An effective pricing strategy is one of the most obvious marketing tools available to all businesses. But too many founders don’t spend the time they should thinking about effective pricing. This was one key takeaway from a digital masterclass on using pricing strategy to transform your business offered to Helm members last week.
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Jenny Millar, founder of pricing strategy consultancy Untapped, told this virtual session that while pricing is one of the top five reasons that businesses fail, it continues to be often overlooked. This is, she said, because people are often afraid to touch it.
More than just a last-ditch, reactive tool to save a failing business, an effective pricing strategy should be used positively as a tool for customer engagement and to reinforce and enhance brand strategy. “How you price says a lot about your brand,” said Millar. “Pricing has to reflect the wider brand proposition. Are you worryingly cheap or reassuringly expensive?”
Value, price and cost
Millar introduced the context of “the price thermometer”, which is a way to understand the relationship between cost, price and value. Value sits at the top, with price in the middle and cost at the bottom. The gap between cost and price is the seller’s motivation to sell, while the gap between the top two is what makes customers buy.
While cost and price are often clear, value is a more nebulous and moveable element. Value takes several forms. It includes the tangible benefits or outcomes from a purchase (more leads, more sales, time saved), as well as many intangible ones (peace of mind, social kudos, enjoyment). But value also depends on consideration of viable alternatives, including competitor products or services, but also the option to do it in-house, do nothing or find a work around.
Millar went on to highlight that value (what something is worth to a particular customer at a particular moment) is highly subjective and contextual. The trick to get the most from pricing is to be alive to this and to be able to offer the right price to the right customer at the right time. Where possible, deploy separate pricing tactics for different customer groups.
The only way to really get the most out of this opportunity is to talk to customers and understand more about how they feel about the product and in particular the price.
Three pricing hacks that will transform your business
1. Provide pricing choices (but not too many)
Think about your local coffee shop that offers options for small, medium and large (or sometimes, only medium, large and extra grande), or software businesses that offer a bronze, silver or gold package. This is the simple model to follow. The reasons for offering choice include:
- It empowers customers, they are in control and asking ‘which one shall I buy?’, not just ‘shall I buy?’
- You create upsell opportunities, as customers see the other options available.
- You can have more influence in shaping customer decisions.
- It can help strengthen negotiation, if that’s part of the buying process.
- You can “anchor” price perceptions - by putting a lower cost option next to a much more expensive one it puts the bigger number in customers’ minds.
- It can help help you to stop guessing what customers are willing to pay - put options out there and see what they buy.
2. Experiment with price
Part of the joy of offering customers a choice or range of prices is that it provides fertile ground for you to experiment with different prices. And it is vital to remember that price is not an end point but a continuous process. As Millar said “Pricing is not a one-off activity that you do at the start and then that’s it. It should be a continuous process of experimentation, to find the sweet spot between how much you charge and how much you can sell.”
One of the easiest ways to experiment is to write down three instances where you know (or strongly suspect) your customers would be willing to pay more. This might be when they are in a rush for your product, or in a particular location or even a particular type of customer or in a particular sector. Then go and try offering your product in these situations at a higher price.
3. Sweat the small stuff when displaying your prices
What and how we write about our prices is, explained Millar, a very powerful factor in determining how prices are perceived. Some of the ways our brains process data and information on words and numbers means that some apparently minor details can make a massive difference:
- Display prices in smaller fonts will make them feel lower (we have a universal conception of size and confuse actual size with numerical size)
- Use 9s to reduce the left digit. Because we read from let to right in Western society, the change has to affect the first digit. While £3.80 to £3.79 won’t work, the drop from £4.00 to £3.99 ,makes a big impression.
- Use shorter sounding prices. Prices with more syllables can appear higher than those with fewer syllables. For example, £27.82 (7 syllables) will seem higher than £28.16 (5).
- Keep prices simple. How you write prices matters. Out of £1,499.00 or £1,499 or £1499, the last one will appear the lowest.
- Expose people to any higher number before they see a price. Anything from number of customers to the old price will help to anchor consumers so that the price appears more reasonable.
Helm is a powerful community of like-minded founders that offers members the opportunity to learn from one other, to share ideas, thinking and experiences at a wide range of in-person and digital events. Find out more about forthcoming events.