Pricing is one of the most important aspects of running a successful business, yet most entrepreneurs give it very little thought or scrutiny. Why is this? And how can you change the way you view pricing in your own business?
If you think about it, the price of the products and services you sell has a major impact on every facet of your business. If prices are too low, you’ll probably see fantastic sales volume, but you won’t be able to make enough profit to keep the lights on. If prices are too high, you might have a robust per-unit profit margin, but you’re only going to sell a fraction of the volume that you need to sell in order to pay your employees’ salaries.
The price of a product isn’t just a number. Sometimes moving a price just 75 cents or a dollar in one direction can have a significantly positive or negative result. Yet in most companies, pricing is something that happens independently. Often, prices are set rather arbitrarily.
“Pricing is a concept that transcends profit margins. It’s also a marketing tactic that can help your business boost sales volume,” respected entrepreneur Neil Patel explains. “When you think about pricing, you need to focus on more than what will cover your company’s operating expenses and pay the bills. You need to choose numbers that will compel your audiences to buy.”
Patel is touching on the real heart of pricing in today’s marketplace. While some consideration must be paid to profit margins so that you’re sure you’re turning a profit and covering operating costs, more attention needs to be given to pricing psychology and how it dissuades or compels customers to open up their wallets.
Sometimes sales slumps have nothing to do with the product you’re selling. While it’s easy for your mind to immediately jump to the conclusion that business is slow because customers aren’t interested in what you’re selling, it’s quite possible that it’s your pricing that’s all wrong.
Pricing is a very psychological thing. Whether you’re selling candy in a convenience store or luxury homes in a hot real estate market, how you price your products will have a very real impact on the way consumers perceive value and associate with your brand.
In 2017 and beyond, you’ll see a lot of competitive businesses implementing the following pricing tactics and trends. Check them out and see if they could work for you.
You’re most likely familiar with freemium pricing, even if you’ve never utilized it. Freemium simply involves offering a free service with the intention of eventually turning that free business into paid business.
“Basically the objective of this model is to get the users hooked to the free product, thereby motivating them to subscribe for the paid plan and also promote the product via word-of-mouth,” marketer Sadhana Balaji notes.
The freemium model is often seen with software and online tools and tends to be wildly successful, so long as the core product is deemed valuable. A poor product will render the freemium model useless and will ultimately end up bankrupting a business.
For the most part, American commerce operates under the assumption that the price you see on the sticker or tag is the price you pay. There are, however, a few exceptions to this – one is the car sales industry. When you walk onto a new or used car lot, it’s generally assumed that the price on the sticker is merely the starting point. Sure, you could pay that price, but you can almost certainly get them to knock it down some with strategic haggling.
Interestingly, many auto dealers are actually trying to move away from this traditional approach to sales and are implementing “no-haggle” pricing that means the price on the sticker is the price the customer pays.
San Diego-based Greg Miller Toyota is one example here. They offer something called Power of One pricing, which is designed to eliminate the back-and-forth hassle of haggling, while simultaneously building trust and maximizing efficiency.
If you’re in an industry where haggling is expected, moving to a no-hassle pricing strategy can set you apart from the competition and put consumers at ease.
One of today’s more popular pricing strategies is referred to as anchoring. It’s a simple, yet effective tactic that seems to work exceptionally well both online and offline. With this technique, you simply provide two or more pricing options for similar items, with one being priced significantly higher than the others. In the consumer’s mind, the high price of one product makes the lower price of another product seem like an awesome deal.
Zoho CRM gives us a good example of what this looks like in practice. Check out their pricing page and notice how they have four different plans for $12, $20, $35, and $100 per month. Zoho knows that the majority of customers aren’t going to pay for the “Ultimate” plan at $100 per month. However, including this outlier makes the $35 plan – which is what they want customers to lock into – seem like more of a value.
The same thing can be done in a retail store. Placing a $200 handbag next to a $59 handbag makes the second one seem like a good deal and increases the frequency of purchase. It’s simple psychology.
Everyone is familiar with the use of the number “9” in pricing. Instead of making a widget $10, a retail store will sell it for $9.99. This pricing tactic is rooted in something called the “left-digit effect,” which says consumers don’t usually read to the end of a price. Even though an item priced at $49.99 is just one-cent shy of $50, it’s more likely that the consumer is going to mentally perceive the item as costing $49. Then there’s the theory that prices ending in a “.99” lead consumers to believe that there’s a deal. This increases purchases and leads to greater customer satisfaction.
But what’s even more interesting than studying the “left-digit effect” is realizing that there’s a time for non-rounded numbers and a time for rounded numbers. This is something marketing professors Monica Wadhwa and Kuangjie Zhang found after conducting multiple experiments on the subject. They discovered that different categories of products are evaluated in different ways.
“For example, products that are recreational or luxurious benefit from rounded prices: Consumers were more inclined to buy a bottle of champagne when it was priced at $40.00 rather than at $39.72 or $40.28,” explains Bouree Lam, a staff writer at The Atlantic. “However, for purchases that are utilitarian—a calculator, in this experiment—participants were more likely to buy at the higher non-rounded price.”
In other words, depending on the product you’re selling, you might be better off using rounded or non-rounded numbers. It’s certainly worth playing around with.
There are a lot of myths surrounding pricing and what it looks like to set the right price. However, one of the more pervasive and delusional ideas is that every product has one “sweet spot” price. And if you can just find that sweet spot, then you’ll be set.
The reality is that a product’s price can’t be stagnant. Your customers’ needs are changing; competition in the marketplace is increasing; seasonal patterns impact demand; stylistic trends evolve; etc. So why would you let your price remain the same from month-to-month and year-to-year?
If you’ve learned anything from this article, it should be this: Pricing is a strategic element of your business and there are certain tactics you can use to achieve specific results that align with your business needs.
“Plug and play” pricing isn’t practical or profitable in today’s dynamic business world. It’s time to get more creative with what you’re doing and develop an advanced pricing strategy that allows you to engage consumers, maximize sales, and grow your profit margin. Which tactics will you use?
Price Tag Photo via Shutterstock