Developing an Effective Pricing Strategy
Pricing your products is challenging. There are numerous variables to be considered and weighed against each other so that you arrive at the dollar number—$19.99, or $299.99, or $35—that will give your product the best chance of carrying your business forward.
Your prices have to let you make money, and you’d like to make more money. But you know you can’t plan a pricing strategy by considering profit margin alone. No spreadsheet of cost calculations will tell you how customers will perceive the value of your product at a given price-point. What will drive sales and the success of your enterprise is a consumer who is psychologically satisfied by the value your product is offering, and happily clicks “Buy Now”.
So the best pricing strategy will depend on qualitative analysis, and even instinct and moxie, as much as on economic reasoning. Besides your need to make a profit, what can we name as different inputs and tactics to consider as you work to figure out price?
Differentiation among competitors
First, what makes your product different? Unless you’ve trailblazed into an exciting new white space (in which case, congratulations!) other brands will be strongly competing for the customers you want. Given whatever is different about your product, what is the price at which you unlock a perception of value in the customer’s mind that lets you win in your market?
Maybe it makes sense to present your product as budget option within its category. This can be a brilliant strategy if you think that everyone else is overpriced, or if you simply know that what you’re selling will be perceived to have lower value than a competitor’s offering. It can also make sense if you judge that the best way to take market share from a dominant competitor is to offer an irresistible deal. This strategy, sometimes called penetration pricing, makes particular sense for products that are bought repeatedly—like consumer packaged goods—or bought on a subscription basis. It lets you hook customers, and leaves you the option of later raising prices to improve your margin.
Alternatively, you can go high. This is a more daring strategy, but one widely practiced by brands we all recognize. Pricing always communicates value, but the value it communicates might have only a bit to do with the material quality of the product. Prestige is also a value, and brands that practice premium pricing generally excel at being premium brands—that is, at communicating that there is meaning and identity for people to achieve simply by ownership of the brand’s products, in excess of the mere utility provided by those products.
If you’re interested in premium pricing, it’s worth recognizing that even if your products don’t use more luxurious materials, sophisticated mechanisms, or chic designs than the competition’s, you may still be able to command higher prices for them by further developing your brand—or even by simply classing-up your online merchandising. The way you display and talk about your products in the brief window of attention that the shopper gives you will establish her perception of your product’s value. If you communicate desirability though brand, you may be able to justify a margin-fattening price-point.
Different categories of products have different kinds of customers, though. For instance, in a product segment focused more on basic utility, it might be harder to follow a premium-price strategy that depends on brand. A certain product niche might have customers who are naturally more sensitive to price; another might have customers who are more inflexible about product quality.
This is to say, you can’t do pricing strategy reliably without understanding the customer you’re courting. With as much data as you have available, you should try to answer questions about your desired customers’ demographic and income characteristics, their cares, concerns, and values, and the problems that your product could address in their lives.
In the absence of thorough (and expensive) persona research, you can find out quite a lot about customers in your competitive space simply by a sensitive reading of product reviews, of your own and competitors’ products. Are there any complaints about price, or positive comments about value? Do buyers seem relatively more concerned with getting a bargain or with owning a high-quality item? Do they show that they are motivated by a brand’s message and meaning, or do they seem more “agnostic” with regard to the label on the product? These sorts of comments can indicate a path forward for your own product in its market.
The way that people tend to perceive the value offered by a given price is by referring that price-proposition to the other options around it. This means that a product detail page showing a strikethrough price of $119.99 and a sale price of $69.99 will instantly communicate a bargain. The $119.99 is taken to denote the real value of the product.
The practice of referring shoppers to some other price as a way of communicating value is known as price anchoring. In the example above, $119.99 is the anchor. Some ecommerce sites make it possible to show such sale prices and strikethroughs like this for a long period of time, keeping the anchor strong and steady—though to a savvy shopper this can come to seem like bad faith merchandising. A more strategic way of using price anchoring involves merchandising different product variations together and arranging their prices (and perceived values) so as to nudge shoppers to a product whose price is in the most psychologically satisfying position—that is, among the options you’re presenting.
Because people commonly display extremeness aversion and gravitate towards compromise options, a product priced in the middle between a luxury option and a budget option can hit a psychological sweet spot, especially if it seems value-rich compared to the outliers. And it may be that that middle option sells as well at, say, $24.99 as it does at $16.99, simply because of this framing work. This is your opportunity in using price anchoring within your assortment: to realize a higher retail price for a hero product, which you do by arranging anchors that frame whatever non-extreme price you choose as the best deal.
This tactic works best, of course, in ecommerce environments where your variations can be merchandised together. One variation, out on its own without its higher-priced anchor and lower-priced budget option, is missing the reference points that inform shoppers of its relative value.
Price Parity and MAP
Suppose that, after digesting data and reasoning through numerous possible inputs and tactics, you’ve finally figured out a pricing strategy for your products, centered on the retail prices you’d like to attach to each. Good job!
This is the start of a different challenge though. As your prices float out into the world, they’ll be under immediate pressure. Retailers whom you sell to at wholesale will want to change them in response to pricing dynamics of other brands’ products, and their own profit opportunity. Resellers who may represent you in ecommerce marketplaces will want to change them to angle for more sales. The pressure on prices is typically downward; this price erosion may squeeze your and your partners’ margins, and devolve into a race to the bottom that undoes the pricing strategy you worked to arrive at. Maybe you have a direct-to-consumer website, at least, where you can always control price—but you find to your frustration that it’s no longer price-competitive with your other sales channels. It’s the best place for you to communicate your brand value to shoppers, but your sales partners are travestying the idea of value that’s baked into your chosen prices.
If you believe that the prices you came up with give you the best chance to capture market, make money, and grow, then you need to make sure that those prices are attached to your products everywhere. You need a mechanism to retain control of your products’ pricing wherever they’re sold.
To solve this problem, consider a minimum-advertised-price (MAP) policy. A MAP policy is a unilateral assertion by your brand that its products can’t be advertised for retail sale at prices below those that you set. Done right, this means that the product you believe should sell for $119.99 will be shown for sale at that price at Amazon, Walmart, the convenience store down the street, your own website, and everywhere else.
We talked earlier about the way that your brand, if it’s developed to signify value to the shopper, can let you choose a premium-price strategy. Think of pressure on your strategically-chosen prices as essentially brand-poisoning; it hurts your ability to communicate value, though a price strategy, to the consumer, and so clouds that consumer’s perception of what your products are really worth. Think of MAP, on the other hand, as brand-guarding; it lets you propagate the consistent aura of brand value that’s installed in your prices. It helps you assert that you, after all, know your market best.
Good luck with your pricing strategy and your e-commerce journey!