Prices and Pricing Strategies: How to price your offerings more effectively

Gas Prices Are Up!!! Feelin' the Pinch...
Image by Clan UiBriain via Flickr

2009 BC: A buyer and a seller barter over the exchange of a few sheep for a couple jugs of olive oil.

9AD: A Roman citizen wanders through a market and exchanges newly minted coins of Caesar for a finely woven rug.

2009: AD: A buyer in one country clicks a button to pay for an instantly downloadable ebook from a seller in another country.

Although the products are different, and the transactions are worlds apart, they share some common elements. In particular, each transaction is secured when the buyer and the seller agree on a price.

I’ve been thinking a lot about pricing and pricing strategy lately as I perform an annual review of my own prices and as I work with clients on the pricing strategy of their products and services. I wanted to write down some initial thoughts about pricing here but this is not my final word on the mater. Rather, it is an essay of sorts on my thinking thus far on the topic of prices. It’s the first of an ongoing, sporadic series on the concept of price and pricing strategy, and their relation to content and content strategy.

What is Price?
Price is one of those factors that we take for granted in a transaction. Yes, buyers might haggle over the price and sellers might experiment with different price points to discover the best price to charge, but price is ultimately a part of the transaction that we think little about. We rarely consider what elements make up a price and, more importantly, how those elements work together to develop a pricing strategy.

Price is the amount of money that a product or service is offered for. It is a pre-set value based on a number of assumed factors by the seller; furthermore, it is half of the value-exchange that takes place in a transaction: the seller asks a price and the buyer considers the potential return on investment. If favorable, the buyer pays the price and receives the product.

Price versus cost
Price is not cost. Cost is the expense of value. There is a cost to creating a valuable product or service and that cost will inform the final price set. Likewise, the buyer has cost in mind when they are considering whether or not to pay the product’s price with their hard-earned money.

Factors that impact price
The price of an offering is usually set by the seller but that number is not (or should not) be set arbitrarily. The price is influenced by the following elements:

  1. What the market can bear
    • Supply and demand: If there are a lot of similar products, the price of the product is driven downwards because the buyer has choice. If the product is rare, the price of the product can be driven upwards because the buyer has little choice.
    • Economic confidence and the availability of money: The buyer’s confidence in their own economic stability, as influenced by their access to money, will also determine what the market can bear. In times of economic uncertainty, when access to cash or credit diminishes, the market may not be able to bear higher prices.
  2. Value perception
    • Perceived ROI: All purchases are an investment and a sale is made when the buyer is convinced that the value they are receiving will be higher than the price they paid. It doesn’t matter if there is a measurable ROI; it’s perception. A product that makes the neighbors envious is a highly valued return and can be worth a higher price.
    • Credibility: The credibility of the seller and of the product helps to contribute to a higher price. Credibility may or may not be related to the return on investment but it could be enough that the seller themselves are a well-known name. This is the classic “celebrity endorsement” scenario at work.

Price as the expression of a product’s value
In the investment world, there is a debate about the meaning behind the price of any given stock, and this debate is similar in the world of pricing and pricing strategies.

The “efficient market” hypothesis says that everything you need to know about a stock is expressed in the price. This school of thought assumes that all stock market transactions are the result of thoughtful research followed by correct action. The same goes for prices: This school of thought would say that everything you can possibly know about a product is expressed in the price.

The “evidence” theory suggests that markets are inefficient and prices cannot be predicted because buyer behavior cannot be predicted. The same goes for prices: This school of thought would say that a price is only a part of a much larger buying decision… and a small part at that.

Brand new entrepreneurs, who are just starting a business and deciding on the price to set, tend to subscribe to the efficient market hypothesis in trying to find the optimized price for their product based on assumed factors. History would tell us, however, that prices are far more inefficient and merely a portion of the selling and buying process. Bartering, haggling, and auctions are three examples of price setting as a fluid event made up of many evolving factors rather than a static event that cleanly expresses everything in one bottom-line number.

Pricing Strategies

  • High priced provider
    • What is a high-price provider? This is where your products or services are among the most expensive in the marketplace, when compared to other products that are seemingly similar. Examples include Rolls Royce and Rolex.
    • Why choose a high-priced-provider pricing strategy? The thinking goes: If your peers see that you can afford a high priced option, they’ll assume you are more successful. Driving a Rolls, for example, comes with a certain amount of bragging rights. The market demand is one of luxury and exclusivity.
    • How to implement a high-priced-provider pricing strategy: If prices are made up of the two comments listed above (“What the market can bear” and “value perception”), then demand must exceed supply and the perceived ROI must be extremely high (and the “return” should include the envy of your peers).
  • Mid priced provider
    • What is a mid-price provider? This is where products or services are in the middle range, neither aiming to have the luxurious or exclusive aspect nor aiming to be the cheapest price. An example might be a mid-size or large car from Chevrolet or a product from Apple.
    • Why choose a mid-priced-provider pricing strategy? This is a surprisingly complex pricing strategy! Prices are not so expensive or inexpensive that supply and demand are far apart. The key point here is to provide value and plenty of it. And, since exclusivity isn’t an option here (otherwise the seller could become a high-priced provider), the value needs to be present in other ways.
    • How to implement a mid-priced provider pricing strategy: If prices are made up of what the market can bear and of value perception, the price needs to be fixed a point where supply and demand are close but where the perception of value is high.
  • Low priced provider
    • What is a low-priced provider? This provider typically charges the lowest price possible in an effort to generate volume sales and/or marketshare. An example might be an economy car from Hyundai or a low end department store brand. Some brands, like Enterprise Rent-A-Car are famously low-priced, inviting buyers to shop the competition first and return with a price to beat.
    • Why choose a low-priced-provider pricing strategy? A business should only be the low priced provider if it can consistently provide low prices and seeks to continue driving prices lower through systems innovation.
    • How to implement a low-priced provider pricing strategy: This pricing play is focused on the availability of money (i.e. By making the price so low, you are increasing the ability of the buyer to purchase with available money). Supply/Demand and credibility are less important. Perceived ROI seems to be closer to a 1:1 ratio here than in the other two types of price provider levels.

Observations and pricing rules of thumb

  • If a high-priced product and a mid-priced product have similar value, the high priced product can only be priced higher if there is a sense of luxury or exclusivity.
  • If a low priced product and a mid-priced product are similar in most respects, a rational buyer will purchase the low priced product.
  • Residing between these points (i.e., having a product that is priced BETWEEN high and mid or BETWEEN mid and low) is going to be far more challenging than finding a price in these points.
  • Being a high-priced provider and a low-priced provider can be very challenging: Both are far more fickle markets. High-priced providers are at the mercy of changing ideas of exclusivity while low-priced providers are at the mercy of competitors who will be able to provide the same product at a cheaper price. The mid-price provider is actually the best positioned of the bunch because of their focus on value.

Pricing Tactics
Bundled Prices are prices where a single price is given on a package of products or services. Bundling prices allows businesses to create a value perception and to move inventory (or sell services) that might not normally be sold as often. In a way, it’s like an assumed cross-sell.

Unbundled Prices are prices where a single price is given but on the “bare bones” product. Other fees, expenses, or additional products or services are not included.

A La Carte Prices are individual products or services, each with their own price, from which the buyer can select their own collection of purchases. (This is different than unbundled pricing, which strips out fees and expenses, too).

Examples:

  • Fast food restaurants offer both bundled price and a la carte prices. Their bundled prices are seen in meal deals where a buyer can pay one price to get an entire meal deal or can pick and choose elements to make up a meal “a la carte”.
  • Rental car companies at highly competitive airport locations are notorious for their unbundled prices: They will quote the unbundled per-day rental fee but later offer additional products like insurance.
  • Airline companies that have introduced a bag fee are receiving negative media attention for this unbundled price practice.
  • As a writer, a lot of my services are “a la carte” because a client can contract my services to just write blogs or articles or ebooks. However, I do have bundled prices – “package deals” if you will – because customers like having an “all-in-one” price that feels more predictable to them.

Loss leaders are under-priced products used to attract buyers to make an initial purchase so that later they can be sold regular-priced products. There is some value in doing this (because you get new customers), but there is also a challenge: You will get a mix of customers in search of low-priced products and customers in search of mid-priced products. The low-priced product customers will always resist buying the regular priced products. Still loss leaders can be a good way build a customer base and there are methods that allow you to acquire good mid- and high-priced product customers with loss leaders. (Those methods are outside of the scope of this article but they may include newsletters or a free downloadable introductory ebook).

Communicating your price
Your content needs to support the price you are asking for your product or service.
•    If you are a high-priced provider, your pricing strategy needs to highlight exclusivity so your content needs to support that. Your content should express how difficult the product is to make or buy; your testimonials should highlight the envy of family and friends; even the business needs to express how little they WANT to sell!
•    If you are a mid-priced provider, your pricing strategy needs to highlight the value you can provide to your customers so your content should describe exactly what return the customer can expect to get from the product or service, and (if possible) this should be expressed in concrete metrics (as opposed to the less-concrete “envy” that is expressed in a high-priced provider).
•    If you are a low-priced provider, your pricing strategy needs to simply highlight the price itself. While you may discuss value, low price clients are buying to solve an immediate need with price-sensitivity as their primary concern and thus their sense of “value” is in the low price itself.

Pricing strategy, content, and content strategy
What does pricing have to do with content and content strategy? Everything! One clearly influences the other and incongruence between the two will result in a faltering business that doesn’t sell anything. Furthermore, your prices are part of the inefficient marketplace that is always evolving to change how the market interprets the value derived from your prices. You can control that with content and content strategy.

Aaron Hoos

Aaron Hoos is a writer, strategist, and investor who builds and optimizes profitable sales funnels. He is the author of The Sales Funnel Bible and he's a real estate investor and a copywriter for real estate investors.

Leave a Reply