Are You Pricing Correctly? How to Price your Product
By Kelly Berry
It’s summertime – so picture this summery scene with me if you will. You’re at a beautiful beach resort, far from home, sunning next to the ocean when you discover that you’ve run out of sunscreen. What to do?
Good thing that souvenir shop on the boardwalk is so close to your spot on the beach! Now think for a moment – do you expect to pay the same price for sunscreen at this vacation resort location as you might at the big box store near your (beach-free) home?
Is the price for that product solely related to the cost to the store? Or are there other elements at play? I would argue that convenience is driving the price up in this case, regardless of whether the actual cost to the store is higher or lower.
Now, let’s move from the beach to the big city. You stop at Macy’s to grab some socks in their “Fine Hosiery” department. Do you expect these socks could be priced higher than the socks at your nearby discount retailer? In this case, it’s not convenience that drives the price up, but quality, or even “perceived” quality. The price is sending a message about the product and its potential customers.
If these examples make sense to you, then you already understand some of the key factors in how to price your product or service. But do you apply the same factors when pricing your own products or services?
As a market researcher and small business consultant, I encounter all sorts of entrepreneurs who struggle with pricing. How can you be confident you are setting your prices in order to maximize your return and attract customers? Are you too high? Too low? How do you know?
How NOT to price your product
The “easy way out” is to take a look at all of your costs (including a salary for yourself) and then add a profit margin. The old “cost plus” model, still very common in some industries, such as construction. But that means that your price is based purely on your costs – and has nothing to do with what the customer will pay. Pricing should be a part of your marketing strategy – and the price you set sends a message to your customer base.
How to price to sell
“Cost plus” is a popular pricing method because it’s an easy formula. Plug in your costs, add a profit margin, and voila! Your price is determined. But pricing strategy should be customer focused, not cost focused. When it comes to selling your product or service, you need to think about how to price your product like you do any other marketing decision.
Think like a market researcher! The more you know and understand about your customers, competitors and the environment around you, the more sophisticated your pricing strategy can be.
Here are some steps to help you follow a path to profitability:
What is the message you want your price to convey?
Think back to the examples I mentioned at the beginning. The price you charge sends a message to your customers. Are you focused on high quality, unique offerings, customized services, and add-ons? Then your customers expect a higher price. Not only do they expect it, but a lower price might actually confuse them.
But what if you are selling a product where prices are easily compared?
Doesn’t that mean you need to keep your prices low as compared to your competitors? Why would someone spend more money than they have to? Here’s where you need to be just a little bit arrogant about your own business. Don’t you offer something that is better than your competitors? Isn’t that worth more?
Sure, if you are selling gasoline or bags of sugar, it might be hard to differentiate yourself from your competitors. But even in these commodity-focused businesses, the companies selling gas or sugar make an attempt to differentiate themselves through branding. Complementary services like car washes, recipes by the “sugar experts” and other value-adds make their product seem more valuable than the competitors’ too.
If you’re selling services, then you shouldn’t be comparing prices with anyone, because there is no way that one person’s service can be exactly comparable to another person’s service. Focus on your unique attributes, the level of service you are providing and the relationships you are building. These things make it harder to ever make an “apples to apples” comparison of one service to another.
But what if people tell me my price is too high?
Don’t automatically lower your price. Instead, use this pricing strategy to help meet the needs of customers who are very price focused and those who are service-focused: offer a range of offerings from Bare Bones to Premium. Typically, three choices work best. Consider the “Good-Better-Best” model you see in many places. Offer your “Better” price when bidding services work. If someone wants a lower price, then you can move to the “Good” option – a lower price but fewer services. If someone wants more attention, faster turnaround, a higher level of service, then move up to the “Best” option at a higher price. The range of offerings gives you some flexibility and helps the customer feel that they are getting what they want at a price that makes sense.
Use psychology to set the right pricing message
Beyond the tiered pricing strategy, there are many other tried and true pricing tips based on psychology that can help decide how to price. Consider these tips:
Price Anchoring: There’s an old saying: “The best way to sell a $2,000 watch is to put it next to a $10,000 watch.” People use prices to help them understand where things fit in. Consider placing premium products next to standard options. This makes the standard option seem less expensive by comparison.
Discounts: If you are going to lower your price to get rid of seasonal products or to promote a sale, then be sure to discount your prices by at least 10%. Research has shown that lower price discounts (like 5%) aren’t enough to inspire people to buy. And if you are offering a discount, you should be doing it to increase your sales volume in exchange for a lower price – so be sure you do increase sales by making the discount worth noticing.
Two-for-ones: Offer product pricing in groups and people will buy in groups, even if the individual price is the same. 10 for $10 makes people more inclined to buy 10 than $1 each. Also, consider limits (“Limit 3 per customer”) as it gives the illusion of scarcity and being a bargain.
Bundles: Consider bundling two complementary products together to increase your sales of both. If customers are more likely to buy just one (or the other) of the two products (say earrings and a necklace), then offer a bundle to sell more. Just be sure that the bundled price is less than the sum of the two products. Customers feel they are getting a deal, and you are selling two products when you might have only sold one without the bundle.
Left Digit Effect: Even though it doesn’t seem like you’re fooling anyone with a price of $49.99 instead of $50, apparently you are. Our brains tend to focus on the left-most digit of a price and that is what sticks with us. So $49 feels like a bargain next to $50.
Stick with the 9’s: Because we all think we are on to the left digit effect, we expect to see prices ending in a 9. Prices that end differently confuse us and slow down the decision-making process. As a matter of fact, research has shown that a product priced at $39 sells better than the same product at $35!
Keep it simple: To make the price seem more affordable, research has shown that you need to make the price seem shorter. Believe it or not, our eyes trick us into thinking the number of characters somehow ties into the price. Look at these prices – they are all the same but the top one somehow feels like a better deal. Consider the use of a smaller font, avoid dollar signs, cents, commas. Extra characters give the illusion of being more expensive.
If at first…never stop your pricing experiments
Pricing strategy, like marketing and advertising strategies, should be constantly changing as you better understand your customers or offer new or different products. How can you change your pricing and avoid confusion? Here are a few suggestions:
- Make a time-sensitive offer
- Test new offers at the start of a new year or quarter
- Try different bundles or different tiers to your pricing or add new ones
- Focus on the value you are delivering rather than the price when you share price increase information
- Keep your base (“good”) price the same in a tiered pricing strategy but increase the others
- Change or add the services you offer when you alter your prices
Each product and customer is different; so don’t be afraid to experiment with your pricing for maximum profit and sales.
Are you struggling to get your pricing just right? We’ve included a free Perfect Pricing Primer Worksheet to download so you can price your products and services to increase sales. Click here to get it!
About Kelly Berry
Kelly Berry is the founder and co-owner of ResourceAbility, LLC, a consulting business dedicated to helping small businesses grow. Founded in 2005, ResourceAbility has been helping Wisconsin businesses and entrepreneurs ever since, with a focus on marketing research, business planning, strategic planning and budget analysis. Kelly has been certified as a Market Research Specialist by the National Center for Economic Gardening, and is a member of the Wisconsin Business Intelligence Team.
Prior to starting the business, Kelly spent four years teaching Applied Quantitative Methods at UW-Eau Claire and currently teaches adjunct both in the undergrad and the MBA program at UW-Eau Claire. She holds an MBA from UW-Eau Claire and a BA in Applied Mathematics from Drew University.
Kelly has experience in the service and manufacturing industries, with a focus on project management, data analysis, and market research. In her spare time, Kelly enjoys travel, playing tennis, reading, and spending time with her husband and teenage children.
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