When creating the perfect product for your customers, you have to ask yourself a lot of questions. What do they need the most? How can you best meet those needs? For whom is this product designed? One of the biggest questions, though, comes up when pricing products and services: how much should I charge?
Pricing strategy is complex. There is no sugarcoating it. Yet every product and every service must be assigned a price. Fortunately, there is an art and a science to pricing products.
Mercifully, it doesn’t involve throwing darts at a dartboard and adding a couple of zeroes to your score.
Price Isn’t Just a Number: How Pricing Creates Meaning
Price isn’t just what you pay for a product or service. Yes, that is its primary purpose: to tell a buyer what a good or service costs. Yet price is also a data point which consumers weigh heavily into their decision-making process.
This is more easily illustrated than explained. Borrowing from our post about decision-making styles, imagine eight different kinds of buyers: the perfectionist, the image-conscious, the hedonist, the frugal, the novelty seeker, the impulse shopper, the confused, and the loyal.
Pricing & Decision-Making
The same person can be a different kind of buyer in different situations. These decision-making styles are flexible. Bear that in mind as we discuss how each individual processes prices.
Perfectionists seek long-term value. They may spend more money up-front, but their goal is to get the highest value out of their purchase. In a sense, they’re perfectly rational about pricing. This is rare.
The image-conscious flocks to more expensive items because they are more expensive. They’re a price snob! They want to buy something exclusive to set themselves apart from others.
The hedonist is just having fun. They’ll spend a lot because they can or because they want to. They’re not trying to impress anyone.
The frugal does the exact opposite. They spend the bare minimum amount of money, even if that means buying garbage.
Novelty seekers want a new experience and are willing to pay extra for it. They don’t pay extra to set themselves apart from others like the image-conscious does, but they will ignore a steep price tag and risk making a poor purchase (in terms of long-term value).
Impulse shoppers don’t think, they just buy. They are attracted to sales and price tags that end in 99 and 95. Pricing strategies for impulse shoppers go out of their way to make sure the impulse shopper doesn’t have second thoughts.
Confused shoppers are overwhelmed with decisions. They may pay extra for an established name brand because of the comfort and security that a familiar experience provides. They are not evaluating prices in a perfectly logical way.
Loyal shoppers keep buying the same goods, but does so in a way that seeks comfort whereas the confused shopper seeks to avoid discomfort. That is to say, the loyal shopper isn’t really evaluating prices in a detached, unemotional way either.
7 Factors to Consider When Pricing Products for Your Small Business
I mentioned customer decision-making styles because it’s important not to see pricing as a math problem. Prices are meaningful, emotion-loaded numbers first, and math problems second.
With everything mentioned above in mind, now we can talk about seven specific factors you should consider when pricing your products or services.
1. Your business goals
Before setting a price for your product or service, consider your overall marketing objectives. Your marketing objectives will affect the kind of customers you want to attract and how you go about attracting them.
Some common business goals include increasing the number of sales, increasing profitability, creating brand awareness, retaining customers, and generating leads.
Some of the objectives will push you toward different pricing strategies, so you need to figure out which objective or objectives are most important to your business. If your goal is to retain customers, you may want to focus on a high-price, high-quality product with a price to match. If you want to increase the number of sales, you may want to set a low price.
The point is: know your business and know what you want to do before you commit to a price tag.
2. Your target market
As discussed above under Pricing & Decision-Making, different people see prices differently. The same person may be frugal with cars but image-conscious with clothes. That means when choosing a pricing strategy for your business, you need to think about your target market.
Your target market will likely gravitate toward one or perhaps two different decision-making styles. Talk to your potential customers and conduct marketing research until you figure out how the specific people you want to sell to react to different prices.
3. Cost of producing your product
No matter how earnestly you wish to please your customers, you need to make sure that you make a profit off what you’re selling. Large companies such as Amazon may be able to take a loss on tablets in order to sell something else, but you likely cannot.
Make sure to consider not only the manufacturing and shipping costs, but also the selling and advertising costs. You need to turn a profit when all is said and done to consider a product or service a success.
Don’t just stop at covering your expenses, though. You need to consider profitability. Making 50 sales at a slightly higher price might actually be better for you than make 100 sales at a lower price. You need to crunch the numbers and figure out where your product is most profitable.
If you’re not even sure where to begin, then I suggest the following. First, figure out how much money you make from an average customer. Next, figure out how much it costs to acquire a new customer.
The first figure is known as lifetime value. The second figure is customer acquisition cost. In general, you want lifetime value to be three times greater than customer acquisition cost.
If you cannot quite pull off a 3:1 ratio here, you have a few options. You can upsell or cross-sell to make more money from each customer. Similarly, you can simply charge more per item. You can create entirely new products to sell to existing customers. Lastly, if you can’t make a steady, solid profit, you can always push your product farther along in its natural lifecycle.
5. Positioning through pricing
We’ve talked about market positioning at length in another post. As a quick recap, a market position is when you sell to very specific people with very specific brand messages.
Recall once more that pricing creates meaning. That is to say, a handful of digits after a dollar sign send a marketing message about the kind of company you are. A low price says “we’re here to save you money.” A high price says “we make premium quality goods.”
Figure out what is important to your customers. Think in terms of decision-making styles, if you must. Are they the perfectionist, the image-conscious, the hedonist, the frugal, the novelty seeker, the impulse shopper, the confused, or the loyal?
6. The competitors’ pricing strategies
Of course, even if you do your homework on your customers’ psychology and triple-check your own revenue projections, you could wind up at a price that looks wacky. This is where context is crucial.
Pay attention to what your competitors are charging. If you charge somewhere in the middle of the pack, that’s pretty safe. If you charge way more or way less, then you probably need to gravitate closer to the center or double-check your assumption that “different is good.” Sometimes having a really different-looking price is worth the risk, but it is still a risk.
You might be able to create phenomenal tennis rackets and make a profit selling them for $5 each. Yet if everyone else is charging $20 or more, then you can get away with charging $15.99 and consider yourself a “low-cost leader.” Likewise, you might have just made the best board game in the world, but the $149 price tag is a massive red flag for many people, even if that’s not fair.
7. The price itself
Lastly, you’ve probably noticed that prices tend to end in .95, .99, or an even .00. At the gas station, you may even see the strange anomaly that is 9/10 cent prices per gallon.
People have been fighting for years to prove or disprove whether or not psychological pricing strategies affect consumer behavior in one way or another. The results have been mixed.
Our advice is this: if you’re looking to appear cheap, go with the .95 or .99. If you want give people an impression of luxury, go with a .00 price. We suspect it makes a difference, if only a small one.
A couple more aspects to keep in mind here is that psychological pricing will change in the near future. A lot of countries are getting read of their .01 and .02 coins, meaning that .99 and .98 prices are falling out of favor there.
Additionally, when selling online, websites such as Amazon and eBay allow you to sort by price. Having a price that is one cent lower than a competitor will make your item show up higher in the listing when sorting from low to high.
Final Thoughts on Pricing Strategy
As with all things in marketing, consider your customers’ needs and wants. A price conveys meaning through a simple number. Think about your marketing objectives and what kind of image you want to project, and then name your price accordingly.