Your pricing says it all… But what does it say?
If your business is typical of many that I work with, your customer list is a collection of those customers who fit your ideal client avatar and those who don’t. The ones who don’t deliver you enough revenue, or who resist paying a higher, more realistic price, or who are a pain to serve likely are in your customer portfolio because of one of two reasons: Either when you started out you didn’t really know who you wanted or were best equipped to serve. Or you took them on because you needed revenue and customers and you felt that you could not be picky. (Anyone breathing who offered you money looked great!)
Sound familiar?
The fundamental concept to get your head around if your customer base does not align with the ideal customer you are seeking is that of price positioning.
Is lower better?
Before I jump into explaining price positioning, let’s recognize how most business people approach pricing. For the typical business decision maker, pricing is an instrument that regulates demand. Simply, the idea is, lower prices attract more business, higher prices attract less business. The idea boils down setting prices as low as possible while still making money on the business that you attract.
This demand regulation approach to pricing is not ideal, first and foremost because it ignores a primary function of price: Communicating value.
That’s why, if you play a role in pricing products or services, it’s really helpful to understand price positioning.
Price positioning is the intentional setting of a price point in comparison to your competitors to communicate a certain value proposition to your prospective customers. Note something very important about this definition: It does not say that you should price as low as possible to create demand. Indeed, price positioning may lead you to raise prices, even to price significantly above others.
Price positioning is enmeshed with your brand promise, which is what you communicate that potential customers should expect from you when they buy your products or services. Price positioning is recognizing that pricing is important, indeed essential, to brand equity: It conveys a quality message and influences the place your brand takes in your target consumer’s mind.
Reality: Businesses often underprice or overprice because they don’t know exactly what they are communicating to their customers.
Where do you sit?
Price positioning indicates where a product, service or brand sits in relation to its competitors in a market as well as in the minds of different customers.
Price positioning impacts where a product is seen on the cheap (low price) to expensive (high price) continuum, as illustrated on the price-value matrix below.
The position of your product, service, or brand in the matrix is based on your brand promise, competition, and pricing objectives. A different position and a different price point result in the targeting of different customers.
What does your price positioning mean?
Now, hopefully, you see the relationship between your price and the value you offer (or at least claim to offer) the potential customer. Having placed your product or service pricing and what your branding conveys about quality/value on the four-square matrix shown above, you might want to ask and answer these questions:
Is your pricing mismatched with your quality, value, and brand promise (meaning signaling the wrong message about quality or value)?
Are you leaving money on the table (meaning can you raise prices given the value you deliver and where you sit versus the competition)?
Are you not getting sales (meaning are your prices too high commensurate to your quality, value, and brand promise and what the competition offers)?
What to do about a misaligned price positioning - or to avoid such a misalignment - leads us to delve into pricing strategies. (Ah, yes, I am a strategist so that’s where my head inevitably goes.)
Pricing strategies abound
There are many pricing strategies. Here are some common and less common pricing strategies, and why and in what circumstances you might want to consider using them. WARNING: Playing too much with pricing can be toxic. Price incorrectly, and your business may become my next case study of failure!
Cost-plus pricing: Setting prices by adding a markup to the production or acquisition cost of a product or service. This approach ensures that you cover your costs and generate a desired profit margin. However, costs set by using cost-plus may bear no relationship to the pricing strategy that will attract business.
Economy pricing (undercut): Setting prices lower than competitors may work and produce gains in market share for businesses that can produce at a lower cost and sustain lower overhead than competitors. Undercutting is offering lower prices than competitors’ offer in some categories to attract attention and customers and charging prices comparable to or higher than the competition offers in other categories. If you are not a low-cost provider (meaning that your costs are not lower than competitors), economy pricing can result in consistent losses and may be the road to ruin.
Value-based pricing: Setting prices based on the perceived value of your product or service to customers. It involves understanding the benefits, solutions, or unique value proposition your offering provides and pricing accordingly. When pursuing a value-based pricing strategy, consider changes in customer preference, market demand, competitive offerings, and the perceived value of your product relative to that offered by the competition. Recognize that value-based pricing may not mean that you cover your costs and generate your desired profit margin.
Price skimming: Setting the price of a product or service high enough to skim from competitors those customers who are willing and able to pay more. This strategy clearly positions you at the top of the market: It tells consumers something is special (i.e., worth paying more for) about your product or service. This strategy can be highly profitable but for it to work it’s imperative that you deliver the higher quality that’s implied and that customers understand why they would pay more for what you deliver.
Competitive pricing (match or surround): Matching the price of a competitor's offering or surrounding a competitor’s pricing, meaning offering a price that is similar to that offered by the competition and another price that is lower or higher than the competitor's price. Competitive pricing without consideration of costs, overhead, margins, and product or service differentiation can produce undesirable results (including lack of profitability or lack of market share).
Penetration pricing: Attracting customers to a new product or service by offering a lower price during its initial offering. The lower price helps a new product or service penetrate the market and attract customers away from competitors. Recognize that a penetration strategy must be short lived unless your have boundless resources to invest in it.
Premium pricing: Businesses with high brand value can use premium pricing to achieve higher margins. A high price has to be justified by offering a “premium” product or service. Risks of under-delivering the premium aspects of your product or service can destroy your profit, especially in this case as you are likely to be then undercut by competitors.
Luxury pricing: Setting a higher price to convey a sense of exclusivity and prestige. This pricing strategy hinges on the Veblen Effect, a phenomenon within behavioral economics where the demand for a good or service increases as its price rises. This effect is rooted in the concept of conspicuous consumption, where individuals conspicuously display and consume goods and services to signal social status and prestige. The Veblen Effect suggests that certain luxury or high-priced items become more desirable as their cost escalates, as consumers perceive ownership of such items as a symbol of affluence and exclusivity. (Think yachts or bespoke sports cars bought by billionaires.)
Psychological pricing: Considering how pricing affects customer perceptions and behaviors. Examples include:
Setting prices that end in certain digits (e.g., $9.99 instead of $10)
Using a bundling strategy to justify higher prices.
Using free or low-cost pricing for a basic option of a product or service and offering premium versions at higher price points.
Psychological pricing involves analyzing customer response/price sensitivity, purchasing patterns, and competitor pricing and adjusting your prices accordingly.
Dynamic pricing: Adjusting pricing based on real-time market conditions, customer behavior, and demand. Increasing or decreasing prices based on factors such as seasonality, time of day, inventory levels, or customer segment. By leveraging data analytics and pricing algorithms, you can optimize your pricing to maximize revenue and profitability. This approach to pricing requires sophistication and discipline.
Don’t forget terms
While we and those to whom we are selling tend to think in terms of the stated price of a product or service, the actual price is wrapped up in the terms that come with accessing and using the product or service. Simple example: All other things including stated price equal, you will naturally favor the product that comes with free delivery over the one for which you will need to pay for delivery.
Here’s a non-exhaustive list of terms to consider when setting pricing:
Availability
Delivery cost
Speed of delivery
Method of delivery
Packaging
Unit size
Payment methods
Payment terms
Credit
Guarantee and warranty
Reorder pricing
Preferred customer status
Club membership
Discounts on other products/services
Conduct a strategic pricing audit
A strategic pricing audit can help you understand your price positioning. Consider:
Alignment with Business Objectives: Does your pricing strategy support overall company goals?
Brand Value Proposition: Does your pricing accurately reflect the value you promise and the value that your customers perceive?
Competitive Positioning: How does the your pricing compare to competitors?
Cost Structure: Are your costs, direct and indirect, accurately reflected in your pricing? Are they covered to the extent that you plan to cover them? (Recognize that you may intentionally price something as a loss leader or decide that only direct costs need to be covered by a specific offering, with the overhead being covered otherwise.)
Profit Margin: Are your net and gross profit margins sufficient and consistent (if that’s your objective) across product or service lines?
(Note that a pricing audit can then devolve into addressing important, but more tactical, questions, such as how pricing affects customer retention, price discounting, pricing segmentation, price monitoring and responsiveness to market change, pricing communications, and much more.)
It’s worth your time!
Recognize that your pricing says it all about your brand and product or service offerings. Diving into your price positioning is a worthwhile exercise because your pricing can be used as a strategic tool to attract your ideal customer and improve your financial results.
