Think like a consumer for a second here, you are at a department store and you want to buy Salt. There is a department store labelled Salt that costs a few bucks lower than a branded one. How does one choose? What are the things to consider when buying one of the two- you might have had better experience with the branded one, one can be healthier, one may be better packaged. The question you need to ask is how the branded one justify the higher price of a few bucks to you. There are no universally right or wrong answers here. Understanding how different users do these calculations is key to optimally price your product.
The exponential rise of online retail has destroyed the older tricks from the book. You can no longer fool consumers into believing your ‘price is right’. Consumers do not want products to seem like a steal, this only makes them suspicious of what will arrive in the box, They are not going to buy your product because it is the most expensive one either, you need to come up with the most optimal figures. This is an opportunity for preciseness in Pricing and a flexibility for minor deviation by providing more details which leads to better consumer segmentation. Combining the above attributes constitutes improved product pricing.
Precision - Precision operates from ‘Pricing Indifference band’. As the term suggests this is the price range in which change in product price does not impact willingness of the consumer to buy thus limiting the enterprise risk to a minimum. In this band you can test the limits of how high or how low to price your product without causing too much damage. An example is if you could conduct limited duration discounts rates at various price points to see which ones are more successful and compare all these stats before you arrive at the most suitable price.
Adaptability - Remember in the good old days how they would whiten out an older price on movie/concert tickets , train/bus tickets? With the arrival of services like ticket master , online passes you can adjust prices on the go. Prices can be spiked conveniently on demand or slashed in the lack of it, thus capitalizing on popularity and high demand.
Consumer Segmentation - Offline every consumer is a mystery unless you are Sherlock Holmes, but on the internet there is a scary amount of information available about the consumer that is tracked through cookies. This knowledge can be effective to better market your products to consumers who have demonstrated even a slight interest towards your cause, this is 100% more effective than marketing to the whole world, you can play your music to people who would actually listen. This translates not just into more successful conversions but also identifies consumers who are willing to pay more than the rest.
Let’s get your pricing right, by amalgamation of these perspectives with Value Based Pricing.
Value based pricing is a notoriously misunderstood concept albeit being the most discussed one. To define Value-based pricing, Utpal M. Dholakia - professor at Rice University Graduate School of Business, uses these words
“Value-based pricing is the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitor.”
Here’s breaking down the greek:
Particular Customer Segment- Value based pricing is always targeted to deliver to a very specific subset of all the consumers in the world.
Compare with the next best thing- Value-based pricing works best when you have something close to what you’re selling in the market. To identify your competition you need to ask yourself- what will your target audience buy in the absence of your product?
Differentiated Worth- This is essentially locating your USPs that separate you from your competition. How is your product better than what is currently available, what problems is it solving , how is it delivering better user experience
Setting A Price- Based on all the above factors of differentiated worth, customer segment, comparison to the competition you need to estimate the value of your product through Market Research, Conjoint Analysis, User Interviews etc which I will talk about more in detail later in this article
Pricing strategies vary a lot when catering to business versus catering to consumers. Value-based pricing stands when firms know the dollar value of what they provide to their users, they then set the price lower to what consumers value that product. A good strategy for this is the 10x model.
"The willingness to pay is dependent on the value the consumer places on the product and the brand among other things".
Here are a few examples of how value based pricing works:
The fashion Industry- Haute Couture is highly priced in general and a lot of luxury brands mark their prices up tenfold in comparison to regular apparel. For example Burberry retails its signature Trench Coat for approximately $3000. You can get a trench coat from any other store starting as low as $120.
The automobile industry- A Model X from Tesla inclusive of all it’s premium features will cost a whopping $1,42,000. A lot of consumers still pay for it inspite of having lower priced electric vehicles like Nissan Leaf because (a) they can afford it (b) it’s effective (c) because it’s Tesla; read: brand value.
The willingness to pay is dependent on the value the consumer places on the product and the brand among other things. It boils down to lifestyle choices which is deep rooted in the psyche of the consumer. Value based pricing taps into the true willingness of the consumer to ‘shell out their dough’ to get their hands on the product. Let me elaborate with an example
In recent news Uber announced that it was trying to move away from it’s traditional pricing model to a newer “route-based pricing model” in cities that have both UberPool and UberX. In the older system Uber charged riders based on time of the day, distance and calculated it according to geographical demand but now they have been testing this new model in select cities for a while discreetly.
In route-based pricing what essentially happens is that Uber chargers riders who choose to request an UberX along some “high-demand routes” that Uber defined. BloomBerg believes this to come into play when a rider
“Traveling from a wealthy neighborhood to another tony spot might be asked to pay more than another person heading to a poorer part of town”.
Daniel Graf , Head of Product at Uber vehemently denies these claims and chalks up this shocker as a move to create more rides at lower costs for riders who take the UberPool. You only have to pay a premium if you want the privacy of a complete vehicle travelling through a direct route saving you time.
This is a classic value-based pricing model, Uber is cashing in on Users who value time over money and have the financial ability to do so to create more rides for users who cannot afford the premium and can choose the Pool option which is relatively lower priced but takes longer. Graf mentioned that they have systems in place to arrive at an approximation of the what users are willing to spend for their rides based on which Uber puts a price on these “high-demand routes” at certain times of the day.
"It is crucial to understand the current pricing landscape of your product’s ecosystem and where your product fits in it to get it right".
Coming up with the magical numbers of price for your startup’s product/service is what dictates the building of a successful venture. This can either make or break it for your firm. It is crucial to understand the current pricing landscape of your product’s ecosystem and where your product fits in it to get it right. Arriving at the right price is never easy, there are a lot of pricing models that you can use to figure it out; here are a few pointers on how
Analyze your competition’s product- This helps you get a feel of how the market currently looks. Identify anything that even slightly bears resemblance to your product and build a worksheet with all their pricing and look for patterns in pricing data.
If you just created a brand new product- If you believe you have just invented something brand new, it’s easy to think that you have no pricing data to rely on but in fact you might be replacing something inferior of some sort. A car replaced a horse, a light bulb replaced a candle. In this case analyze the prices of these older products.
Crowdfunding campaigns- With the increasing popularity of crowdfunding portals like KickStarter, Indiegogo. etc. it has become easier for startups to conduct multiple trial runs for pricing and come up with the most optimum prices. FitBit did that way back at it’s inception and they could correct their pricing model to be more fruitful. With these campaigns you can try different price points achieved through different pricing models. But keep in mind that you have to be absolutely sure you can deliver to your backers.
AdWords and Facebook Ads to the rescue- This is a great platform to test out your pricing. You can run various ads on a small budget, for your product with the only difference in price, to decide which one picks up more success and use that as an approximation to price your product in that bracket.
Ask around- Your potential consumers are your guides here. You need to identify them through extensive user research and asking the right questions that help you identify user behavior and experience. Also note that you cannot ask yes/no questions like do you like the product. You need to ask questions that let you deduct their genuine experience. You need to understand at what price the product seems too cheap or too expensive.
Value-based pricing, as mentioned earlier is one of the most misunderstood concepts and a lot of ventures fail to understand it completely. Here’s a list of things pricing teams often get wrong:
Value-based pricing has to take into account consumers’ willingness to pay for every product attribute- not true, only the differentiated features need to be used for value-based pricing. It makes it much harder if you take into account every feature and all the more difficult to do in practice.
That value-based pricing will always lead to success- it is a means to success that is true but that does not always convert to success. Do not have any such false expectations as this is very dangerous. Take into account your competitors pricing and what they are offering, if they have priced their products foolishly low you will be at a loss if you stick to value-based pricing. Do not forget this most important aspect part of value based pricing.
Overdoing Product pricing- You need to accommodate your innovators. Do not over complicate pricing by adding more than 2-3 pricing tiers. The first year pricing of your startup should be as simple as it can get.
Failing to see that pricing is a dynamic process- Initial product price is how you enter the market but it needs to change till it is effective enough. These markets evolve rather quickly and so must you to adapt to the change. Do not overdo the change in prices either it will only frustrate your consumers.Going to retail too early- This one is tricky for firms that need to manufacture products. It’s always best to wait and analyze consumers completely before you jump into retail.
To have a better success rate, the pricing strategy of any startup must align with it’s market research, sales pitches, PR releases and website messaging. When all these come together pricing can reinforce the position of a firm in the market and forging your own brand. End of the day it all boils down to how well you can market and sell your product. Take Airbnb for example, it used an existing business idea adding a few attributes, marked itself at a premium and still catapulted to global fame, all thanks to it’s brilliant marketing.
Quoting Lawrence Steinmetz who wrote in his best-selling book: How to Sell at Margins Higher Than Your Competitors-‘The first thing you have to understand is the selling price is a function of your ability to sell and nothing else. What’s the difference between an $8,000 Rolex and a $40 Seiko watch? The Seiko is a better time piece. It’s far more accurate. The difference is your ability to sell’.