Guest Post By Pricing Intelligently
Need more revenue? You needn’t adopt a sweeping sales strategy or create a new product offering. Your current operation just may need to tweak some prices. Pricing is the most important (and most overlooked) aspect of revenue-generation. Most firms take a stab at Pricing - but end up with results that don’t much to instill confidence in value. Keep reading, I’ll show you why - and how - you should pay attention to pricing.
In 1992, Mckinsey & Company published a study revealing that a 1% improvement in price yielded an 11% increase in profit. Of all the profit levers they analyzed - variable costs, volume, and fixed costs - profit came out on top as the most impactful variable. Thus, changes in profits can be made quickly and easily - if you know how to manage your prices. Here’s three tips to get you started.
Give Your Customers Options
Let your customer decide what to pay. By focusing on one, single-priced product offering, you’re alienating potential customers who may need not need all the features and benefits of a product. Different options allow you to tailor different options to different personas.
Of course, finding out what value metrics to leverage within different tiers is challenging. In a freemium model, for example, it can be difficult to decide just how “free” it should be. At what point will an upgrade to a more expensive tier be necessary? What should the pricing gaps between tiers be? To find these the answers to these questions, simply ask your customers. Gathering customer input will enable you to make an informed decision on feature offerings. Make sure the price you’re offering conveys the value they desire - which brings us to our next point about articulating value.
Don’t undersell. If your product is worthwhile, people will be willing to pay more than bargain prices. “Value” is not the same as price - value is what your product gives to customer in exchange for what they have to give up for it. Even if you are pricier than competitors, make sure you communicate that you are delivering a value greater than the cheaper option. If a competitor’s offering is perhaps more comprehensive, then do some research - what value do your customers see out of your product? What is their willingness to pay? It can be difficult to nail down your product’s value perception in a quantitative way, for this, we recommend prize optimization software. It is crucial to know if your price (i.e. your perception of product value) is aligning with customer expectations. Use the customer to get the answer.
A comprehensive pricing strategy also must align with these value perceptions. If a customer perceives something to be expensive, show them why. Don’t put the blinders on and pretend like it isn’t asking for a significant chunk of change - show why that chunk of change will make an impact in their lives. You can try some alternative pricing strategies to augment value perceptions. Are you bundling products that may be too expensive for your typical persona? Utilize Captive Product Pricing to break up products into core and complementary parts. For products with a low entry cost, freemium has become a common method of bringing new customers. Read up on some pricing strategies that work and find out why some went bust, and apply history accordingly.
Don’t guess - Pricing is a process
Don’t go with your gut. Getting pricing right requires iteration and feedback. There is no magic pill - It may not be right the first time, and given that people’s wallets are a sensitive issue, they’ll give you lots of feedback on the decisions you make. Be wary, however, of making sweeping changes based upon anecdotal evidence. It is far wiser to go with hard metrics that will predict a significant business impact. Sample from groups of your target persona to find out exactly what it is they want - otherwise, you’ll be losing money to do poor market calibration. You can do this on a small-scale by yourself, or you can use price optimization software.
Turning pricing from a guessing game to a value-based, iterative process is the key to raking in the extra revenue. Even though the extra money is nice, nailing down your pricing will get you in the habit of applying scientific methods to your business processes - a good habit that will lead to priceless improvements in your business.
Tell us how you price - do you guess? Do you have a process that you’re sticking to? Do you think anyway of this will actually work? Let us know by visiting our price optimization blog.