Pricing strategy is a tricky issue.
Price too high and you’ll never gain traction in a market. Price too low and you’ll never make a decent profit. What’s the right approach?
I recently asked some fellow marketing consultants how they help clients define pricing strategy. There were a few different methods so I wanted to share it in this post.
1. Academic approach
First up, some people use an academic approach, called Van Westendorp’s price sensitivity meter. It has four questions:
- At what price would customers consider the product so expensive that they would not consider buying it? (Too expensive)
- At what price would customers consider the price of the product so low that they’d question its quality? (Too cheap)
- At what price would customers consider the product starting to get expensive – not out of the question, but they’d need to give some thought to buying it? (Expensive)
- At what price would customers consider the product a bargain – a great deal for the money? (Inexpensive)
The answers are plotted on a graph and analyzed. Here’s an example:
This is a fabulous tool – IF you can get the data. This works well in consumer products, but not so well in Business-to-Business (B2B) because of the difficulty of getting data. So most marketing consultants who deal in B2B didn’t have a lot to say about good ol’ Van Westendorp.
2. Pragmatic Approach
Which leads to a pragmatic approach favoured by those of us in B2B:
- How much is the product worth to the customer? (What problem does it solve, how costly is that problem?)
- How much can the customer afford to pay? (This dictates target markets as much as it does pricing strategy.)
- What does it cost to produce and deliver the product or service? (If the answer to #3 is higher than #1 or #2, you have a problem.)
While this is a simple framework, it’s a practical starting point for pricing strategy. The fourth question that I suggest adding to this framework is about perception – what does the customer perceive as the value of what you’re offering?
3. Research Approach
One great way to add nuance to pricing strategy, and tackle the issue of perception, is conjoint analysis. Conjoint analysis allows companies to test various price and product scenarios and determine the best cost and price combination. Here’s a great primer on conjoint analysis if you’re interested in using it in your business.
An effective pricing strategy is one of the most powerful ways to grow revenues and profits, but – based on my conversations with other marketing consultants – there isn’t a black-and-white, sure fire approach. If you have a great story on how you’ve set pricing in your business, with great results, I’d love to hear it.
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