How to Price your Products & Services
Working for three different DTC e-commerce brands has taught me that while founders have a clear launch strategy, they usually have no idea how to price their products.
Pricing strategies are usually an underrated form of marketing, a lot of companies or individuals choose to ignore. A strong pricing strategy is a lot more than just calculating the costs and adding a markup.
It’s a no-brainer, you need to know how much it costs to make a product or obtain a product and get it to market. This includes your production costs, business costs, marketing costs, and shipping and handling costs.
Even though it always starts with simple math, a pricing strategy isn’t always arithmetic. A lot of founders chose the cost-plus pricing model due to its facile nature.
The reality is that humans are creatures of emotion, and it’s incredibly rare that we make all our decisions exclusively through the lens of logic.
Here is a simple truth.
What a customer is willing to pay for the product isn’t really about how much the product costs.
What it’s actually about is how they perceive the product’s value.
When variables like competition or demand for your product are considered incorrectly, it can lead to a situation where you’re charging too much or too little.
In this post, I’ll show you different pricing strategies that seem to work well in the various sectors.
You can reevaluate and experiment with your current prices based on these examples.
➀ ‒ Know your Competition
Competitive Pricing is when you check out what your competitors are charging to figure out the going rate. Then rather than focusing on profit margin as a starting point, it's about making the price of your products comparative, and you can do this one of two ways.
The first is pricing your products slightly lower than the competition, thereby attracting price-sensitive value shoppers.
Think Target vs Whole Foods.
If you have lower costs and can actively promote your special pricing, this communicates that your brand is economically accessible.
The second is pricing your products slightly higher, signaling that your product might be better in terms of quality.
Think Starbucks vs Dunkin Donuts.
Competitive pricing is often used in highly saturated markets with highly similar products, where pricing can be a differentiator.
➁ - Skimming
Price Skimming is when a company charges the highest possible price for a product right from the initial launch and then decreases it over time.
This is a pricing strategy that Apple has used for years. This works best when there is a scarcity of a product and when new versions of that product will be released in the future, justifying the reduced cost of the previous generation because it’s become less relevant.
This pricing strategy is best used by businesses that have stand-out products with features that other companies just can’t compete with. So if your business has a unique brand image and creates innovative products, Price Skimming could be the pricing strategy for you.
However, it might not work if you’re in a saturated market and your product doesn’t truly stand out.
➂ - Penetrate the Price
Penetration pricing is used when a company charges a low price to enter a market. This strategy is used to draw attention to your business and take away business from competitors who effectively can’t match that price.
Once you have more market share, then you eventually start raising the price.
This pricing strategy is famously used by internet service providers, like AT&T, who attract customers with cheap introductory prices. But once the lifetime journey of the customer, the price of the service goes up.
Discount pricing like coupons, seasonal pricing, and of course sales, can all be forms of penetration pricing as well, helping stores get rid of old inventory and attract short-term traffic to the store. The logic behind Penetration Pricing is that once the sale is over, some customers will remain loyal to the brand in the long term.
One important thing to be aware of is that too many sales can make people vary in paying the regular price and too low prices can create a perception of inferior quality products.
➃ ‒ Price based on True Value
Value-Based Pricing is when you set the price based on how much the customer perceives your product to be worth. This is done by locating data on what customers pay for comparable products, then listing what makes your product different and better.
Then you need to place a financial value on those differentiating features.
Lastly, you need to communicate the extra value your product provides to customers.
This is one of the most ideal strategies for entrepreneurs.
It only works if you have a differentiated product and you are genuinely providing more value than your customers pay a price.
➄ ‒Loss Leader
Loss Leader Pricing is a strategy where you intentionally price a product for a loss to attract customers, to get them in the door, or to your website where they may buy other items. The goal with loss leader pricing is to make your profit on other items, not by increasing the price of the item you’re taking a hit on.
Loss Leader Pricing is heavily employed in the video game industry, where game consoles are sometimes sold for less than the cost to build because of video games and subscription services.
Retailers usually trick people by putting loss leader products in the back of the store in order for us to walk through high ticket items.
➅ - Bundle Em Up
Bundle Pricing is when you sell two or more complementary products together for a single price.
Think Play Station Bundles during Black Friday Sales.
Now, this doesn’t require much explanation, but it’s used by companies to add value for customers at a lower cost increasing the number of sales and increase loyalty to the brands. For example, getting a new phone with your data and phone plan is an example of Bundle Pricing.
Anchor Pricing is the use of comparison, and everyone knows humans love to compare things. With Anchor Pricing, a retailer lists both the discounted price and the original price right beside each other to establish the savings you’ll gain from buying right now.
Anchor Pricing triggers the cognitive bias, where an initial piece of information is used as the anchor by which all future judgments are made.
If you’ve ever seen a price slashed out and a discount next to it and thought, I better take advantage of this while it lasts, well, you have just participated in anchor pricing.
Thanks for reading,