Your pricing strategy is as important as marketing or product development. The price of your product or service can make or break its success in the market.
This article will discuss the complex issue of product pricing. And, we’ll look at how to experiment with your product pricing strategies. Let’s dive in.
Why you should experiment with product pricing
Any business must determine the best price for its product to be successful.
It sounds effortless, but pricing products is challenging in practice. If you charge too much, you might reduce the demand for your product. Charge too little, and customers might think your product is substandard.
Pricing is a delicate balancing act between value and profits. That’s why pricing experiments are so important. By testing different strategies and gathering customer feedback, you can find a price point that maximizes revenue.
5 pricing strategies
We’ve established why you should do pricing experiments. Now, let’s look at a few you can try.
1. COMPARATIVE PRICING strategy
Comparative pricing strategy involves comparing the prices of your product with a competing product.
It’s a good way to set customer expectations. You can emphasize the price and quality of your product so customers will go for it as the cheaper option.
Ecommerce and SaaS businesses use price comparisons all the time. For example, Amazon provides comparative pricing analysis for all products on the site:
As the owner of a marketplace, the goal of Amazon is to generate sales. The company’s goal is to help visitors find the best product to fit their budget.
If you offer only a few products or services, it’s best to use comparative pricing sparingly. The goal is to show how your product or service provides more value for money than a competitor.
New entrants usually win customers by promoting their product as being cheaper.
Companies will highlight comparative pricing on sales pages or in marketing material.
The example above is from Systeme.io, a Clickfunnels competitor. The article highlights the higher cost of Clickfunnels compared to competing solutions.
Cheaper solutions attract customers on a tighter budget or high price sensitivity.
Warning: this market is also likely to switch to a competitor that offers a lower price.
2. ANCHOR PRICING strategy
Anchor pricing is almost identical to comparative pricing. It’s a tiered pricing approach with one crucial difference: you compare your product against more expensive options instead of direct competitors. Anchor pricing is common among both ecommerce and SaaS businesses.
You can look at Amazon again as an example.
If you look up Amazon Echo, you’ll see the full product range anchored by price point. This price comparison helps consumers make an informed decision.
Most SaaS businesses use anchor pricing to help people compare plans.
For example, here is the pricing model that we use at Right Inbox.
The yellow button in the center emphasizes the value of the annual plan compared to the monthly plan. Most SaaS businesses use some variation of this effective pricing strategy.
3. ITEM BUNDLING strategy
Item bundling is a strategy that involves selling a set of related items together at discount pricing.
This strategy helps you achieve economies of scale and quick product turnover. Still, you need to ensure that the products you’re bundling still have value if purchased on their own.
In the SaaS space, Clickfunnels is one of the best examples of a company that uses bundle pricing.
On the pricing page, they list 20+ information products you can access if you sign up for the $297 Platinum plan.
The idea is to provide an overload of value for the reader to incentivize them to pick your favored package. Few companies imitate this psychological pricing strategy implemented by Clickfunnels, even though it is effective.
4. CHARM PRICING strategy
Charm pricing is another form of psychological pricing. It is also known as the rule of 9. Instead of rounding your price off to an even number, you make it a lower odd number.
For example, under this principle, more people will buy an item at $14.95 than at $15. Or, in the case of GetResponse’s pricing plans, $49 and $99 rather than $50 and $100.
Why does charm pricing work? Some believe that the human brain recognizes only the lower value and sees it as better value for money. Others think that using a specific value is the same as offering a discount.
5. HIDDEN PRICING strategy
Hidden pricing is the final pricing strategy you might come across.
As the name suggests, this pricing model is where you don’t share a product or service cost. As far as pricing models go, it’s one of the less common ones. However, some SaaS companies do use the hidden pricing model.
A nice example of such a company is the blogger outreach tool Pitchbox. There are no price plans on the website. The only way to find out more about the tool is to book a demo.
Pitchbox doesn’t have a price plan because they claim that all their plans are custom-priced. Based on my understanding, they use a premium pricing model. But, it’s a strategy that works for them.
One of the great things about this model is that a prospect has to enter your sales funnel to see what you offer. You are much more likely to convert a customer on a demo. Second, hiding the price will allow you to charge premium pricing. This helps you provide better customer service and invest in product development.
You can also use dynamic pricing, meaning that you can adjust your price point for each client.
3 steps to performing a systematic pricing experimentation
Doing a pricing experiment is a bit like doing a science lab experiment in high school.
You need to set clear goals, take a careful and deliberate approach, and gather the necessary data (like target market research, market demand, market condition assessment, and more).
Price experimentation is a great way to make the right pricing decision in the end.
Here are the steps you need to follow to determine the right pricing strategy for you.
1. CONSIDER YOUR SITUATION AND DISCUSS GOALS
Each of the strategies we discussed has its own results, advantages, and drawbacks.
You’ll first have to assess your product and decide how you want to change your price structure.
A logical starting point for this approach is to conduct competitor pricing analysis. You should see how much your competitors charge and what features they offer. Document your findings and share the results. This is called competition based pricing.
Once you’ve done your analysis, you need to know where you want to position your product. Do you want to be the most expensive solution, the cheapest option, or something in the middle? You should choose a pricing method that fits your positioning. Different pricing strategy works best for each of these positioning. It all depends on your pricing objective. Here are some popular pricing strategy examples.
| Positioning | Pricing strategy |
|---|---|
| The most expensive product | Premium pricing (prestige pricing to appear premium and valuable) Price skimming (high price at first, lowering it later) |
| The cheapest product | Penetration pricing (lower initial price to generate demand and establish brand awareness) Freemium pricing (free initially with an option to upgrade) Economy pricing (lower price due to low production cost) Loss leader pricing (selling one product below its market cost to stimulate other sales of more profitable products) Captive product pricing (the main product is priced lower, but requires an accessory product to function) |
| Other | Value based pricing (charging based on the target market’s perceived value of the product) Cost plus pricing or markup pricing (fixed percentage is added on top of the cost) Keystone pricing (twice the production cost) |
As you do this exercise, consider the following questions:
- How will you roll out the new pricing?
- Will you charge all customers the new rate or only new customers?
- How many customers will you need to maintain your profit margin?
It’s important to remember that dropping your prices won’t mean higher market demand for your goods or services. Conversely, raising prices might result in fewer customers that bring higher profits.
Be sure to watch out for internal discussions about your strategies. You are probably going to get feedback from your customer service or business development team about your new pricing models. These discussions can give you a lot of valuable insight that you can apply to pricing. You can use Gmail notes to keep track of your email discussions, for example.
If you need a better solution for product feedback management, try Canny. It’s a comprehensive feedback, idea, and product management tool.
2. SET OUT THE METHODOLOGY
The next step in the process is to define your pricing objectives. You need to determine how you want to carry out the change, and how to track results.
Start by setting out your goals for your product pricing experiments. It’s a good idea to use the SMART goals framework.
A SMART goal could be something like:
Increase gross quarterly revenue by 5% by implementing a new pricing strategy.
That’s a pretty straightforward goal to measure.
Next, you need to consider how to execute these changes. Changing the price of your service is a big deal. Consider price sensitivity of your clients. If you suddenly start charging your existing customers a higher price, they will complain. The same customers will also complain if they discover that others pay a lower price for the same product.
The best approach when running any type of pricing experiment is to be transparent about it. For example, you can tell customers that you are selling the product at a promotional pricing for a limited time. Clear communication with your audience can generate a lot of goodwill.
3. RUN THE EXPERIMENT AND OBSERVE CAREFULLY
The final stage of any experiment is observation. Change one price, see how the market reacts, and then record your findings. Repeating this process will give you a good idea of market demand and preferences.
The key indicators you need to track are:
- Sales volume
- Total revenue
- Profit
These three aren’t synonymous with each other. In fact, a high sales volume might mean having to sacrifice profit margin by offering a very low pricing.
At the end of your experiment, you have to make some hard decisions. Are you fine with lowering prices to increase sales volume, or do you prefer higher profits? These decisions will depend a lot on the pricing objectives you set at the start of the experiment.
Bottom line about product pricing strategies
Pricing is one of the most important considerations when setting a product strategy. You need to be thorough and deliberate as you create a pricing model for your brand.
When you run a product pricing experiment, start by analyzing competitive pricing. Next, set your pricing objective and decide on your approach. Finally, track your KPIs so you can see if your hypothesis yields positive results.
Remember: prices are meant to change with the market conditions and your products’ stage. Don’t be afraid to experiment and adjust.
