Not all too long ago, a “win” in customer acquisition was just getting a customer through the doors. Today, by the time many customers have made their purchase decision, they already know what they want and the price they are going to pay for the product. Because of this market transparency, price perception plays a much larger role in attracting customers, and companies need to fully understand what a customer is willing to pay for the differentiated features of a product.
So, how does a company decide on its price point? There are several pricing strategies/processes that will allow the effective application of a price:
- Cost Plus Pricing – this is a simple way to ensure that your price covers your cost structure, but you could be missing out on additional profits bypassing any cost efficiencies on to your customers.
- Competitive Pricing – requires market insight and competitive intel, but can also result in sub-optimal profit by potentially comparing a premium product to a discount one.
- Attribute Pricing – an effective way to ensure logical price points within a family of products, but can lead to erratic margins due to inconsistent cost models across the supply base.
- Value-Based Pricing – is the process in which a factor of worth (in the customer’s eyes) is applied to a product’s differentiated features, relative to the competitive alternatives in the market. When a company determines its product is superior to the competitor, the value-based factor is represented as a premium (> 1) and conversely, when the product is determined to be inferior, the factor is represented as a discount (< 1).
Each of the aforementioned pricing strategies has its merits, but only with value-based pricing can you effectively assign a price point for your product with the customer’s perception built into the process.
Value-based pricing can be broken into four key steps:
DEFINE WHAT’S IMPORTANT TO YOUR CUSTOMERS
Determine what is going on in your customer’s mind and what is driving the purchase decision. If the color is the key value driver and your product is the only one in that magic color, then you have yourself a premium differentiator and can charge accordingly. You can often define the customer’s sentiment into just a few key value drivers, but drilling down to these vital few characteristics is often where you will spend the bulk of your effort in value-based pricing activities.
IDENTIFY TARGET COMPETITORS
Identify your target competitor(s) in your market and gather relevant data. Thanks to the internet, market intel can be quickly and easily gathered. If you don’t know who your competitors are, simply do a quick web search for a product like yours and you will likely be presented with several options. You will want to choose your competitor(s) by determining what your customers would buy in the absence of your product. Document the competitors’ names, published pricing, date of search, and any other pertinent feature data and key value drivers available (e.g. product life, dimensions, durability, weight, ease of doing business, etc.).
EVALUATE AND QUANTIFY
Evaluate your product and its features compared to the target competitors’ products. You’ll want to put some quantitative measures on how your product stacks up against the competition. You should choose the features that drive the purchase decision.
CONVERT DIFFERENTIATION INTO DOLLARS
Apply the factor or value to each feature of the product. This step will likely cause you the most angst in setting your price. You have to objectively determine either the feature dollar value or a weighted percentage comparing your product to the competition.
For example, Two web design companies each build intuitive and engaging websites. Company A builds the site 25% faster, therefore, it could conceivably charge up to a 25% premium if turn-around is the key value driver – if Company B charges $1,000 for their web build, Company A charges $1,250 and can maintain their market share.
Through understanding your customers, market, and competitive landscape, you will be able to maximize your profits, keep and grow your customer base, and avoid underpricing your products. Start utilizing your industry knowledge and don’t be afraid to take credit where you’ve earned it. But, remember to keep your assessments realistic and always view them from the customer’s perspective. With these things in mind, you’ll find your pricing activities more fruitful and less dreadful.