There’s more to pricing your products than simply calculating acceptable profit margins. While some business owners use a basic model of pricing strategy, calculating the cost of the product and adding on a healthy profit, savvy marketers know that there is much more to it than that.
There are a number of pricing strategies that businesses can use that can actually have a direct impact on sales. So the next time you’re pricing a product or service, keep in mind that the price you choose is more than just a random number: it’s a strong indication of perceived value and it can have a huge impact on sales.
It’s just not about having the lowest price…it’s about choosing the smartest price.
Pricing Strategies That Can Increase Sales
Offering Products at Slightly Different Prices
In theory, listing all your products at the same price would make it easier for your customers to choose, right? Surprisingly, research by Yale University has shown this not to be the case.
Rather than making the choice easier for consumers, pricing products similarly actually resulted in an overall decrease in sales. With one less determining factor in place, consumers were more likely to defer their purchasing decision to sometime in the future.
Takeaway: Make sure you offer prices at varying price points. Even if you have two products that are virtually identical, pricing them even a few cents apart can make purchasing decisions easier for your customers.
Altering Your Pricing Format
An experiment was carried out by Cornell University at St. Andrew’s Cafe. They decided to test different pricing formats using 3 different menus to see how minor differences would affect consumer spending.
The 3 different menu types were as follows: one had the price with a $ sign in front of it, one had the price without the $ sign, and one had the number spelled out (for instance, twenty dollars).
While many expected to see higher spending with the third pricing format, they actually found that customers with the numeral-only menu (20, rather than $20) actually spent the most.
The researchers of the study were quick to point out that because this study was limited to lunch at one particular restaurant, the findings may not apply to all pricing strategies. However, what the study did make clear was that consumers have preferences when it comes to pricing formats; this means it’s always a good idea to test various pricing strategies for your own products and services.
Takeaway: Consider not just your price points, but your pricing format as well. Prices without the dollar sign ($) may outperform those with the sign. This may be different for your business or industry, so be sure to test this theory for yourself.
In a move that some consider quite risky, Netflix has decided to try out a new pricing strategy. Since their inception, Netflix has kept with the same price: $7.99, even though their competitors’ costs – namely cable providers – have gone up year after year.
But rather than simply raising their price across the board – something its current subscribers would likely not be too happy about – the company has decided to try out a pricing strategy known as ‘decoy pricing’.
The strategy goes something like this: When faced with 2 choices – a lesser priced item and a higher priced one – consumers will tend to choose the lower priced item. However when faced with 3 choices of varying price, they will tend to choose the item with the middle price point.
It seems that consumers don’t want to feel cheap (by picking the cheapest item), but also don’t want to feel too extravagant (by choosing the highest priced item).
So, getting back to Netflix, the company has decided to offer a 3-tier pricing structure: A price lower than their current 7.99 for a one-device subscription, a premium option that goes for more than 7.99, and an option that’s even better than premium at a higher cost.
Can you see what Netflix is trying to do here? Essentially they are counting on the majority of subscribers signing up for the mid-priced option, even though it will be more than what they’re currently paying. However since they have the option of paying less, they won’t feel like they’re being forced to pay more. And because they’re not paying the super-premium price, they’ll feel good about getting a ‘deal’.
Takeaway: Try offering similar products and services in groups of 3, with 3 different price points. Count on your customers being most likely to purchase the mid-priced option.
Using the Number 9
We’ve all heard about the benefits of using the number ‘9’ in our pricing. Study after study has showed that ending a price with a 9 – for instance, .99 rather than $1 – increases sales. But why is this?
Research seems to suggest the ‘left digit’ effect; namely, that we tend to look at the most left-dwelling number when comparing prices. So, rather than thinking we’re paying 1 cent less than $5 for an item ($4.99), we tend to think of it in terms of $4 and some change.
It’s all about what consumers perceive: a price with a lower starting number is perceived as being less expensive. It may also be perceived as being on sale, which may be just the incentive buyers need to make the purchase.
Takeaway: Because consumers perceive round-number prices to be more expensive, end your prices with .99. Some studies have also shown that even dollar amounts ending in ‘9’ do better; for instance, $49 may even outperform $45. Try implementing this strategy the next time you’re determining the price of a product or service.
Have you ever wondered why some service-providers ‘bundle’ their services? For instance, a cable provider may offer 3 options: a basic TV package, a package offering the basic channels PLUS your choice of add-on packages, and an all-inclusive package? While some of their strategy may be based on anchor pricing (as mentioned above), it is largely because ‘bundling’ prices in this way puts the seller at an advantage.
Think about it: By bundling services together, the consumer is unable to directly compare prices between different service-providers. It’s unlikely that various service-providers would have identical bundles, making it impossible to know exactly who’s offering the best prices.
Takeaway: Some businesses bundle their products or services, giving them an advantage over their customers. In some industries, businesses even have an unspoken agreement to bundle all their services to ensure consumers can’t directly compare pricing. It’s good to be aware that this is routine practice among businesses in certain industries.
Can’t We Do Away With All These Games?
Pricing strategy can definitely come across as manipulative and unnecessary. Why can’t we just do away with all the games, and just focus on offering the best price possible?
One company had this idea, and attempted to carry out a new pricing strategy called ‘Fair and Square'; JC Penney CEO Ron Johnson decided that consumers were sick and tired of all the gimmicks surrounding pricing. Gimmicks like inflated pre-sale prices, and constant coupons and discounts.
So in an attempt to ‘do away with the games’, Johnson cut prices 40% across the board, lowered prices to round figures (no more .99 endings), and held sales about once per month (instead of their usual 600x per year).
While the idea was certainly admirable, the strategy didn’t go at all how Johnson had imagined. Rather than consumers appreciating the completely transparent, no-nonsense approach to pricing, the company’s stock prices fell 55%, sales fell 28%, and overall revenues dropped 40%.
It turned out that consumers were confused by the new price points: for instance, if an item was priced at $20, how could they know whether or not it was a good deal? In the past, if the product was marked down from, say, $30, they would know they were getting a good price. They would be more likely to purchase what they perceived to be a good deal – that the product was actually worth $30, but that they were getting it at a discount.
It seems that perhaps we, as consumers, actually like the game of pricing: at the very least it’s comfortable and familiar – it’s all we really know.
As you can see, the prices you assign to products and services are a critical part of your marketing strategy. Pricing products too low may imply poor quality and low value, whereas pricing items too high – while implying quality and prestige – may price you right out of the market.
How much thought do you give to your pricing? Have you used any of the strategies above? Let me know below!
Image courtesy of arztsamui