Pricing Policy: Seven Factors to Consider

Does your pricing maximize your revenue opportunities? A recent episode of “The Apprentice” underscores the importance of packaging and merchandising to pricing and, ultimately, profitability.

Two teams competed to sell the most M-Azing candy bars. The winners packaged the chocolate with the “Amazing Sisters,” two attractive blondes in short skirts. The augmented offering sold for a whopping $5, yielding higher profits than the other team’s candy.

The losing team undermined the value of its product with a combination of generic pricing, an established $3 price for a basic candy bar; anxiety pricing, whatever customers were willing to pay (under the $3 price point); and “flasher pricing,” $20 for a view of a contestant’s underwear with a candy bar.

Like the contestants, marketers too often underestimate the strategic importance of pricing. As a result, they don’t optimize revenue potential. To avoid this, examine your offering’s benefits, both tangible and intangible, in fulfilling the consumer’s specific needs. Consider how you can move your product from generic, including only its core physical attributes, to augmented, including additional features to enhance the offering and enabling you to charge more. In doing so, be careful how customers perceive the offering.

To increase annual subscriptions, for example, an online publishing client considered bundling subscriptions with $25 worth of merchandise its target market valued. The merchandise retailed on its Web site. The strategy instead decreased the value of my client’s subscription in subscribers’ eyes. Customers considered the subscription worth the full subscription price — but minus the merchandise value.

Pricing Factors to Consider

• Determine primary and secondary market segments. This helps you better understand the offering’s value to consumers. Segments are important for positioning and merchandising the offering to ensure maximized sales at the established price point.
• Assess the product’s availability and near substitutes. Underpricing hurts your product as much as overpricing does. If the price is too low, potential customers will think it can’t be that good. This is particularly true for high-end, prestige brands. One client underpriced its subscription product, yielding depressed response and lower sales. The firm underestimated the uniqueness of its offering, the number of close substitutes, and the strength of the consumer’s bond with the product. As a result, the client could increase the price with only limited risk to its customer base. In fact, the initial increase resulted in more subscribers as the new price was more in line with its consumer-perceived value.
• Survey the market for competitive and similar products. Consider whether new products, new uses for existing products, or new technologies can compete with or, worse, leapfrog your offering. Examine all possible ways consumers can acquire your product. I’ve worked with companies that only take into account direct competitors selling through identical channels. Don’t limit your analysis to online distribution channels.

  Competitors may define your price range. In this case, you can price higher if consumers perceive your product and/or brand is significantly better; price on parity if your product has better features; or price lower if your product has relatively similar features to existing products. An information client faced this situation with a premium product. Its direct competitors established the price for a similar offering. As the third player in this segment, its choices were price parity with an enhanced offering or a lower price with similar features.

• Examine market pricing and economics. A paid, ad-free site should generate more revenue than a free ad-supported one, for example. In considering this option, remember to incorporate the cost of forgone revenue, especially as advertisers find paying customers more attractive.

  To gain additional insight from this analysis, observe consumers interacting with your product to better understand their connection to it. This can yield insights into how to package and promote the offering that can affect on pricing, features, and incentives.

• Calculate the internal cost structure and understand how pricing interacts with the offering. I recommended a content client promote its advertising-supported free e-zines to incent readers to register. The client believed the e-zines had no value as the content was repurposed from another product, so it didn’t advertise them. Yet the repurposed content was exactly what readers viewed as a benefit. By undervaluing its offering, the client missed an opportunity to increase registrations and, hence, advertising revenues with a product that effectively had no development costs.
• Test different price points if possible. This is important if you enter a new or untapped market, or enhance an offering with consumer-oriented benefits. To determine price, MarketingExperiments.com tested three different price points for a book. It found the highest price yielded the greatest product revenue. Interestingly, the middle price yielded greater revenue over time, as it generated more customers to whom other related products could be marketed.
• Monitor the market and your competition continually to reassess pricing. Market dynamics and new products can influence and change consumer needs.

Pricing is tricky, as “The Apprentice” contestants learned. Optimally, you should test to determine the best price and understand long-term goals. Determine price based on a number of factors. Most important is what potential customers are willing to pay and their value to your company over time. You don’t want to hear, “You’re fired,” when it comes to pricing policies.