The Art of Pricing

The Atom Team

Many businesses struggle with price-setting, but real success lies in understanding and implementing different and more effective pricing strategies by challenging conventional pricing norms and thinking differently about how to price a product or service.

Why Pricing Needs a Rethink

Many businesses become stuck using pricing strategies such as hourly rates or project fees, or a simple cost-plus-margin approach. However, these traditional methods may not always yield the best results.

A well-executed pricing strategy helps to frame the value of a product or service, whilst maximising profits for the business. Here are a few strategies to consider:

Three-tiered Pricing Structure

The proposition of a three-tiered pricing structure enables businesses to give customers more choice by offering a different package for each price point. This structure often involves an entry price, a mid-range option, and a premium package. This segmentation allows customers to choose the package that provides them with the best value, aligning the customer’s willingness to pay with the perceived value of their chosen package.

Discounting: A Double-edged Sword

Throughout the pricing process, the subject of discounts is often considered a contentious point. While discounts can secure sales or prompt customers to buy more, it’s essential to consider the direct impact of discounts on net profits. If you’re always discounting, your customers will constantly expect a lower price, thus reducing your perceived value. A well-planned discounting policy can control this risk, establishing set limits for discounts and ensuring they are in line with the business’s financial goals.

The Power of Value

Look at your offering from the customer’s perspective, by understanding how your product or service provides value or solves customer problems. Whether an offering saves customers time or money, enhances their experience, or solves a critical problem, identifying and communicating this value forms the core of effective pricing. The magic ingredient of pricing success is understanding value.

Successful pricing involves grasping not only the direct, much-pondered questions of ‘How much should we charge?’ but also delving into deeper, value-oriented queries like ‘What are customers willing to pay, and why?’. By appreciating customers’ perceived value, businesses can create a more comprehensive and effective pricing model, securing their ongoing success.

Communicating Your Pricing

Another critical aspect of pricing is how it’s communicated. Using a range instead of a fixed number helps set the limits of your pricing and anchors the clients’ expectations within this range. Presenting a high number first and then descending can lessen the psychological impact of the cost. This gradual revelation of options, starting with the premium, paints a clearer picture of the different values each package can offer.

Decoy Pricing

An interesting pricing strategy is the decoy pricing method. This tactic involves using a product comparable to your premium offering but with fewer features or worse value. This intrigues customers to lean towards the premium product offering since it seems to deliver more value for the same price. However, it should be handled carefully as this strategy can be seen as manipulative for clients.

Crafting a Pricing Policy

For better clarity and control over your pricing strategy, it’s recommended to draft an internal pricing policy. This policy outlines how you calculate, track and monitor your pricing. It can include your price positioning in the market, competitor comparisons, and pricing controls, among other factors. Additionally, the policy can incorporate psychological pricing tips and how you present your prices.

Reviewing Your Pricing Policy

Once documented, a pricing policy shouldn’t collect dust but should be regularly reviewed and updated. Also, make sure that your policy is adhered to by all stakeholders in the business, including your sales team. By following this policy consistently, you’ll instil discipline and rigour within your business.

For businesses to succeed financially, it’s crucial to rethink conventional pricing methods. Whether it’s adopting a three-tier pricing method, setting a price range, dabbling into decoy pricing or drafting a comprehensive pricing policy, with the right tools, businesses can create more comprehensive and effective pricing models. Mastering these pricing techniques will help businesses align with their customers’ perceived value and secure their ongoing success.

Listen to the full podcast on Pricing for Success here.

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