged people to buy the middle price more often than not, which lowered overall revenue. But the study did not end there.
The researchers then decided to take out that cheap beer and add a "super premium" beer priced at €3.40. In this case, 85% of the subjects chose the "premium" beer, while 5% chose the "regular" option and 10% chose the "super premium" option.
As you can see, the final test was the best of all, with slightly more people buying the "regular" beer, but with the added bonus that people now also buy the "superpremium" beer, increasing overall revenue. .
The bottom line here is that you should be careful about anchoring your prices by introducing too many lower price points, but that you can take advantage of the fact that many of your users will be perfectly fine paying a higher price as long as you offer a premium experience.
4. Price presentation too complicated
According to a Journal of Consumer Psychology research article on behavioral economics, prices that contain more syllables when pronounced appear drastically higher to customers. What does that mean exactly?
Compare the prices of:
They technically all mean the same thing. But according to the study, the subjects felt that both the first and second examples were much taller than the third. Why is that? Well, when the extra syllables and commas were added to the price, those prices felt higher.
The researchers indicate that this phenomenon occurred even when the prices were not declared out loud, meaning that reading the price out loud in your head was enough to make you feel more expensive.
What does this mean for you? Ideally, you'll avoid any and all "unnecessary" additions to your pricing structure. It may sound silly, but research has shown us that you should have a "€2,500" product instead of a "€2,500.00" product, even though they represent the same cost.
5. Sell money over time
Ever wonder why cheap beers like Miller Lite have slogans like "It's Miller Time!" instead of slogans that exalt its low prices? Well, Stanford professor Jennifer Aaker's research provides a pretty convincing answer.
Their study found that customers generally referred to positive memories they had with certain products when asked about them, not the money they saved by buying them.
As Aaker points out, "because a person's experience with a product tends to foster feelings of personal connection with it, referring to time generally leads to more favorable attitudes and more purchases."
In a further investigation published by the Wharton Business School , Aaker and colleagues showed that when prices for an item were already low, the best way to invoke positive thoughts about that product was to remind customers of how long they enjoyed it or how long they bought it. saved by investing in it.
Think of it this way: Does Miller Lite want you to think about how cheap their beer is, or do they want you to remember a hot summer night you enjoyed drinking cold beers with good friends?
That is the mentality that you have to carry in this situation. People care more about experiences than saving a few bucks here and there; take this into account when pricing products.
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6. Do not update prices
Your market is probably not stagnant. New trends, consumer trends, and competition can change the landscape you're working in. If your space fits that bill, you may want to consider adjusting how much you charge from time to time.
Some companies have trouble keeping their prices too rigid, even as their competition adjusts to changing market circumstances. It is worth noting that this particular point does not necessarily apply to all companies.
Some industries and companies tend to keep their prices sticky, or resistant to change despite changing demand and other changing economic conditions, but others find it convenient to adjust their prices here and there.
If you find that a specific price isn't delivering the results you need or if your industry is quickly and aggressively moving away from what you're charging, consider updating your price to keep pace.
7. Not budgeting profit margins on multiple products
One mistake companies selling multiple products often make is insisting on a uniform markup for all their offerings. For example, suppose your company sells two products: one that costs €3.00 to produce and one that costs €5.00 to produce.
It could be easy to become obsessed with the idea of making a constant profit margin on both products, selling them at €10.00 and €12.00, respectively. That margin might seem ideal on paper, but it probably wouldn't work too well in practice.
Different products have different markets, usually populated by different buyers. So naturally, those products should be priced to reflect that variability. Don't get too hung up on oversimplifying your pricing strategy to get a steady margin on all your products. Going that route can seriously stifle sales.
8. Without considering the context
When is one Budweiser worth more than another? Logic says that since they are the same product, the answer should be never, but this investigative study in the New York Times magazine shows that this is not the case.
The researchers found that customers were more willing to pay higher prices for the same type of beer when it was sold at an upscale hotel than when it was sold at a run-down grocer. Lead researcher Richard Thaler was surprised that consumers had no objections to higher prices when asked what they would pay.
So what is the moral of the story? Your prices can be increased simply by changing the context in which you are selling. Adding an element of prestige to your offer can change consumers' minds about it and, in turn, improve its perceived value.
Do you sell full-featured products or solutions? Is your e-book for sale or is your complete training toolkit available to customers and ready to solve all their problems?
These wording choices may seem trivial, but on the web, they're often the best way to express the value of your product, and as we've seen in research, part of the value of your product is based on the context in which users use it. customers see it.
How to know if you have made a pricing error
The ability to identify and remedy a pricing error is much easier said than done. It may seem easy to look at less than stellar sales and immediately know that price is to blame. But many elements are at play when pricing a product, and there's more to consider when counting to sell and market it.
Revenue goals, brand positioning, broader demand, marketing objectives, and several other factors influence the price of your product. That means a pricing error can come from a number of possible sources.
That said, there are some signs you can look for to help you see if you've made a pricing mistake. Perhaps the most obvious has to do with lackluster sales, especially if you have a competitor outperforming you at a particular price. If that's the case, you may need to reassess your market position and accompanying pricing strategy.
Another is to see if sales plummet at a given price over time. If you've had success selling at a certain price, historically, only to see sales drop off a cliff on a dime, it probably means the market for your product or service is changing, and your pricing strategy may need to change accordingly. he.
Ultimately, products and services are worth what people are willing to pay for them. If people aren't willing to pay a certain price for yours, it's probably not worth what you're charging, at least not right now.
You need to sell based on the value of your offer, and that comes from your positioning and the perception of your customers. Identifying mispricing depends on you understanding that value and adjusting your strategy to convey it effectively.
Like I said, pricing a product or service is rarely straightforward, and there's a good chance that coming up with a price that works for you will take a bit of trial and error. Still, there are some common mistakes you can avoid when working through the process.