You know you are priced right….
John Harrison once said, “You know you are priced right, when your customers complain — but buy anyway”. It’s no surprise that striking that right pricing balance is one of the toughest task that Product Managers have to do. There are so many things that goes into deciding the right price, as shown in the illustration below.
Scandinavian Institute of Business Analytics in one of its online course at Udemy called Price Analytics describes a set of 11 pricing techniques which I have summarized below.
1. Creaming Prices — Charge high price initially by targeting 1 to 5% of the market.
Advantages: High Initial Revenue
Disadvantages: Product has to be unique
Example: Apple iphone is expensive when launched but as new phone comes up, old phone becomes cheaper
2. Demand Based Pricing — Works better when companies can change prices quickly based on product demand.
Advantages: Maximize long term profit
Disadvantages: Need to know the demand curve
Example: Restaurants offer cheaper drinks during happy hour
3. Everyday Low Pricing — Best suited for price sensitive customers, however the company must have competitive advantage in low cost goods.
Advantages: Smooth out demand
Disadvantages: No expected seasonal sales
Example: Walmart
4. Going Rate Pricing — Align your price with competitors, works well when there are fewer companies in market.
Advantages: No price wars since the prices are not very different
Disadvantages: Needs collective wisdom and approach, illegal in some countries, collective wisdom could be flawed
Example: Gasoline
5. Markup Cost Pricing — Add some % age to the cost
Advantages — Fast and easy to calculate
Disadvantages — does not take care of demand and price
Example: Credit card industry adds some markup on top of cost of supporting a merchant
6. Penetration Pricing — Low prices to expand market share
Advantages: Higher penetration, customers might not switch once acquired
Disadvantages: Low prices, lower profits
Example: Android phones are available on deep discounts to acquire a huge customer base
7. Prestige Pricing: High prices based on high quality
Advantages: High profits
Disadvantages: Needs high brand recognition
Example: Nike prices are usually higher to maintain its brand image.
8. Target Return Pricing: Price your product to achieve a ROI
Advantages: Easy to calculate
Disadvantages: Depends on sales forecast
Example: A lot of products sold at Dollar Tree are designed to be under one dollar.
9. Tiered Pricing: Set different prices for same type of products
Advantages: Easy choice for customers
Disadvantages: Hard to explain the value of different levels
Example: Linked charges differently prices based on features
10. Value based pricing: Based on value to customers
Advantages: Captures customers value
Disadvantages: Must understand the benefits to the customers in monetary terms
Example: Fashion industry can charge higher based on specific brand or a handy man can charge high rate based on how much valuable he thinks his services are.
11. Variant Pricing: Different prices for different versions of products
Advantages: Freedom in pricing
Disadvantages: Deep understanding of market segments
Example: Airlines charge higher for first class passengers
I believe, this is a good first start to see how a company wants to portray itself and what model works best for the company. Nevertheless, pricing is so complex that big companies have dedicated teams just for that and sometimes they still get wrong. Hopefully, this list will serve as a quick check list and help them price just right, where customers even if complain, buy the product anyways.
