After receiving the ‘OK’ from your key stakeholders, you need to switch your focus to fine-tuning the most essential part of any successful product: a watertight pricing strategy.
Striking a happy medium when pricing is a challenge and will play a significant role in the overall success of your product. If the price point is too low, you’ll run the risk of negating the effort you and your team have put in during the build-up to your eagerly awaited product launch. On the other hand, if you price your product too high, this could drive your customers into the arms of a competitor and increase your churn rate.
Let’s take a look at the ways you can avoid such pitfalls and incorporate a pricing strategy that’s mutually beneficial for you and your prospective buyers.
Let’s take it back to basics.
What’s inside this guide?
Whether you've got a pricing project on the horizon or just want to brush up your knowledge and learn from the best for when the time does come, here's a selection of presentations, templates, and guides to help you through all things pricing.
Part 1: Presentations
Part 2: Templates
There's plenty more where this came from. 👆
Unlock it all in here. 👇
What is meant by pricing?
A pricing strategy is a model and/or method a company uses to price its product or service suitably and optimize its sales volume and market share.
The process helps companies generate maximum profits, whilst simultaneously taking into account the buyer, as well as trends within the market.
Pricing strategies differ depending on the nature of the company and circumstances, which makes teaching it somewhat tricky because there really is no such thing as a one-size-fits-all solution.
It’s important to do your market research and choose the right pricing strategy because your target audience is going to respond differently to different costs, depending on their circumstances (whether they can afford a premium price), and how other business owners on the market choose to price their products, too.
What is the importance of a pricing strategy?
Oftentimes, pricing is considered an afterthought by organizations launching new products, when it should really be at the forefront of the decisions you make.
After all, the price point defines your product’s value and can make or break your customer’s purchasing decision.
What are the benefits of pricing strategies?
One of the first things a customer is going to think about when making a decision about purchasing your product is “how much is it?”
A good pricing strategy is ultimately going to be affordable for your target audience, but also cover the manufacturing costs of the product, employee salaries, and so on.
Finding the right pricing strategy for your product is going to entice your customers, rake in those sales, cover costs, and ultimately bring in those ever-coveted profits.
So, it’s less of a question of “what are the benefits of a pricing strategy?” and more of “what pricing strategy should I be using?”
What are the pricing strategies?
Product marketers have several competitive pricing strategies to consider. The most common pricing strategies include:
- Competitor-based pricing
- Cost-plus pricing
- Value-based pricing
- Dynamic pricing
- Penetration pricing
- Price skimming
- Target costing
When choosing amongst these different pricing strategies, you must think about how your audience will react to them, based on their own circumstances, the product’s functionality (whether it’s good enough quality to consider purchasing), and whether it’ll fit in with your other marketing strategies.
For example, if your messaging is consistently talking about how affordable your product is, and you choose a premium price, this wouldn’t help your brand reputation.
Or, if you’re a start-up or small business with a smaller customer base, freemium or fixed costs may be a better choice, in order to boost your brand reputation and customer loyalty - you can then choose to raise your price further down the line.
Types of pricing strategies
Competitor-based pricing
Organizations using a competitor-based pricing strategy get an indication of how much to charge by checking out pricing structures at rival companies that’re offering products or services similar to their own.
When businesses are competing in a highly-saturated market, it’s not unusual for them to opt for this strategy. After all, the slightest price difference can sway a customer's decision in their favor.
Let’s say company A has been designing specialist sales enablement tools to save product marketing teams’ time when producing templates and frameworks. If company B enters the market and offers a similar product priced at $39.99 per month, company A can price strategically and set a monthly cost of $34.99.
This pricing strategy offers prospects the chance to solve their pain points at a lower price. As is often the case, there are pros and cons fixed to competitor-based pricing; but we’re a positive bunch here at PMA, so we’re gonna start with the good news first.
For starters, it’s a piece of cake to implement. All you have to do is spend half an hour or so searching your competitors’ pricing pages and getting the info you need. Secondly, to a degree, you’ve got some certainty.
After all, if customers are willing to spend $100 for their solution, providing your solutions on par, why wouldn’t they be willing to fork out the same amount for your product or service?
When you use a competitor-based pricing model, you don’t have a pricing strategy of your own - you’re more or less copying someone else’s, in which case, you’re not differentiating yourself, nor are you considering your costs.
With competitor-based pricing, you’re putting your destiny in the hands of the competition. When possible, give the people what they want. Just because people are willing to pay a certain price for something, doesn’t necessarily mean they’re over the moon to be doing so.
Show them your hand, and let them know why you’re different. You may spring a few pleasant surprises.
Cost-plus pricing
The cost-plus model is essentially adding a percentage of profit to your costs. For example, if the total cost for a pair of trainers adds up to $60 and a company wants to make a 30% profit on each pair, the cost per item would be $78, with an $18 profit.
Remember, this model is more widely used among physical products because their material costs can be easily identified; the same can’t necessarily be said for SaaS products. Nonetheless, if you’re a SaaS business trying to follow this model, look at costs like staff salaries and the number of hours spent building your product.
But remember, pricing based on these costs will more than likely rely on a level of assumption. So, why do organizations lean towards this approach?
Cost-plus pricing advantages
For starters, it’s simple and generates profits. Any product marketer will tell you communicating a price rise is no walk in the park - and they’d be right. However, if you apply this model and your costs increase, there’s a direct correlation to your customers’ price increase too.
Cost-plus pricing disadvantages
The key disadvantage of cost-plus pricing is it doesn’t factor your competitors into the equation. By ignoring competitor pricing, there’s a good chance you could end up charging considerably more and achieving small profits, or considerably less, and giving away potential profits.
Another problem with this model is it doesn’t encourage the people who are building your product to be prudent. If you’re not careful, people can go in with the attitude of ‘well, we’re going to add 30% onto however much it costs us to make, so it doesn’t matter how much it costs, we’ll profit anyway’. Wrong.
If your costs become too high, your retail price will be too high, and people won’t buy your product. It also doesn’t take into consideration the customer and what their perceived value of your product is, and how much they’re willing to spend.
The cost-plus model is very company-centric, so even if it’s technically beneficial to your bottom line, it can create obstacles for sales because they aren’t able to justify the price; this can result in a lot of discounts which negates the whole point of the model.
Although we mentioned price increases might be easier to justify if the price of materials etc. rises, you have no control over how often and by how much these costs will go up, and there are only so many times you can up your price in a given period before customers start to get antsy, but if you don’t reflect the difference in your price, it’ll eat into your profits. It also doesn’t account for unknown costs that come as you grow - like marketing, sales, and new hires.
Value-based pricing
Value-based pricing is a method where you set your price based on how much different customer segments believe your product’s worth.
Consequently, the price you charge can vary from customer to customer or segment to segment.
Imagine Nike is all set to launch its brand-new shoe (product A) and Reebok has already launched a shoe of its own, (product B).
Both are lightweight, both are targeted toward endurance runners, and both come in a variety of colors. Nike’s running shoe, however, comes with high-performance insoles built-in. Reebok’s doesn’t. Nike’s shoe targets endurance runners who need extra support underfoot, and Reebok’s shoe targets all endurance runners.
With value-based pricing, you need to look at what the next best alternative is and how much people are willing to pay. In this case, that might be buying an ordinary running shoe and the insole separately. Next, you need to understand what it is about your product that makes it different, so in this example, that’s the built-in, high-performance insole.
The final (and trickiest) step is putting a monetary value on that differentiator. How much are people willing to pay to have the insole built-in to their shoe rather than buying it separately? To get the answer to this, you need to get out there and do some qualitative research.
Let’s pretend you’ve done the research and the result is shoe B costs $50 and separate insoles set people back $10. However, your customer would be willing to pay an extra $15 to have that feature built-in from scratch. 50 + 10 + 15 = $75. That’s your value-based price.
Value-based pricing advantages
Value-based pricing gets to the bottom of what your customers are willing to pay with more accuracy. Sure, you could argue that competitor-based pricing does this because customers are willing to pay for their product (they’d be out of business if not!), but value-based pricing puts your potential customers at the heart of that journey as well as differentiating you from your competitors. As always, never underestimate the value of talking to your customers.
Value-based pricing disadvantages
The biggest downside is the time. Value-based pricing requires a lot more time and resources than the other two methods we spoke about but you know, as they say, if something’s worth doing, it’s worth doing right.
Cost-plus pricing is often considered one of the most simple methods on offer, but target costing is another method used by PMMs when mapping out their pricing strategy.
Dynamic pricing
Otherwise known as demand pricing, surge pricing, or real-time pricing, dynamic pricing is a flexible pricing strategy influenced by market demands, as opposed to a traditional fixed-price structure where prices for goods and services remain the same at all times. The same product or service is sold to different people for different prices.
Factors influencing the price a customer pays can vary depending on numerous factors, including:
- Customer location,
- Time of day,
- Day of the week,
- Level of demand,
- Stock levels, or
- Competitor pricing.
Generally speaking, dynamic pricing is used by fast-paced, B2C businesses, and it’s a price structure that’s logistically more suited to e-commerce because price changes online can be amended quickly and automatically with little-to-no staff input after initial setup.
It’s also worth mentioning dynamically lowering prices can increase demand, while dynamically raising them is typically used when there is a strict constraint on supply.
So, how is dynamic pricing automated? Initially, product marketing needs to identify the market factors that’ll make dynamic pricing acceptable for customers. For example, customers will see value in increased prices for a hotel room in a full hotel or a room with a sauna in it, but not for the model of TV in the room or the quality of the sheets.
These market factors are then used to set an algorithm in place, which is used by software agents who work in the background analyzing this data and adjusting the pricing accordingly. In terms of frequency, these prices can be adjusted as often as required - sometimes even up to once every hour.
Although dynamic pricing can work across many industries, it’s most commonly found in hospitality with things like changing hotel room price structures, early-bird tickets to events, and widely across the transportation industry - such as airline tickets, London’s congestion pricing, toll surcharges during busy periods on San Francisco's Golden Gate Bridge or Sydney’s Harbour Bridge, or off-peak public transport.
Consumers see dynamic pricing on a day-to-day basis, whether it’s during happy hour at the local pub, buying tickets to a baseball game, Uber’s surge charge, or from their electricity supplier with peak and off-peak rates.
However, despite being a fixture in modern commerce, the legality surrounding dynamic pricing can be a little grey. It can and has been argued that dynamic pricing has its roots in price discrimination, which is illegal depending on the criteria used. It’s illegal if race, sexuality, gender, or religion are factored in; price discrimination is also a no-go if it violates antitrust laws set up to ensure fair competition in an open market.
Dynamic pricing advantages
There are many advantages to a price structure as flexible and fluid as this, and price changes don’t always have to mean increases. Flash sales can help businesses or consultants reach targets, and pricing can be dropped to boost sales in slow periods or for a less-popular product.
Price drops can also help put bums on seats in the lead-up to entertainment events like sporting events or music concerts, for scheduled flights, or to fill empty hotel rooms, because when it comes to service-based sales, open seats equates to zero revenue.
Being able to raise or decrease pricing depending on product availability is another benefit of the dynamic pricing structure. For example, it’s much easier and cheaper to grow citrus fruits in the summer months, creating savings for growers that can be passed on to customers. This, in turn, allows growers to increase prices in the winter months when growing citrus is more labor-intensive and expensive.
Consumers often see this in their local fruit and veg shop or supermarket. Of course, prices are often increased too. Maximizing profits is a key goal for any business, and dynamic pricing allows businesses to compare their price point with that of the competition and increase it if there’s wiggle room. After all, there’s no point selling a product as cheaply as possible if customers would be willing to pay more for it, while still seeing value for money.
Dynamic pricing disadvantages
On the flip side of all these benefits, it’s important to remember that everyone hates feeling ripped off, and many customers who notice varying pricing will feel like they’re being taken advantage of, or that they’re less important because they haven’t been given the best price. This can lead to customer alienation, future loss of sales, and a lack of customer loyalty.
Consumers don’t always look at the possibility that dynamic pricing could result in better bargains, but can assume it’s being used to charge them more money than the next person. So the issue to consider first and foremost when adopting dynamic pricing is the perception of fairness. Many shoppers these days are very aware of dynamic pricing, even if not on a conscious level.
Savvy shoppers identify themselves as ‘bargain hunters’ and shop around for the best price at the best time. This means many customers may hold off purchasing a product until the best possible moment, skewing product demand statistics.
Although a price war’s the last thing anyone wants, this can be a byproduct of dynamic pricing. Price wars can force prices so low that they become unsustainable, which isn’t good for your product, your competitors, or the customer. Automated adjustments will help ensure this doesn’t occur as pricing models are regulated.
Penetration pricing
When companies are launching a new product, there’s one thing they’re interested in: customers. Money is delightful, but if you don’t have any customers buying your product or service, you don’t have any sales.
To reduce the risk of this occurring, companies use penetration pricing. They price their product lower than their competitors to prompt an initial surge of sales during the initial release period. Penetration pricing pulls on the heartstrings of the prospect, with the strategy targeting the customer’s urge to secure the best deal possible.
Introducing comparatively low pricing means the customer will earmark the brand as the more affordable option, and you’ll always win a fan or two when there’s money to be saved.
This pricing strategy is in operation more often than you may think. For example, streaming services, such as Spotify and Netflix continue to pit their wits against the big boys of music and film/TV, while Android and Samsung position their products as the more affordable alternative to Apple.
Penetration pricing advantagesPenetration pricing can work wonders for your brand if the market is right. Given the lower price of the products on offer, this generates increased customer interest, and brand loyalty, and eliminates competition from companies who simply cannot afford to match your offer.
Penetration pricing disadvantages
On the flip side, when penetration pricing is applied in the wrong market, this can lead to a poor customer experience, generate price wars, or even lead to people forming a poor perception of what your brand represents.
Penetration pricing is often confused with price skimming, when in fact, they’re two different approaches. Here’s a brief insight into price skimming to round off our insight into your pricing options.
While some companies adopt the penetration strategy and price their product at a lower price, advocates of price skimming adopt a different approach, instead opting to charge a high price at launch, before reducing the price as time goes on.
This method is particularly effective when the product or service in question is part of a premium market, or if the target customers don’t have any other choice and pay the price because it’s not available elsewhere.
Price skimming
While some companies adopt the penetration strategy and price their product at a lower price, advocates of price skimming adopt a different approach, instead opting to charge a high price at launch, before reducing the price as time goes on.
This method is particularly effective when the product or service in question is part of a premium market, or if the target customers don’t have any other choice and pay the price because it’s not available elsewhere.
Price skimming advantages
Price skimming is beneficial because it can help organizations recoup the money they’ve spent during the research and development processes. Take Apple, for example. They reap the benefits from short-term profits that are through the roof when they launch a new gadget. The higher prices can be justified given the trailblazing approach to technological innovation at the given time.
Price skimming can also create an element of prestige surrounding your product or service; it creates the impression your offering is a must-have.
Introducing high prices in the early stages attracts customers who are status-conscious, and provides you with a much-needed buffer when it comes to reducing the price in the future, if needs be, when rivals enter the market.
Price skimming disadvantages
It could be suggested if you were to introduce a low price, to begin with, then this would heighten the sensitivity surrounding price amongst your target market, in which case, it’d be difficult to increase rates in the future, without jeopardizing your relationship with your customers.
Target costing
Target costing is defined by the Chartered Institute of Management Accountants as: “A product cost estimate derived from a competitive market price”.
Target costing is categorized as a management technique, as well as a pricing method, in which price points are influenced by the condition of the market, and other key factors, such as:
- Homogeneous products
- Volume of competition
- No/low switching costs for the end customer
Target costing advantages
There are quite a few benefits to choosing the target costing pricing strategy.
For example, it’s a more customer-centric approach because the product is created from the expectation of the customer, and the price is then similarly decided based on this. This then makes the customer feel more valued and appreciated, leading to a happier and more loyal customer base.
Also, as time goes on, the organization’s processes will begin to improve drastically, leading to economies of scale which is a huge cost advantage. Not only this, but the new market opportunities brought through this strategy can be converted into real savings to achieve the absolute best value of money to stakeholders.
Target costing disadvantages
Unfortunately, the development process is often quite lengthy as the product has to go through multiple changes and alterations to meet the target cost.
Reducing costs can also cause a hit in employee morale due to the contribution and hard work of so many teams. This can make it a lot harder for an organization to come to an overall decision on the target cost.
What is the simplest pricing strategy?
Cost-plus pricing is often considered one of the most simple methods on offer, but target costing is another method used by PMMs when mapping out their pricing strategy.
Target costing operates completely differently from cost-plus pricing. When using this model, you start with the market prices to decipher the limit of the cost you can use to create your product.
To determine the market price, base this on an average. Conduct some competitive intelligence and use the information on the pricing pages of other companies to establish the price range customers are willing to pay for your product.
If you’re inexperienced with competitive intelligence, seasoned PMMs have provided their CI tips as part of our Competitive Intelligence Trends Report 2021.
Lawrence Chapman
How to conduct a pricing analysis
Pricing analysis is the process of evaluating and gauging whether your product’s price is reasonable. There are many things you can do when conducting a pricing analysis that’ll improve your product price and profits.
Some steps include:
- Outlining your cost structure (Maintenance, marketing, resource prices).
- Understanding and outlining competitors’ prices (To see how your product price will fare on the market).
- Estimating how sensitive your market is to price fluctuations (you’ll be able to anticipate changes easier, and achieve more profits).
- Calculating a price that’ll maximize your profits.
- Recommending a price and sharing your findings with your stakeholders to get everyone on board.
Grab your copy of Putting a Tag On It: The Product Pricing Playbook to look deeper at the main six steps you should take when pricing your product.
How to generate profit
Companies have one thing in common: they all want to make a profit. There’s no doubt a suitable product selling price plays a crucial role in helping them achieve these objectives. After all, a new customer might see your price compared to competitors on the market and decide to remain a customer, improving your retention rates and, when they continue to return to your business, your overall sales.
In his presentation, How to Price for Growth and Profitability, Yannick Kpodar, Global Director of Product Marketing at PayFit, outlined his step-by-step process to identify the best pricing strategy for company growth and profitability.
Product Marketing Alliance
How is customer information used as a part of the pricing strategy?
Phill Agnew, Senior Product Marketing Manager at Hotjar said:
“Pricing principle number one is to base your price on customer value. Too many companies fall into the trap of simply taking their cost, adding a margin, and just going with that as the price.
“Your customers shouldn't care about how much your product costs to produce. They should pay based on the value they gain. Take this example.
“Example one: Coffee
“These are two cups of coffee that really cost about the same to produce. They use similar beans. They're roasted in a similar way, they use the same milk.
“Yet Costa coffee, a high street chain charges almost twice as much as Wild Bean a gas station coffee shop, Costa could have matched or even undercut Wild Bean by simply taking their costs and adding a smaller margin, but they'd be leaving money on the table.
“The nicely designed cafe that they create, the smiling barista, and the premium brand all add to the value that customers are happy to pay extra for. Similar studies in different scenarios have revealed the effect that customers pay for value, not for simply cost essentially.
“Example two: Perfume
“One study offered luxury perfumes at a London store, and consumers were asked to sample the perfume and rate their likelihood of purchase.
“However, halfway through the experiment, the researchers switched the labels on the test perfume, doubling the price from $40, which it was before to twice that - $80.
“What was incredible is that after seeing the higher price, participants were more than twice as likely to rate the product highly. At the low price, only 33% of the users rated the product as being seven out of 10 in terms of smell or higher.
“Whereas at $80, 78% of the potential consumers rated at seven out of 10 or above. The price anchored consumers and changed their perception of the underlying product.
“Charging what the customer values rather than simply the cost plus your margin can increase sales and really double down on revenue. But it's not all just about charging more, charging on customer value can mean you can come up with some innovative methods of pricing your product.
- AWS, Amazon's platform charges not on a flat fee but instead is priced based on the amount of data you consume, very different from margin plus cost.
- MailChimp too doesn’t charge a flat fee but instead charges you based on the number of contacts you have in your system.
“In other words, the price is based on what the user actually values, the data, and the contacts they consume and use. So if price is based on value, you can actually start to get more revenue, more margin, and get out of this loop of just pricing based on cost plus margin.
Customers must see what they’re paying for
“Principle number two is customers must see what they're paying for. All too many companies hide the value of what the customer will get instead of hoping for simplicity, that it will be easy to understand.
“But the science tells us that adding more descriptive elements to the items we're selling helps increase the intent to buy. I'll give an example to explain what I mean.
“Example one: Menus
“I spoke to Professor Sibyl Yang on my podcast, she was a professor at San Francisco University. She gave a great example of how adding tangible descriptive lines to menu dishes can increase the likelihood that customers will buy.
“In her study, hungry restaurant customers were given one of two menus - one which simply had the name of the dish being sold, cod fillet for example, and the other which had more descriptive elements around the dish that was being sold, pan-fried cod on a bed of rocket with balsamic glaze or whatever it might be.
“Perhaps unsurprisingly, the more descriptive version increases the money spent at the restaurant, increased the number of customers visiting, and even increased the actual enjoyment of the meal they then ate.
“Yet, so many marketers fail to add descriptive elements to their products and services.
“Example two: Tower of London
“Take this site, it's selling tickets for the prestigious Tower of London. It's a World Heritage Site listed by UNESCO. It's hosted Royals, famous executions, and of course holds the British Crown Jewels rumored to be worth 22 million pounds.
“There are so many great reasons to visit this place and yet the page that is selling the tickets struggles to get this across. There's a small section on the terms of the tickets, the price is at the bottom, and just those three bullet points explaining what you'll get entry to.
“It hardly gets the imagination racing. B2B companies and B2C companies across the world fall into a really similar mistake. They showcase the product that they're selling but don't give enough tangible reasons to buy it.
“They don't show a tangible value, whether that's the data you might get, the features you might consume, or whether you'll be purchasing a great day out if you're going to the Tower of London.”
How to calculate the price elasticity of demand
As we said, there are many different strategies you can use when pricing your products. But irrespective of which one you choose, there is something you need to take into consideration - the price elasticity of demand.
“What on earth is the price elasticity of demand?” we hear you say.
Price elasticity of demand is used to determine how a change in price can have an impact on consumer demand.
There are some products consumers continue to purchase, even if prices increase. For example, milk. If the price of milk increased by 10%, it’s unlikely there’d be a huge change in the demand.
Other products, however, suffer when their price fluctuates. These are known as elastic goods. For example, Coca-Cola. If the price goes up, there are other, cheaper sodas available and the buyer can get their sweet, fizzy fix elsewhere.
It’s time to pop your math hat on, ‘cos we’re throwing a formula for calculating price elasticity your way:
What to consider when pricing a product
We’ve outlined a select few of the pricing strategies available, but ultimately, there’s no definitive answer when choosing a solution for your company - it all boils down to one thing.
That’s right: personal circumstance.
Businesses need to utilize a pricing strategy to drive cash flow. To do so, you’ve got to be crystal clear on:
- The cost of producing your product
- The value of your services to your clients
- How much your customers have and want to spend
- The overall running costs of your business
- What critical costs need to be covered short-term (e.g. loan repayments)
- How your competitors price their products
Pricing needs to take every one of these principles into account to drive optimum profit. Who knows? You may even have to go through your business plan with a fine-tooth comb and consider factors such as brand development, team restructuring, etc. before you can draw a definitive conclusion.
Remember, your pricing strategies are by no means definitive. You should continually assess your plan and make changes whenever something isn’t working as you anticipate. Your decision-making process can be dictated by simple metrics such as sales figures and churn rates.
Silvia Kiely Frucci, Senior Product Marketing Manager at Castor, shared five pricing lessons from her career so far:
- Follow the process, but don’t be bound to it.
- Pricing is a team effort.
- The perfect pricing structure is a myth.
- Negative price testing is the best ground to re-evaluate your product value proposition.
- Pricing is not just a number.
Check out each principle in further detail. 👇
Silvia Frucci
How to increase your product price
There are also instances when you may need to increase your prices, and this can prove a challenge in itself.
Phill Agnew, Senior Product Marketing Manager at Hotjar outlined two tactics you can use: hyperbolic pricing, and the decoy effect.
He said:
“The first tactic I want to focus on which will help you increase your price without losing customers is something called hyperbolic discounting.
#1 Hyperbolic discounting
“It's a fancy word for something we all know. It's the feeling that when you have a mountain of work piling up, and you know you need to get it done within the next couple of days but you just can't find the motivation to do it.
“You put it off and instead watch Netflix and convince yourself that tomorrow you'll get all that work done. In that scenario, you have fallen victim to something called hyperbolic discounting.
“Hyperbolic discounting is a cognitive bias where people choose smaller immediate rewards, so watching Netflix and feeling a bit of satisfaction, rather than larger rewards in the future, essentially getting all that work done and feeling real relief.
“The problem: immediate gratification
“Now, initial studies into this effect showed that subjects when offered $15 immediately, $30 in three months, or $60 after a year, always take basically the wrong amount. In the right scenario, if we were all smart, rational consumers, we would all take the $60 - that's worth the most it's the best package we could get.
“But most of us pick the $15 immediately, the salience of gaining something quickly and immediately beats having to wait.
“Interestingly, when consumers asked the same question with the same intervals, but a year in the future, so what do you want in one year? What do you want in one year and three months? What do you want in two years? We choose the largest $60 dollar reward.
“This reveals that we just clearly are impatient, we prefer immediate rewards in the short term, we just want it now. We prefer those immediate short-term rewards, but we're also more patient in the long term as well.
“For individuals, this creates a lot of problems I won't get into today, things like not saving for retirement but one of the ways that you can get around this and one of the ways you can convince your prospects that doing something may be difficult in the short term is worthwhile is by breaking down big goals into smaller manageable chunks.
“The solution: chunk it
“The problem with things like saving for retirement is that saving is a huge challenge, the amount an American needs to save is about $1.7 million for their retirement. Obviously saving that much takes a lot of money and almost a lifetime to achieve. With huge goals like that, it's much better to break it down into smaller tasks with a reward coming after each chunk.
“That way, the reward is no longer a far-off possibility, but something that is more immediate and guaranteed. This works not just for people trying to save for retirement, but for big brands and product marketers who are trying to justify their high prices.
“Let's pretend you're selling a high-value Mercedes Benz, you could show the full cost for $40,000 today, or you could show the cost broken down perhaps by using a bit of this hyperbolic discounting insight.
“You could say it's broken down to $32 per week, or $4.75 a day over the course of two years, but which would look most attractive to the user?
“One study actually analyzed this to reveal conclusively which was seen as the most attractive price, the researchers presented one of three numbers at random to over 500 participants and the results revealed the shorter the timeframe, the smaller the cost, the more appealing the deal.
“In fact, when the prices were shown as daily figures, they were five times more likely to be rated as a great deal than when they were shown annually.
“For SaaS marketers, for product marketers, this is a really interesting insight. We're quite good at doing this, we often break our pricing down per month, or maybe even per week, maybe there is an opportunity to break it down even further and really benefit from hyperbolic discounting.
“Where possible in the future, we should purse the extra bill, the cost of paying off into the future, we shouldn't encourage consumers to spend 40 grand now instead, we should get them to make small commitments like $4 a day.
“Now that's one way you can reframe your products to push for a higher price. It works because you have to remove that immediate pain of payment. But it's not the only way you can reframe your price.
“#2 The decoy effect
“I'll finish by highlighting one of the tactics that a lot of SaaS marketers use, but not one that the majority of us particularly understand. It's the decoy effect.
“Example one: Popcorn
“To explain the decoy effect, I'll give a bit of a story about myself and I'm weirdly habitual when I go and watch movies at the cinema. Every time I go and watch a movie, I buy a ridiculously large amount of popcorn.
“After the movie, I always regret how much I've eaten, I'm usually full after a couple of handfuls, but I always plow through to the bottom and I always eat this popcorn.
Nevertheless, next time I go, I'll also buy it again. I keep getting into a habitual loop and I feel awful every time, but I can't get out of it. Now when looking at the price of popcorn, I start to realize why I keep falling into this trap.
“This is the actual price of popcorn at my local cinema in London, it's a lot of money I know. There's something really interesting about these prices, right? The extra-large is obviously too much, £7, that will be about $10 in America, that's almost the price of the actual cinema ticket.
“I'd never spend that much but the next option down which is just 50 pence more than the smallest option, the large option at £4 looks like a much better deal. You get so much more, you get a large for just 50 pence more than the small option.
With this pricing, I can't help but pick this middle option, it looks like such a good deal. The reason it looks like such a good deal is due to something called the decoy effect. I'll come back to this example at the end.
“Example two: The Economist
“But let me explain the decoy effect by bringing in the famous study which was cited by Dan Ariely in his book, Predictably Irrational. So Dan, being a professor at Princeton University, spotted the decoy effect, not in the cinema, but while flicking through The Economist.
“He found that The Economist had these three pricing options that they were publishing, they had that online-only subscription at the top, which was $59, the print-only subscription $125, and then the print and web subscription for also $125. That's quite weird, right?
“With this third option, you get both the print and online versions, but it's the same price as the print option by itself. The Economists were doing that same pricing and Dan thought this is a really strange phenomenon. Also, why would anyone buy the print-only option? After all, it's the same price as the print and web options.
“Basically, Dan predicted that The Economist was using this strange pricing strategy to create a decoy and encourage more consumers to spend $125, rather than the $59 for the online-only subscription.
“To test this hypothesis, he tested it out on his students, he showed one set of his students the actual pricing with the decoy included, and the other set of students an edited version with the decoy - the print-only option - removed.
“He wanted to see if removing the decoy price changed what people thought about the product and change what people wanted to buy. Turns out removing that decoy had a huge effect.
“When students were shown the decoy effect option, which was the one that The Economist had on their site, they would, on average pick the most expensive print and web subscription, it looks like such a good deal because it was the same price as the print subscription and yet it had the web subscription included as well.
“Yet, when Dan showed his students the edited version, without the print subscription included, suddenly students were far more likely to pick the online subscription only, the majority of students only spent $59.
“That's really interesting. Just the way that The Economist has priced their products, the way they frame their pricing, the way they built their options, dramatically changes what consumers want.”
Charley Gale, Copywriter here at Product Marketing Alliance, covered some important topics around prestige product pricing to help you gain a better understanding of the strategy in this article:
Charley Gale
What to consider when discounting a product
When your prices increase, you can’t keep every single one of your customers happy, particularly customers who are more economically minded. While a degree of customer churn is inevitable, you can improve your customer retention by introducing discounts to your customers to negate the price increase.
Your customers with one eye on their spending will be more than happy to use a discount code, while customers who aren’t necessarily too fussed about a slight price increase will pay your new price anyway. Either way, a significant proportion of your customers will be paying full price. However, there are still things you need to keep in mind when discounting a product.
For example, why are you discounting? Discounting can sometimes have a negative effect on your sales, especially if your consumer is someone who is always looking to spend more money to show more value with their product. Reducing the price is going to convey to this particular base that it’s worth less, so it would deter them from making a purchase. Which could then, in turn, damage your profits.
So, you need to have a solid understanding of why you’re making this move, how you believe your customer is going to react to this change, and whether it’s worth it depending on the estimated outcome (e.g. sales and profits).
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Pricing strategies have the power to make or break your product - set the bar too high, and you’ll price your customers out of the market, set your price point too low, and you’re running the risk of undermining the quality of your product.
Our Pricing Certified: Masters course has been designed so you can delve into the intricacies of pricing, and get the essential knowledge and tools needed to price your products competitive.
Led by Tamara Grominsky, VP of Product Marketing and Lifecycle at Kajabi, this course will help you to confidently:
💰 Understand pricing strategies.
💰 Be able to change your pricing confidently.
💰 Understand how to conduct a pricing analysis.
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