Why are consumers tempted to pay 99 dollars on plain white socks from a luxury brand when they’re on display next to thousand dollar bags and accessories? This week we discuss the magic of pricing by digging into theories behind anchoring, types of pricing strategy and, get to understand why pricing can have the biggest impact on growth. Below you’ll get in touch with the following elements we thought would be most helpful for you and your startup to understand:

It Begins with Positioning

Pricing Strategy

Psychology of the Tag

To get a little more personal on pricing, listen to our episode with Reto Laemmler here.

It Begins with Positioning

Your product doesn’t need to be better in every way it just needs to be better in one.

It may seem obvious, but when it comes to determining your price point, it is imperative that you build the price around the people who will readily use your product and who will understand it’s value. Instead of just deferring to basic and premium products and plans, start by asking yourself some of the following questions:

• Who are your customers, your competitors and how does your product differentiate in both value and price? 
  • Knowing your customer and market segment means you understand the top value and the needs of that customer. Then, you can customize and be competitive accordingly. 
• How do you want to be known in the market? 
  • You can potentially take the place as the more affordable version of another product or perhaps you prefer to be a superior one, with lower volume and a higher price. 
• How much is it actually worth?
  •  Keep in mind that some value can be easier to quantify than others.

Don’t forget to calculate and consider your expenses: 

• Development expenses
• Cost of goods sold
• Customer Acquisition Cost
• Overhead 

Remember, if you ask openly people will always want free or cheap. It’s better to survey your marketgroup with a scale and ask in which range they are willing to pay. 

Pricing Strategy

Pricing can have the biggest impact on growth because growth is often measured in increasing revenue, not just new customers. 

For starters, if your business has a model for profit, it has a pricing strategy. After you’ve captured a solid understanding of your positioning, you can explore the various options or strategies, for how you will determine your products price. This is especially valuable in non-physical products such as software and can be best understood through these following three well known divisions. If you would like more details, click here.

• Value based pricing – Pricing given the perceived worth of the product. VBP is generally the optimal strategy because as long as you can deliver a product reliably and execute, you can be in control of the price. For example: you have a solution that helps customers save X, but the product costs much less to produce, your pricing should be based around X, what they are saving, rather than just your costs. 
• Competitor based pricing – Pricing given your fellow competitors price. You can try and be competitive by charging less, the same or more for a superior product. 
• Cost plus pricing – Pricing given your cost of goods or services plus a markup to create margin. 

Once you’ve determined the right pricing model for your product you can explore various micro strategies to help set you on a trajectory for growth. Rather than always looking for ways to find new customers you can improve the acquisition of the people who are already shopping and heading towards the check out. One way of doing this could be by excluding VAT from the price if you haven’t already. That said, listen to your customers, and only use these strategies if it’s standard practice in your industry. Always get feedback about what the needs of your customers are and if they’re happy with paying for your product or service. If they can’t replicate the product, you have a better chance of being firm with your price, as was mentioned in the value based pricing model. 

Remember, a model which generates recurring revenue versus transactional revenue can be more stable, offer better predictability of your cash flow and ultimately be positive for the valuation of your company. 

Psychology of the Tag

Price is what you pay. Value is what you get. -Warren Buffett 

In the intro we mentioned how expensive socks in a luxury store can seem like a good deal and prompted you to question why that is. Studies conclude that expensive things seem more affordable when placed next to extremely expensive things because of contrast in our perception. Contrast, in addition to context, impacts our appraisal of our experience with price.  Because of this, often the most expensive thing on the menu (metaphorically speaking) is there to help you to decide to purchase the second most expensive thing which in comparison, seems affordable. 

Anchoring

Understanding anchoring is all in the name. During repeatable experiments on this well known psychological phenomenon of anchoring, experimenters throw down a number and then ask people to guess a number, statistic, etc… Whatever it may be, the figure guessed by the participants is consistently in the range of the original anchoring number the experimenters dropped. 

What does all this mean for your pricing strategy? Most often, those top tier plans or most premium products are there to create contrast to help make socks or the plans they really want to sell seem affordable or to drive you into subconsciously believing that the price reflects the true value. Companies can also anchor out competitors’ more expensive pricing to create contrast to your own price or negotiation. Additionally, tier based pricing can shift people into the position of deciding which of your plans or product to buy, rather than whether or not to buy it at all.

Remember, when it comes to software or subscription products, rather than choosing the conventional basic, super, premium divisions, try dividing between customer and market divisions. For example if you’re selling editing software on a subscription basis you could divide your pricing plans between hobbyist, freelancers and studio sized subscriptions. That way each model caters to a customer’s exact needs and connects with how they appreciate the value your product brings. 

Time to read more? Priceless, the Myth of Fair Value

Why our intuition is fooling us in a repeatable & consistent way.

Very comprehensive Pricing for Software

Useful guide & Pricing for platforms 

Creatives and Pricing for freelancers

The Good-Better-Best Approach to Pricing