Pricing is perhaps the most important choice you will make when selling your products and services. Price is an indicator that lets customers know what to expect. High price = this must be good. Low price = probably not going to work/break in a short time (and that can be just fine).
Small pricing increases can have massive impacts on your bottom line. Take for example a business with sales of $1,000,000. A 5% increase in sales price, that’s increasing the price from $1 to $1.05; $10 to $10.50 etc will increase profit by $50,000 (assuming no decrease in the number of products sold) a year.
Obviously, you still need to be providing your customers with value, and you can’t just keep increasing prices, but a proactive pricing strategy, is critical to business success. If you don’t at least increase your prices by inflation each year, you are worse off this year, than last year.
There’s a couple of pricing tactics you can use to help sell your products/services, let’s get started by taking a look at two of the most frequently used: price anchoring and price signaling.
Price Anchoring is a marketing strategy which uses customer psychology to guide customers to “choose” a pre-determined price point. It’s done by “anchoring” the price point you want your customers to pay against less attractive options at substantially higher price points.
This pricing strategy is powerful. We humans, are frighteningly susceptible to the power of suggestion, and frequently unaware that the choices we make may not have been our choices at all. Some of the ways in which you can anchor are;
You’ve got a full spec product/service. It’s got all the inclusions. It’s the works burger. You price it accordingly. But you know that a lot of people don’t want all that, the standard distribution of your customer base says they only want/need X, Y & Z included. So you scale down your offering & your price point accordingly. Then you take just the bare bones and create the lowest tier. This again will only appeal to a small percentage of your prospects. You then place these tiers next to each other on your pricing page, proposal etc. Your prospects then compare which package they want, based on what they need & value. This plays massively into psychology. Their mind starts thinking – I can get X for $ or I can get XXXXXXX for $XXX. So I’m basically getting XXXXX for free!
You offer a service, if someone bought this off the rack it would be $1,000. But you run a promotion – for all new enquiries in the next 30 days, you can get it for $599 (usually $1,000). In this you are anchoring to the original price, making the $599 look “cheap”.
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You sell burgers for $10; you sell fries for $4, you sell drinks for $3. You put them all together into the Burger Combo & sell it for $14.
Yes, you are “losing” $3 of sales across all 3 products, but the amount of people who buy all 3 is very low. By bundling them together you increase the volume of the products sold more than the decrease in price which gives you a greater $$ Gross Profit (and $$ Net Profit).
The secret is to make sure customers can see they would normally pay $17, and what they are getting now $14. This makes the $14 look “cheap”.
This strategy can also work in reverse, like the tier packages discussed earlier.
Instead of showing it as a discount, you position it as an upgrade. You’re currently getting this, but for a couple of more dollars you can get THIS!
So rather, than getting a discount, they are getting “free” stuff.
Customer: 1 Burger please
You: No worries, that’s $10. Just letting you know we’ve got a special on at the moment where if you buy a burger & fries, we’ll give you a drink for free. Sound good?
Customer: They look at the menu prices – Yeah ok
I’m not really a fan of this one but include it for completeness. The anchor pricing in this instance is the competitor’s price. This version of anchoring is a bit riskier since you will be providing free advertising for your closest competitor as well, so use with caution. This should only be used if your product is clearly the better value. It’s imperative not to get entangled in a price under-cutting competition. It is vital when showing your details next to those of your competition that you show your product’s superiority in areas like support, features, and innovation and steer clear of a pricing war.
Price signalling is a technique that uses the price assigned to a product to influence consumer perception of the product reputation. The pricing itself conveys the brand’s image. This strategy can work with other strategies as part of a larger pricing plan. Price signaling and price anchoring can often overlap and work in tandem.
Welcome signals are similar to social signals. Like social signals, welcome signals use pricing discounts to target a desired group of customers.
An example of a welcome signal in use is the promotion of a 15% discount to all those who served in the military.
Goodwill Signals
Goodwill signals are used to build a sense of teamwork, solidarity, unity, and connectedness within a community.
An example of goodwill signalling is the local deli in a community that has recently suffered extensive wildfire damage deciding to prepare and serve drastically reduced-price lunches to help feed hungry and displaced community members.
Engagement Signals
Engagement signalling showcases your connection or your brand’s connection to a larger group like a sports team, a school, or a social club.
Luxury Signals
Placing a high premium on a product implies popularity and desirability. In this instance, the product itself is the anchor. By pricing the product higher, rather than lower, people will perceive it as having a greater value. “If it costs that much it has to be good!” The premium price attached to an item identifies that item as being worth more than average, everyday products.
Questions to Discover the True Value of Any Product
To reap the full benefit of these strategies, it is vital to determine an accurate value baseline for your product. This is the most challenging step for many, so we have included the following list of questions to aid in determining an accurate value as painlessly as possible.
- How does this product or service positively impact my customers’ lives?
- What contribution does my product or service offer to others socially, communally and personally?
- How common is my product or service?
- What are my closest competitors charging to deliver a similar product or service?
- How much are they charging to provide a very different product or service that provides the end user with a similar result or benefit?
- What does the brand’s existing reputation or backstory offer that customers may view as deserving of a premium price tag?
- What type of customer service or additional support will we be providing to the customer and how long will this service or support be provided?
The pricing strategies you choose possess the power to shape the future of your business and certainly shape your overall profitability. You’re going to need to get the calculator out and do the numbers. Then do the numbers again but use the worst case scenario assumptions. See what this worse case scenario means for you financially, draw up some rules, that say, if the result is this by this time, change it to this, so if your assumptions turn out to be wrong, you know when to pull the pin and change the strategy to limit your losses.
Taking the time to determine the true value of your product and the best way to price and market it to the right customers generates early buzz and momentum that is crucial to a successful business.
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When using a social signal pricing strategy, a special discounted price is offered to encourage consumers who identify strongly with that group (or strongly oppose that particular group) to visit at that time to get the discount for themselves.
For example, offering a discount to uni students at a local gym on weekday evenings communicates the social signal that weekday evenings at the gym will probably be populated by a larger number of college co-eds than other non-discounted nights.