product pricing for profit

A beginners guide to strategic product pricing

Our perception of price for any given product or service is directly related to cost and value. Perceived cost, for example, has a bigger impact on consumption than actual cost, according to a study by Harvard Business Review. These perceived costs are often shaped by pricing policies, which can also hide costs. Here’s a deeper look at strategic product pricing.


Understanding price perceptions

strategic product pricing ted talkBehavioral economist Dan Ariely recently gave a TED Talk presentation on strategic product pricing, in which he compared the following choices in an ad in The Economist:

  • an online subscription for $59
  • a print subscription for $125
  • both for $125

Ariely wondered why the ad would offer both a weak and strong choice for the print subscription. Getting both the online and print subscriptions is clearly the best deal. He used the ad for an experiment with his class and found that most people wanted the combo deal. Then after eliminating the unpopular middle option he found that the least popular option became the most popular.

It turned out the middle option was useless as a choice but helped people decide what they wanted. It helped make the last option look like an amazing deal. It’s an example of how people are not always completely in touch with their preferences. Sometimes people naturally accept defaults and other influential options that are presented to them in a certain way.


Boost sales with strategic product pricing

Dan’s main point is that the pricing of a product affects your chances of how well you can sell it. Ultimately, if you can communicate value and ROI effectively, you may boost sales from pricing products and services properly. This is where strategic product pricing comes in to play. You must also consider that a wide range of factors and external forces will impact your ability to maximize profits.

Strategic product pricing requires creating a unique positioning statement that summarizes the value you offer. This message should be crafted with the target audience in mind. It should explain why you are different from your competition and why people should choose your brand over others. The statement should also reflect messages that are already part of your overall brand awareness campaign. Developing a clear positioning statement helps provide a reference for messaging.


Crafting an effective positioning statement

Ideally, your positioning statement will reflect how you want consumers to think about your products and services. Here are examples of strong positioning statements:

  • For convenient family grocery shopping, Countdown provides fast and competitive shopping options and ways for mums to shop from home.
  • For companies that need a logo produced quickly and affordably, The Logo Design Lab provides a fast all-in-one service.

Another way to sharpen your positioning statement is to ask a series of survey questions that help define the uniqueness of your product and service, such as:

  • What main service do you offer in a few words? Example: digital marketing plans
  • What makes your products or services unique?
  • What types of consumers specifically fit your target market?
  • What value do you bring to your customers?
  • What do your customers do for you?

Use the answers to create the building blocks of your positioning statement. It should help you identify how you help specific groups of people and how it helps them achieve their goals.


Research your market position

Once you have developed a clear positioning statement, you need to research your industry to find out where your business fits in your market. According to Inc., conducting such a competitive analysis can lead to the following benefits:

  • More in-depth understanding of the market
  • Better potential for reaching target customers
  • Ability to make market forecasts
  • Learning about how overall economic climate affects the market
  • Raise awareness about what competitors offer at specific prices
  • Determine economics for ancillary markets
  • Helps you find new customers

Here are some resources to help you conduct your competitive analysis of the market:

By studying your competitors, you will have a better understanding of how you are perceived in the market and what role you can play. In the process, you will learn about fair pricing of your products and services, based on the value they bring your customers compared with rival brands.


Determining price and making adjustments

To ensure that you are pricing your products properly, here are some questions to ask about them:

  • What opportunities without competition currently exist in the market?
  • Are you able to fill those market holes?
  • Will your branding strategy impact how you price products?

strategic product pricing matrixDetermining the most appropriate price can be a balancing act between avoiding scaring away customers with high prices and avoiding low pricing, which may create a perception of lower quality. While offering competitive prices is extremely important, other factors also affect pricing. Much of your product pricing strategy will depend on where your niche fits in the market and how you portray your brand.

A key example to study is Apple, how Steve Jobs developed it as a luxury brand compared to more office-oriented computer makers. By associating the brand with nice packaging, clean design and uniqueness compared with other computer brands, the company built a strong bond with loyal followers, particularly from the artistic community.

The streamlining of products with sleek features and an emphasis on user-friendly software helped Apple gain the image of being a cutting edge brand in both style and efficiency. Due to the massive number of reviews about the quality of Apple’s products, the company was able to justify premium prices for its computers and software.


Packaging a quality brand

Many marketing firms that offer high-end services deliberately set higher prices than their competitors. This product pricing strategy serves a few important purposes. First, it can elevate your brand and help establish a perception of quality. It also helps weed out prospects that have no interest in your product or service.

It’s important to focus your marketing efforts on target customers and not waste too much time or resources on attracting random unqualified leads. You will be more productive if you prioritize your focus on leads that are willing to pay top dollar for your offering. If people think your price is too high, there’s a chance they aren’t that interested in the quality to begin with. By setting high prices, you have a better chance of attracting warmer leads that are are serious about the quality of your brand.

Just as important, however, is your ability to deliver what you promise. Any claim you make in advertising or branding must be backed up with evidence, or it can hurt your reputation. These days consumers are less forgiving when a company lets them down, since multiple alternatives are just clicks away. You must be able to live up to whatever value you claim that you can deliver that makes you a better choice over competitors.


Setting competitive prices

Even though the goal is to make as much profit as possible on each sale, there are still reasons to set prices below competitors. Most of the time, large companies like Amazon and Walmart can benefit from offering low prices since they have large resources to fall back on, in addition to increasing the chances of selling the product at high volume.

Small businesses can take advantage of this pricing methodology in certain situations. It depends on market conditions, such as how crowded your market is and its level of quality. If your research shows that lower prices are rare in your market, it’s an opportunity to step in and take market share. You may want to offer speed rather than quality as to what makes your business stand out, at a lower price than what the market normally offers, which defines the value you provide.

Whatever prices you set, it should be based on your own financial situation, combined with current market conditions. In other words, you shouldn’t be willing to risk going broke in an attempt to undercut competitors. Your pricing should fit your business model and should not be based on other businesses if you do not have sufficient resources.


Product and brand quality

Consumers ultimately gravitate toward the products they identify with either because they are familiar with the product or connect with its branding. What works for one company may not work for another in terms of pricing or positioning statements.

Even though you may be able to learn from the marketing techniques developed by industry leaders, it’s most important that you can communicate what your unique position in the market is. Do you appeal to luxury consumers or is your product’s value more related to the utility it provides? Another question to ask is to what degree is your target market being served? Do consumers have multiple choices or just a few?

If your business is affected by several competitors offering similar products at lower prices, how should you respond? You can either try to race with them to the bottom of pricing or figure out how you can boost the value for higher-end customers. Here are the three most essential questions you should keep in mind:

  • How much value does your product or service provide?
  • Where in the market is your product or service competitive?
  • How does your pricing relate to your unique market position?

Once you have clear answers to these questions, you will be closer to realizing the most appropriate prices for your products and services. Sometimes pricing ends up being a reaction to what competitors do in the market, but you can keep pricing under control the more you gain edges in performance over competitors. I hope this helps you understand the principles of strategic product pricing.

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