Pricing Strategies: How To Set Prices For Your Products

Opinions expressed by Entrepreneur contributors are their own.

Pricing Strategies: How To Set Prices For Your Products Make
Pricing Strategies: How To Set Prices For Your Products Without
Pricing Strategy For Products
Pricing Strategies: How To Set Prices For Your Products Sold
Pricing Strategies: How To Set Prices For Your Products On Amazon

With this pricing strategy, marketers set prices higher than their rivals or competitors. It is, however, used when there is a considerable competitive advantage, and the marketer or the business is safe to charge a comparatively higher price. Premium pricing is ideal for small companies that sell unique services or goods. Cost-plus pricing strategy is one of the simplest methods of determining a price for your product. In this strategy, a prefixed profit margin is added to the total cost of the product which becomes your selling price. A market penetration pricing strategy is as it sounds: When you first enter a market, you keep your prices low to attract new customers and increase market share. This is a worthwhile strategy if you know your product will be in high demand. This is a pricing strategy in which customers pay the full price for one product or service to get another for free. The psychological strategy at work here is, simply, greed. Once a customer comes. Economy pricing or No Frill Low Price. The pricing Strategies of these products are considered as no frill low prices where the promotion and the marketing cost of a product are kept to a minimum. Economy pricing is set for a certain time where the company does not spend more on promoting the product and service.

We are all in business to solve problems, add value and make a profit -- tasks which involve pricing your product or service. But how do you effectively price your product or service to increase sales and make more money with little or no effort?

Related: Mastering the Art of Pricing: What the Textbooks Don't Teach You

It’s simple; use psychological pricing.

Psychological pricing is a pricing/marketing strategy based on the theory that certain prices have a bigger psychological impact on consumers than others. Below are five pricing strategies entrepreneurs can adopt:

1. 'Charm pricing': Reduce the left digits by one.

This strategy, often called 'charm pricing,' involves using pricing that ends in '9' and '99.'

With charm pricing, the left digit is reduced from a round number by one cent. We come across this technique every time we make purchases but don’t pay attention. For example, your brain processes $3.00 and $2.99 as different values: To your brain $2.99 is $2.00, which is cheaper than $3.00.

How is this technique effective? It all boils down to how a brand converts numerical values. In 2005, Thomas and Morwitz conducted research they called 'the left-digit effect in price cognition.' They explained that, “Nine-ending prices will be perceived to be smaller than a price one cent higher if the left-most digit changes to a lower level (e.g., $3.00 to $2.99), but not if the left-most digit remains unchanged (e.g., $3.60 to $3.59).”

In an experiment conducted by the University of Chicago and MIT, women's clothing was used to test the left-digit effect. First, prices were set for $34, $39 and $44. To the amazement of the researchers, the items sold best at $39 even though that price was more expensive than other options.

Related: 10 Pricing Strategies That Can Drastically Improve Sales

So, the message here is, if you want to increase purchases of your products and services, convert zero ending numbers to nines. A perfect example of this strategy can be found on Apple’s website, where each product price ends with a 9.

A postscript: Keith Coulter, associate professor of marketing at the Graduate School of Management, Clark University, has suggested that this effect may be enhanced when the cents are printed in a smaller font.

2. 'Prestige' pricing strategy

Prestige pricing is the complete opposite of odd or charm pricing. Prestige pricing involves making all numerical values into rounded figures, i.e., $99.99 is converted to $100.

You may be wondering why. According to Kuangjie Zhang and Monica Wadhwa in a 2015 study, rounded numbers (e.g., $100) are more fluently processed and encourage reliance on consumers' feelings, compared to non-rounded numbers (e.g., $99.99), which are less fluently processed, and encourage reliance on cognition.

This means that rounded numbers 'feel right' because the purchase is being driven by feelings and the price is processed quickly.

Zhang and Wadhwa realized that consumers were more inclined to buy a bottle of champagne when it was priced at $40.00, rather than $39.72 or $40.28.

3. 'BOGOF': Buy one, get one free.

This is a pricing strategy in which customers pay the full price for one product or service to get another for free.

The psychological strategy at work here is, simply, greed. Once a customer comes across the offer, logic gets tossed to the wind and the main focus is making a purchase to get the free item.

Now, because this technique has been widely adopted and most people no longer take the bait, you could stir things up a bit by offering one of the following:

Buy one and get 25 percent off your next purchase.
Purchase one and get four bonuses valued at $60, for free.
Buy one, get three for free.

To fully maximize this strategy, get creative with your discount offers.

4: Comparative pricing: placing expensive next to standard

Comparative pricing may be tagged as the most effective psychological pricing strategy. This simply involves offering two similar products simultaneously but making one product's price much more attractive than the other.

This is a psychological game of choice for the customer, who has to choose between two products that are similar but have different prices.

This strategy works well with fashion brands, which place side by side tuxedos with similar quality but different prices, to make customers pick the more expensive one, which is the desired purchase.

To the average human, if something is expensive, then it is 'quality.'

A perfect illustration of this strategy would be the case study on “The Williams-Sonoma bread maker”.

5: Visually highlight the different prices.

When you offer a sale with a previous price side by side with a new one, you make more sales because customers feel they are getting a bargain and are not interested in researching the drop in price.

To make the new pricing strategy work effectively, use the psychological trick of changing the font, size and color of the new price.

This trick triggers a fluency effect and consumers interpret the visual difference to a larger numeral distinction, according to 2005 research by Keith Coulter and Robin Coulter.

According to that research, simply changing the font, size and color of the signage for the current sale price and placing it a little bit away from the previous pricing will increase the number of purchases, because customers see the new price as cheaper and a better deal than the previous price.

Tip: The pricing difference should be no more than $10.

Related: Make Sure the Pricing Is Right With These Tips

Conclusion

So, given these psychological pricing strategies, you might try them out, remembering to split-test different ones on different pages and products to determine what works best for your business.

How you price your product, service or workshop can have a massive impact on your sales. Unfortunately, it can also lead to a massive anxiety attack as well.

In this episode we lay out 8 pricing strategies you should know about.

More importantly, however, we share off the cuff, brutally honest ideas about how to price your offering.

Let’s Talk About Pricing Strategy

Most entrepreneurs never think too much about their pricing strategy. They might take a peek at a similar product from a competitor, adjust the price by a couple dollars, and joila – the product is ready for sale.

But in the classic business world, pricing was an art form. Pricing gurus at major companies obsessed over finding the perfect price to maximize profit from a given product or service.

In other words, that Gillette razor is priced the way it is for a reason. Not because it makes the most sense for the consumer, but because it maximizes shareholder value.

So, keep in mind that a pricing conversation is really about how you will get the most value from the product or service you decide to sell. Thankfully, independent business owners don’t have shareholders, so we can also take into account things like doing what’s right for the customer.

Price Elasticity of Demand

While we’re not crazy about business school terms, we wouldn’t be doing our jobs if we skipped over price elasticity of demand in this conversation about pricing.

All you really need to know about price elasticity is this: if all else remains equal, demand for your product or service will decrease with an increase in price.

As an example, imagine this: you can sell 100 units of a $100 dollar product to your current audience. If you increase the price to $105, you are able to sell 95 units. Your costs are $20 per unit. Should you sell at $105 or $100?

The answer: $105. Why? Because you’ll earn $8,075 profit as compared to $8,000 at $100 per unit.

Great. That’s all the theory you need to know. When price increases, demand goes down. There is an optimal pricing level you can reach to make the most money from your thing. Capiche?

8 Pricing Strategies to Help You Price Your Digital or Physical Product, Service, or Workshop

Elasticity is great in theory, but it doesn’t tell us anything about where to start with your pricing strategy. Instead, let’s talk about some of the most common methods for pricing:

Cost-plus Pricing – Cost-plus pricing is an effective way to build a profit margin directly into the price of your product or service. It’s just what it sounds like: you calculate the cost to deliver a product or service (cost) and then add a 10% margin, for example (plus). Cost-plus is straightforward for the entrepreneur, but doesn’t take into account the mindset of the customer. You may also leave money on the table by focusing on cost.
Competitive Pricing – Competitive pricing focuses neither on costs or customers. Instead, competitive pricing is all about the existing market for your product or service. In competitive pricing, your job is to research the pricing strategies of many competitors to establish a pricing range. The range should have a high end and a low end, and the price of your product or service should fall somewhere between those bookends so that it is competitive.
Luxury Pricing – Luxury pricing is a classic strategy used by brands like Louis Vuitton, Mercedes, and Rolex. The price has more to do with the aspirations and image of the person making the purchase than anything else. By buying a product or service at a luxury price, we are buying our way into a club. That club is a representation of how we want others to see us in the world.
Rate-based Pricing – Also known as hourly pricing. Freelancers, consultants, and coaches most commonly use rate-based pricing for their services. The downside is that you have to trade time for money. The upside is that you’re guaranteed to get paid for every hour of work. Clients are sometimes hesitant about hourly pricing because they fear the incentive is to work more hours to make more money as opposed to being efficient.
Project-based Pricing – Project-based pricing is a flat fee arrangement agreed to at the outset of a project. The entrepreneur may make an estimate of how many hours she thinks the project will take and then price accordingly. Or, she may combine this strategy with some of the upcoming pricing strategies to charge more. The incentive is to finish the work quickly and with high quality. For this to work well, the scope of work should be well defined up front.
Value-based Pricing – Value-based pricing takes into account two key questions: 1) Can they pay?; 2) Will they pay? They are the customers, which makes value-based pricing a customer-centered approach to pricing. The determinant factor in this pricing strategy is how much your customers are willing to pay, rather than how much a product or service costs to produce or deliver. There is huge upside for the entrepreneur when value-based pricing is used well.
Tiered Pricing – A tiered pricing strategy gives consumers the option of choosing between different versions of the same product or service. For example, imagine considering a single gear bike for $299, a three-gear bike for $399, and a seven-gear bike for $499. A tiered pricing strategy turns a yes or no decision into an either or decision for the potential customer. It also provides a price anchor (as a consumer, I can convince myself I am being frugal by spending $299 on the single gear bike as compared to $499 on the seven-gear).
Pay What You Want Pricing – Also known as a donation-based pricing strategy, pay what you want pricing allows the customer to make the decision on how much the product or service is worth to her. Pay what you want allows you to test market demand without knowing the price elasticity for your thing. When combined with a “suggested price,” a pay what you want pricing strategy can sometimes lead to more profit than a set price.

As you read through the eight pricing strategies, you might have noticed something… These pricing strategies are not mutually exclusive. And, in fact, they are not.

Pricing Strategies: How To Set Prices For Your Products Make

Many of the pricing strategies can be used together to create the best outcome for your business and your customers.

Pricing Strategies for Digital Products, Physical Products, Services, and Live Events

Now that you have an arsenal of pricing options available to you, let’s get into the specifics of how to apply them.

Digital Products

For digital products, pricing strategies range widely. From $.99 books on Amazon to $2,000 courses, digital products truly run the gamut. Your price should be a reflection of your industry, your customers, and the value provided through your product or service.

Pricing strategies to consider: Competitive Pricing, Value-based Pricing, Tiered Pricing, Pay-What-You-Want Pricing

Physical Products

Pricing Strategies: How To Set Prices For Your Products Without

Unlike digital products, there are hard costs (other than time and energy) to producing a physicial good. While services like drop shipping, print-on-demand, and 3D printing are helping drive costs down, the physical product world is still very unique. It’s important to keep in mind unit economics when it comes to pricing physical products: if you lose money selling one product, you’ll lose more money with every successive sale.

Pricing strategies to consider: Cost-Plus Pricing, Competitive Pricing, Luxury Pricing, Value-based Pricing, and Tiered Pricing

Pricing Strategy For Products

Services

Pricing services can be challenging, as so much of the value comes from your personal ability to deliver. Customers like to see things like testimonials, portfolios, and case studies of your work before they’re even willing to consider hiring you. While price is important, make sure you don’t disqualify yourself by keeping necessary information from your customers. Additionally, “productizing” your services can be a great way to help customers understand exactly what you can do for them.

Pricing strategies: how to set prices for your products without

Pricing strategies to consider: Rate-Based Pricing, Project-Based Pricing, Value-Based Pricing, and Tiered Pricing

Live Events

Like services, workshops and live events are highly dependent on the speakers or workshop leaders to deliver value. The experience of the attendee can vary greatly from session to session. Setting clear expectations up front helps frame the value of the event so that a potential attendee is ready to consider the price you’ve set for the ticket.

Pricing strategies to consider: Competitive Pricing, Value-Based Pricing, Tiered Pricing, and Pay-What-You-Want Pricing

Pricing Strategy Matters, But a Great Product or Service Matters More

Hopefully this gives you a great overview of the pricing strategies available to you, and the ways you can use them to help price different kinds of products and services.

Pricing Strategies: How To Set Prices For Your Products Sold

But if you take one thing away from this podcast episode and article, let it be this: no matter how well you price your product or service, nothing can make up for the importance of having a truly great product or service.

Your customers will tell you whether you have a great product. Make sure you listen.

If you want to learn more about pricing strategies, be sure to check out the show notes below!

Galoading386