As many of you know, this article is Part 2 in a two-part series on product and service pricing. And I am happy to say that so far, Part 1 (4 Pricing Mistakes You Need to Stop Making) has generated a surprising number of comments and spurred some interesting debates among Marketing people. One of the more heated Twitter conversations compared and contrasted the pricing strategies of big companies versus small ones; and as I was following their discussion, one comment in particular—from a marketing executive within a multi-billion dollar firm—caught my attention:
“When it comes to pricing, big companies use hard data and statistics. Small companies just wing it.”
Not only did this comment completely reinforce the reason I started this blog in the first place, but it strengthened my resolve to never, EVER work for a member of The Fortune 1000 again. The fact is, coming up with a price for a product or service is EXPONENTIALLY more complicated at a small company, for the exact reason stated above. Small companies and startups not only lack the historical data often necessary for pricing analysis (FYI—companies like Ford have been collecting data since 1903), but many of them operate in niche industries where the majority of competitors are privately held, and offer no visibility into their pricing models.
So with all of the above in mind, are there a few product and service pricing strategies that small companies can use without ‘winging it,’ even in the absence of mathematical models and 100 years of economic trend analysis? Absolutely. And they are outlined below, along with two bonuses: real-world examples!
Pricing Strategy #1: Set Your Price Relative to Value or Quality
Overview: In its simplest form, this pricing strategy involves setting your price in direct proportion to the value or quality level you wish to project in relation to competitors—a higher price being indicative of a more valuable (or higher quality) product than a lower price.
Reasons for Use: Like the other pricing methods presented here, setting your price relative to value or quality is easy—and involves nothing more than a quick glance at the competitive landscape. Obviously this pricing strategy is most effective in industries where there is a significant difference in the value of each competitor’s product or service. But in some cases, this pricing strategy has worked extremely well in industries where the difference in value between competitive products is only perceived.
Bonus! Real-World Example: By definition (and by law) vodka is to be odorless, tasteless and colorless. In fact, Section 5.22 of the U.S. Government’s Standards of Identity for Distilled Spirits defines vodka as follows:
“. . . neutral spirits so distilled, or so treated after distillation with charcoal or other materials, as to be without distinctive character, aroma, taste, or color.”
Yet, despite the fact it is illegal for drinkers of Vodka to be able to tell the difference between brands, consumers can pay anywhere from $9 to $60 or more for a 750ml bottle. And as martini snobs are painfully aware, there is a $6 to $9 per-martini difference between a rail drink and one made from booze found on the ‘premium’ shelf.
Pricing Strategy #2: Set Your Price Based on Relative Features and Benefits (Competition-Based Pricing)
Overview: This method involves setting your price using similar competitive products as a baseline, then raising or lowering your price based on the presence (or absence) of specific features and benefits. Using an over-simplified example: if the market leader’s product has ten primary features and your similar product has only eight, you might set your price at 80% of the market leader’s price.
Reasons for Use: Not only is this method extremely intuitive, but it mirrors the decision-making process that most customers use when deciding among different brands (i.e. “Should I pay for more features, or save money and settle for less?”). It also makes the lives of your Sales and Marketing people easier, by giving them tangible differences to point to when potential customers ask why your price is different than a competitor’s. And finally, if you are marketing in an industry where regular improvements are expected, this method makes the pricing of newly released products and services extremely easy as well.
Pricing Strategy #3: Set Your Price to Compensate for a Reseller Discount, and Possibly a Discounted Reseller Price
Overview: This strategy involves setting the List Price of your product or service higher than you normally would, knowing that your reseller channel will demand a heavy discount—and possibly sell the product or service at a discount as well.
Reasons for Use: Primarily applicable in industries where a significant portion of a company’s products or services are not sold direct, this strategy allows a company to maintain a certain level of margin on sales, while still giving its reseller channel a standard percentage discount AND giving the reseller the room to sell at a discount as well.
Bonus! Real-World Example: In the mid-2000s I did some Marketing for a high-end independent publisher. One of the company’s business titles was a perennial category leader, outselling competing books by a margin of over 10 to 1. Because of this, the publisher only sold the book direct through its own e-commerce site, and NEVER discounted the book from its $39 List Price.
As the book became more popular worldwide, demand for translated versions increased. Although the publishing company sold the English version exclusively through its own store, it was decided—due to the inherent complications with International shipping and customs—that the primary sales channel for translations would be Amazon.com. However, a pricing issue soon arose. In exchange for reselling the books worldwide, Amazon.com demanded a 55% discount from the book’s projected List Price of $39 per copy. At a printing cost of only $3 per copy, the publisher had been enjoying $36 of margin on the English version of the book by selling direct, but the pending deal with Amazon.com for translations was much less attractive—under $18 of margin per copy. And to make matters worse, Amazon.com was planning to sell the books at 37% off of List Price—a move that flew directly in the face of the publisher’s desire to be the ‘premium price leader.’
So what did we do? We raised the List Price of all translations to $69. This allowed the publisher to sell books in bulk to Amazon.com at a price of $31.05 each (only $8 less than a direct sale) and still enjoy a $28+ margin per book. Additionally, the new List Price caused Amazon.com to sell the books at just over $43, thus retaining the publisher’s premium price within the marketplace.
Pricing Strategy #4: Set Your Price Based on Convenience
Overview: This pricing method is relatively simple: if your product is more convenient to buy, easier to use, or comes with an upgraded level of service than competitive offerings, charge more than everyone else does.
Reasons for Use: This pricing method is second nature in service-related industries, where customers are regularly presented with the option of paying more for upgrades or a wider variety of services. But it is also used extensively on the consumer product side. At some point in the last few months everyone reading this book has paid a premium for something because of convenience—a wireless router (no cords), a kinetic watch (no batteries), pre-cooked chicken wings (no grilling), a self-inflating raft (no pumping), a pre-assembled kids meal (no lunch box needed), pre-measured sugar or coffee packets (no thinking) or a jar of good old-fashioned pre-mixed peanut butter and jelly (for the truly lazy at heart).
Wrapping it All Up
When it comes down to it, the question “How do I effectively price my small company’s products and services?” can rarely be answered with math, formulas, and complex calculations. If it could, coming up with a price would be easy—we would simply feed a few numbers into an economic model, click the mouse, and wait for our over-used laptops to spit out a number. But the inherent lack of data at small companies forces us to price our products and services based on things like perception, convenience, and competitive offerings; which, in reality, is much more complicated . . . and nowhere close to ‘winging it.’
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