As an advisor to new business owners, I’m accustomed to seeing primarily the simple traditional product pricing strategies, usually driven by competitor prices, or cost plus a reasonable margin. I often wonder whether you as the entrepreneur have worked as hard on your pricing strategy as you have on your innovative solution. I hate to see money left on the table through poor pricing.
For example, I believe that Starbucks surprised most people by proving that they could take a commodity business, a coffee shop, and make it a worldwide profit winner, just by justifying premium pricing with a quality product, the right locations, personalized service, and appealing to the professional customer personas.
As I look around at other great businesses out there, I see many have incorporated innovation into their pricing strategies, as well as their products or solutions. By definition, true innovations are things we haven’t seen yet, but here are a few pricing alternatives that have contributed to the success of companies I know, and I recommend for evaluation by every business leader:
Charging a premium for your technology innovation. If your innovation is real, it brings added value to the table, so most customers, especially early ones, are willing to pay a premium over competitive products. Later, when that innovation becomes the new norm, you must be prepared to lower your price to meet new competitors.
Elon Musk and Tesla are prime examples of this approach, when the market for all-electric vehicles was new. Now that it is more mature, they are offering lower-cost alternatives, consistent with non-electric competitors.
Define ancillary services to increase the average price. Small but important options to provide expedited delivery, or priority service can significantly increase your average sale, without being tagged as a higher price. Here it is important to monitor customer feedback, as you may find one of these services could be a revenue source in itself.
Set a price based on your customer psychology bias. If competitor prices are high, keep yours in the same ballpark, but slightly lower, despite lower cost. Be aware that most people see two digit numbers as lower than three digits. Convince customers that you are selling at a loss, or use a sale price much lower than the original price.
Include free digital products to enhance physical ones. Your incremental costs to ship software tools to complement a retail device, such as a smart home product, is near zero, and it may justify a sizeable price increment. Digital products also allow users to be advocates for you and help each other, thus reducing your support and marketing costs.
Offer a “name your own price” to pay what you want. Believe it or not, in some market segments, customers with many alternatives, who see extra value from your product, will altruistically offer more than you might need to compete and thrive. Everlane and Radiohead have used this strategy on specific items to build their customer base.
Flat pricing – charge the same for many combinations. This pricing strategy started primarily associated with buffet restaurants, but the concept has now been applied to many other businesses. Amusement parks sell "day passes," and cell phone providers sell “unlimited use” plans. With e-commerce online, I see many new industries jumping in.
Pricing based on personal attributes and timing. Often online consumers will provide information such as birth dates, education levels and occupations. These can be used to estimate their propensity to buy, and combined with the time of day, and competitive trends, to offer an optimal price to close the sale as well as meet your revenue targets.
Offering a lower price to penetrate the market. The lower price helps a new product or service penetrate the market and attract customers away from competitors. Of course, raising prices later is difficult, unless pre-specified. Examples include an online news website offering one month for a dollar, or a bank offering free checking for six months.
So you see, pricing a product is not a simple exercise, and requires the same creativity that you have put into your solution and your marketing. Your goal is to make each of these elements complement the others, and deliver a more competitive and successful business.
*** First published on Inc.com on 04/28/2021 ***