developing your pricing strategy

7/28/2019 Developing Your Pricing Strategy

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Developing YourPricing Strategy

CHRISTOPHER ODONNELL

PRICE INTELLIGENTLY

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CHAPTER1

The Challenge and

Importance of Pricing

IN THIS CHAPTER

1. The most important business decision you will

make

2. Revenue optimization

3. Unit sales maximization

4. Value perception

5. Exercises

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The most important business decision

you will makeEvery business profits and losses can be described in a spread-

sheet, and though the model of each is unique they all share

one thing in common: at some point the number of customers

is multiplied by the sale price of the good or service.

Optimizing the value of each potential buyer is the most criti-

cal activity to making a business model work. Understanding

price sensitivity, value systems, and the buying behavior of

your target customer is perhaps the single most treasured

piece of institutional knowledge an organization can develop,

though shockingly few get that far.

As a business owner, operator, or manager you generate value

day in and day out by making good decisions. Some of these

decisions are creative decisions, some are interpersonal, and

many are quantitative. Though there are thousands of these

decisions that need to be made in order to operate a business

profitably, none is more important and fascinating as the deci-

sion of how much to charge for your product or service.

Pricing is an art as well as a science: a decision making proc-

ess that requires both qualitative and quantitative inputs.

While it is valuable to acquire a deep knowledge of the target

customer, and thus an instinct for their value system, pain

points, and requirements, this knowledge does not suffice. At

a minimum, it is necessary to acquire a working awareness of

the methods and vocabulary of pricing specialists, which will

allow you to make far more informed decisions. Developing

this awareness is the goal of this publication, and we are confi-

dent that you will quickly and efficiently get up to speed,

speaking the language of price strategy.

Revenue optimizationClearly the first benefit of optimal price point identification is

to ensure that no money is being left on the table. That is, that

your product or service is not identifiably more valuable than

the price you are charging for it. Perhaps you have had people

make a purchase decision with few objections, seeming to

glance over price as small administrative detail. These scenar-

ios are common and represent opportunities to affect mean-

ingful business change by understanding more about the cus-

tomers price sensitivity and ultimately finding a higher, more

appropriate price and package. Goods and services should rep-

resent a good value, not a no-brainer purchase decision; if

your market never comments on or discusses your pricing and

packaging, it is a sign that more thorough research is war-

ranted.

Unit sales maximizationOn the other side of the coin is the effect of price sensitivity on

product or service adoption. In certain circumstances, such asthe early stages of a startup business, there is meaningful

value to the business to have potential customers adopt the

use of the offering. A thoughtful pricing strategy should take

this into consideration and recognize that momentum of adop-

tion can offset marginal lost revenue through generating

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greater awareness that leads to future sales. The optimal price

point to maximize revenue is often different from that which

aims to optimize the rate of adoption. It is a key factor in pric-

ing strategy to understand if there is a wide delta between

these two numbers, and to act in a manner that is consistent

with the business current strategic priorities.

Value PerceptionOne realization that most often shocks pricing newcomers is

that, below a certain point, a price can deter potential custom-

ers who perceive low price as an indicator of low quality. Con-

sider a $15 mountain bike, or an urban condominium listed at

half the price per square foot as the market rate, or maybe a

$30 pair of running shoes. While there may be generated inter-

est in products priced so aggressively, the suspiciously low

price will draw buyers attention to shortcomings while en-

couraging a skeptical mindset.

The strategy of deliberately pricing products much higher

than, say, a competing offering has worked marvelously in cer-

tain circumstances. In new markets, or with novel new prod-

uct offerings it should be considered and understood what the

impact of intentional overpricing could be vis a vis the mar-

ket perception of the new widget. The best cases have the sur-

prisingly high prices triggering a renewed interest and deep

curiosity for the value proposition of the product, often result-

ing in speculative purchases.

ExercisesFor this section, consider these questions on the left, writing

2-3 sentences in response to each.

QUESTIONS

1. When did you last choose a price for a product

or service? What quantitative and qualitative

information did you use to make that decision?

2. What impact would a 10% price increase have

on your overall profitability as a business,

assuming you did not lose sales?

3. What impact would a 10% unit sales increase

have on your overall profitability, assuming

your price were 10% less?

4. Can you identify any suspiciously low priced

products or services in your field?

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CHAPTER2

The ValueMetric

IN THIS CHAPTER

1. What is a value metric?

2. The importance of being understood

3. Exercises

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What is a value metric?The reality of pricing is that ultimately you have to charge for

something, and that something is traditionally described and

counted in the form of a value metric. If you are selling eggs,the value metric is the egg. Seems simple, right? Well, it ought

to be simple but often the best intentions lead to the presenta-

tion of a convoluted pricing scheme with an unclear or confus-

ing value metric.

Consider, if you will, selling online email services. At first

shade it seems simple: you offer the ability for a company to

send email to individuals, and should therefore charge for

each email sent. Or is it for each person who receives an

email? Or is it for the size of a list, or rather for the number of

sends per month? All of these options incur incremental cost

for you, the service provider. You could, for example, imple-

ment a pure, transparent cost plus pricing tactic that

marked up the cost of goods sold, so to speak, and charge cus-

tomers a premium for a simple-to-use service with tremen-

dous underlying complexity. But how, in this scenario, are you

to present clear pricing on your website and marketing materi-

als? Clearly, this is not a good approach. In fact, the most valu-

able exercise here is to identify who your target buyer is, and

work to determine the correct value metric for that buyer.

Maybe your buyer is a small business that sends varying

amounts of email month-to-month. For these folks, the right

value metric is probably the total size of their list. By bucket-

ing these customers into different discrete purchase options

you can serve them properly and charge them an accessible,

transparent and predictable price.

If your buyer is, instead, a large company with a dedicated

email marketing team whose job it is to send various targetedemail blasts to segments of contacts within their overall list,

your value metric might well be the total number of unique

emails sent.

The importance of being understoodThe single most important test of a value metric is simple:

does your customer know how many [your metric] he needs?

In the above example, the small business owner certainly

knows the size of his email list but perhaps doesnt know howto easily predict the number of emails sent [within a certain

time frame]. The email marketing team, on the other hand,

knows not only how many emails they send (in addition to

their list size), but also how many they might need to send dur-

ing special promotion periods or other circumstances. In each

case, the value metric is clear and understandable by the tar-

get buyer.

When someone asks you to clarify your value metric, you

know you have a problem.

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QUESTIONS

1. List three different value metric options you

have for your product or service, even if you

have identified one you like.

2. For each of these value metrics, is there a type

of customer who knows how many he needs? Is

there a type who would be confused or be

forced to perform an unnatural calculation?

3. Name a creative value metric! Think of

businesses that have been radically disrupted

in the last few years; in which cases have new

companies used creative new value metrics to

introduce a disruptive product?

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CHAPTER3

Packaging &Bundling

IN THIS CHAPTER

1. Packaging basics

2. Making bundling work

3. Tiered pricing

4. The power of customized pricing

5. Exercises

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Packaging basicsAn aspect of pricing that is as old as time is the principle of

combining goods or services in various combinations and then

offering a price for such a group. In industry parlance this isknown as packaging or bundling. Dont be fooled by the name,

this topic extends well past the method in which a physical

good is wrapped and presented. Packaging encompasses a far-

ranging set of tactics and considerations designed to entice

the buyer while rewarding the seller. A working vocabulary of

the common approaches used in bundling remains a funda-

mental building block of a professionals pricing knowhow.

Generally speaking, bundling of discrete purchase options

into a single package benefits the seller. In the rational buyers

perfect world, each component piece of a purchase transac-

tion would be separate and priced in consistent relative value

to the others. In such a world, the buyer would have access to

his most efficient deal, as he would choose only the options

that suited him. Imagine buying a car from a dealer who let

you customize every last option, choosing only what you really

need. Now remember every time youve bought a car: every-

thing works on the idea of packages. Though there are quite a

few sunroofs out on the road that get little to no use, they were

all paid for - at high margin.

Making bundling workWe know that bundling is invariably in the sellers favor, and

so we must wonder: how can bundling goods generate per-

ceived value for the buyer? The answer is straightforward:

bundling presents an opportunity for the seller to propose a

discount.

Leveraging an intelligent bundling strategy, the seller can en-

large average deal size by dangling unnecessary but heavilydiscounted items in front of the buyer.

The buyer will often be irrationally enticed by such offers,

sensing that the incremental power of each purchase dollar is

uniquely enlarged in the context of the bundled offer being

presented.

Tiered pricingBundling often presents itself in the form of tiered pricing. Par-

ticularly in the modern world of software, there is an increas-ing and justified investment in understanding the segmenta-

tion of the target market, and offering bundles at different

price points to each segment of this market.

In practice, this segmentation is often a ruse. A product that is

available for a monthly subscription may offer 4 different

plans for the express purpose of framing the intended plan in

a favorable, understandable light. The distractor plans will

typically serve to establish value of each component part by il-

lustrating the price of at least one plan that is insufficient, and

at least one that is bloated and too expensive. This tactic can

work brilliantly, demonstrating the thoughtfulness of the bun-

dle (all the things you seem to need, none you dont) while

as we know serving to offer a bundled discount that is quite

favorable to the seller.

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The power of customized pricingOne of the main advantages to tiered pricing is that it helps

the buyer understand why the pricing and packaging being

presented is appropriate for them. One can take this principlea step further through the use of editions, deliberately bun-

dled offerings that represent turnkey purchase options for vari-

ous target buyer personas. Once again, we see the simultane-

ous power of presenting the buyer with marginal buyer power

while optimizing for deal size and margin for the seller. What

is critical when offering pre-set customized bundles for your

different type of buyers is to deeply understand their value sys-

tems, and to see the relative value and importance of each fea-

ture or item you can offer. Conjoint analysis and discrete

choice modeling are strong options should you choose to in-vest in quantitative research in this regard.



QUESTIONS

1. What bundling does your business employ

today? Where is marginal gain realized

through this bundling?

2. What customized pre-set bundles could your

business consider offering? Is there a type of

buyer that remains underserved by your

current bundling options?

3. Does your business have a sunroof,

something that buyers happily purchase

[because it is bundled with other products]

regardless of actual need?

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CHAPTER4

Discounting

IN THIS CHAPTER

1. Offers

2. Promotional discounting

3. Long-term value perception

4. Exercises

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OffersTo maximize sale volume and deal flow, introducing urgency

into the buying decision has as large an effect as anything.

Amongst qualified leads the primary objection to moving for-

ward with a deal is almost always now is not the right time.

Sometimes this is true, more often it is an alibi; its your job to

make it the right time for the lead, and providing a due date is

a fine idea.

When exploring the use of discount offers, keep in mind the

two factors that together combine to generate value for the

seller:

1. Introduction of urgency2. Promise of valueOne of these factors, even done right, will cripple the effective-

ness of the offer if done without the other. Showing a huge dis-

count with no end date, or having a one-day sale without a

meaningful discount both fall well short of their goal.

Instead, clearly show the end date and/or terms of any offer.

Explore traditional tactics like the one-day sale or the mes-

saging of while supplies last. At the very least, be sure to dis-

play offer ends on prominently in the offer creative.

To demonstrate the greatest value, many have found that at

lower price points a percentage savings generates the most

buyer interest, and as prices rise the total-dollars-saved met-

ric makes a bigger statement. The latter is particularly compel-

ling, given the ease with which the buyer values the savings;

knowing the value of the offer in concrete dollars is hard to

beat.

Promotional DiscountingA good reason to offer discounted pricing is to generate new

accounts and potential repeat purchasers. Consider the

bounty of discounts that come to the new homebuyer; these

discounts are prescient in their aim to capture the loyalty of a

neighborhood newcomer and can afford to be aggressive.

Of course, remember to quantify the value of such discounts

over the long term. If you take a short-term loss, be sure you

know how to measure the long-term gain, to ensure that pro-

motional discounting is working for your business.

Creative promotional discounting approaches have been on

the rise, aiming to generate pass-along value or viral growth

characteristics. The goal in these cases is to create an offer

that rewards the buyer directly but only if and when the buyer

brings another potential customer into the fray. A new service

may give account holders a web link (bearing a coupon code)

for the account holder to pass around to friends. Those friends

who act on the link and create accounts of their own receive,

say, $10 in credit, while the original sharer receives the same.Such promotional approaches can be tremendously success-

ful, particularly when a business has made customer satisfac-

tion a priority above all else; in addition to being incented to

share the service, the account holder will testify to the product

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or services value personally, dramatically increasing the value

of the offer in the prospects eyes.

Long-term value perceptionAny time a company decides to charge less for what it offers it

runs the risk of devaluing these core assets. In order to safe-

guard against the deterioration of perceived value, keep some

of the following heuristics in mind.

Dont offer discounts for long periods. Rememberto retire your offers after they have served their usefulness.

Maintain credibility with your buying audience by retiring of-

fers in line with the published schedule. Failure to do this will

result on your customers archiving offers for future considera-

tion. When this happens you have failed to introduce urgency!

Vary your offers. Offers that are too consistent will cre-ate a rhythm that will once again undermine your efforts to in-

troduce urgency. Whenever you give your buyers a reason to

wait, they will.

Guard your value. Above all else, remember that dis-counting communicating that you are willing to sell for less

be mindful of the dynamics that you introduce, or quickly

your buyers will come to value your offering less highly.



QUESTIONS

1. What is one example of your business offering

promotional discounts? What is the cost of

these discounts, and what is the long-term

gain?

2. Name three ways your business could create

urgency in the buying cycle, by using discount-

based offers.

3. Name one business that has tarnished its

brand or product value in the public eye by

offering consistent, aggressive discounts.

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CHAPTER5

Conclusion

We hope that this introductory guide to

pricing was useful to you and your com-

pany and represents a valuable first step

toward developing a robust, validated

pricing strategy. If you found this eBook

helpful, or if you had hoped for more in-

formation in a certain area, please visit

http://www.priceintelligently.com and

we will do our best to meet your needs in

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