Pricing. It’s one of the most important elements of any business value proposition. And yet, it’s a topic that many struggle with. That’s because setting the right price is about much more than simply setting price higher than costs or mimicking the actions of competitors.
Some things to consider…
Pricing sends signals.
While economists have long developed theories based on the assumption that we all act as rational beings (i.e., as customers, we do the math and figure out the optimal action), an entire field of behavioral economics has suggested otherwise.
For example, my tennis club has a simple, annual membership fee, avoiding the complexity of charging for court time by the hour. Like most exercise facilities, the frequent users are therefore subsidized by those who come less often. And, thanks to the “use it as much as you like” experience, the club feels more like home in comparison to those clubs that charge by the transaction.
Effort does not necessarily equal value.
In my own consulting work, I price based on the project, avoiding hourly charges or the old “time and materials” approach. After all, my clients are hiring me for an outcome — often a strategic plan — not simply time spent working on their project.
Project pricing removes “bad” incentives for me (e.g., working slowly, doing more research than necessary), while rewarding me for my existing knowledge. Most important, it provides simplicity and predictability for my clients while aligning price with value delivered.
Lower prices can reduce demand.
Some companies assume that when business is slower than anticipated, the best thing to do is lower prices… but that might not always be the case. One company in this position surveyed its customers, only to find that price was the third most important consideration, behind quality and the ability to make customized requests. Concluding that lowering price might suggest that those two factors would be reduced in the future, they raised their prices — and their business improved.
Likewise, a concern about charging too much can cause organizations to leave money on the table. As the pandemic was getting underway, a nonprofit client of mine had to quickly convert a convention to completely virtual. Their instinct was to lower the price, thinking that the value offered would not be perceived as being as high as their in-person offering. But when you consider that the real cost of attending an out of state conference can be many times higher than the virtual ticket alone, a discount may not have been necessary.
Pricing can influence customer behavior.
Microsoft made the change to subscription pricing a few years ago, when the change from version to version was no longer enough to encourage users to buy updates. Now users are upgraded automatically, so long as they remain subscribers. More recently, a car wash near me began offering unlimited washes on a monthly, subscription basis.
In both cases, these companies are removing friction from each transaction and leveraging inertia to keep customers with them over time.
Pricing offers the potential for creativity.
My tech support guy charges for his time, but on a “pre-paid” basis, with hourly rate discounts based on how much is purchased up front. When I ask him to fix something, I am using services already paid for — which feels decidedly different than making a decision to incur a new expense.
My newsletter editor offers webinars using a “pay what you want” model. After stating that the webinar is “valued at” $99 (suggesting a psychological anchor), he recommends a payment of $49 (suggesting a 50% savings). But he then allows attendees to pay whatever they wish, making it accessible to a broad audience. He reports generating just as much total revenue. Indeed, a Harvard Business Review article noted that when the rule is “pay what you want,” almost everyone pays something.
As these examples demonstrate, pricing is about much more than just price. Perceived value, degree of friction, and positioning in the eyes of customers and clients all come into play.
Bottom line? Pricing is an important decision, something that merits your thought and attention!