How to Price your product or service.

Pricing may be the most important marketing decision. It is easy get pricing wrong and getting pricing wrong may be a mistake that keeps on giving. This ScentTrail Marketing post shares the first of five pricing tips. My background is B2C retailing (mostly), so this post walks and talks online retailing. B2B pricing strategies are similar at concept. Change a few of the words and online retail pricing strategies outlined here work for B2B. This post is the first in a five article series on how to price your product or service.

5 How To Pricing Tips (in 5 posts)

Pricing Tip 1: Price Consistent with your Business Model
Pricing must be an extension of your business model. Pricing inconsistent with your model creates dissonance and confusion. Confused buyers NEVER buy. Selling a premium service with ultra-low pricing is inconsistent, confusing and doesn’t work. There are five basic pricing strategies:

• Ultra-Low Cost (Amazon)
• Low Cost (Walmart)
• Market (Barnes and Noble)
• Value (Zappos, Apple)
• Value Plus (Tiffany, Brooks Brothers)

Ultra Low Cost
Amazon tends to set the basement price for retail products with velocity. Velocity, let’s call this V, is related to sales. Fast sellers provide quick return on capital and other retailer benefits. Count on Amazon to have the lowest retail cost on products whose V is greater than average. Amazon will probably be low cost on products whose V has the potential of being better than average. Amazon’s algorithm is so powerful and swift it reacts to any move, up or down, quickly. If your business model is ultra-low cost you must consistently beat Amazon pricing by better than 10% (good luck with that).

Ultra Low Cost “daily deal” retailers like Woot.com and Tanga.com are the best “beat Amazon” approach. They combine auction site (eBay) behavior with ultra-low prices. They sacrifice offering breadth (e.g. number of SKU’s) to turn marketing volume up on other features such as Woot’s unique voice and great product selection. Ultra-low cost retailers want high V products where they can beat Amazon, if only for a limited time, better than 20%.

Ultra-Low Cost = Change Model by limiting selections, focus on high V products, add unique features such as voice + beat Amazon by at least 10%

Low Cost
Low cost retailers mix low retail prices on products high V, market prices on slower moving products, and “price match” strategies to curate the most profitable mix. Low Cost retailers such as Walmart, Walgreens and Target know price fluctuates faster than they react. “Price match” strategies enlist customers as an “early warning” system. Customers tell Low Cost retailers when they are out of sync with competitors. Price match is more important as a brand concept than a pricing strategy. Low cost retailers know few “price match” requests will be made. The strategy is drive home the concept of “low price leadership” without having to be the lost cost provider on 150,000 stock keeping units (SKU’s and the average number in a super store, online stores may merchandise millions of SKU’s). Low cost retailers count on shopping baskets containing low price high V products AND higher margin lower V products. If you read, “higher margin lower V products” to mean Low Cost retailers are NOT the lowest cost retailer on every single product all the time then you get a cookie. Low cost retailers price at or around Amazon and they use “price match” as an early warning when they are out of alignment.

Low Cost = Price around Amazon + Enlist shoppers to use “Price Match” to move back into alignment and create a “lowest cost” brand without being the lowest cost retailer on all products at all times + look to sell as many combinations of low cost high V and higher cost low V products as possible because SALE + NON-SALE baskets = MOST PROFIT

Market
Market retailers are usually Amazon + 5% to 10% (give or take 3 points). Market price retailers such as Harris Teeter (southern grocery stores), Nordstrom’s, Barnes and Noble and Macy’s use brand strength to create float above their Ultra-Low Cost and Low Cost retail competitors. They use loyalty programs and affinity credit cards such as Barnes and Noble’s Members and Macy’s “Star Rewards”. Ironically market pricing is harder if your product or company is new. New products and services need a pricing strategy that DOESN’T DEPEND on established brand strength. New products and services need to think BELOW or ABOVE market pricing.

Market Price = Requires Established Brand Strength to justify pricing above Amazon by 5% to 10%

Value
Value retailers combine growing brand strength, more customer service (in direct or indirect ways) and other unique ideas such as Zappos’ free shipping on all purchases AND returns (a revolutionary unique idea that won). Value can come to mean hundreds of variables in consumers’ minds. Variables such as word-of-mouth, reputation, return policies, reviews and urban legend create consumer perceptions. Toughest thing to learn as a P&G trained marketer is value and brand perceptions are set by the mob especially an Internet fueled wisdom of crowds mob. It is possible to nudge mob perceptions. It is impossible to control mob brand perceptions. Great examples of nudges from value retailers include Bass Pro Shops excellent Q&A user generated content (UGC) and Apple’s revolutionary retail stores complete with “Genius Bar”.

Value = Some Unique Selling Proposition (USP) + More Customer Service (people, content or social) + Growing Brand Strength + can afford to price Amazon +10% to 15%

Value Plus
Value Plus or “extreme value” must have some compelling, popular and sticky unique selling propositions tested over time. Extreme value retailers such as Crate and Barrel, Tiffany, Saks and Brooks Brothers combine strong brands, highest levels of customer service (or the perception of this), great “house brands” and unique selling propositions to justify higher prices.

Value = Strong Brand + More Customer Service (or perception of same) + USP + can price Amazon +15% to 20%

Pricing Strategies Bottom Line
If you are creating a new product or service pricing options are more limited than you might think. Your brand isn’t established so other things such as a unique selling proposition (USP), customer service and a cool idea are the hooks to hang your marketing plans on. New products or services pricing options include:

• Ultra-Low Cost - find a way to consistently beat Amazon like Woot.com.
• Value Pricing – provides the most leeway for incorporating market feedback and is less risky than being David to Amazon's Goliath. Price is always easier to move down rather than up.

The best solution for startups with a new product or service is Value Pricing. Value Pricing can go down to ultra-low cost if space is too crowded and you don't get traction. Value Pricing can go up to Value Plus if brand becomes established, sought after and able to carry more of a premium price

Product prices rarely successfully go up. Product prices usually go up when generally understood raw material costs such as oil are going up. Many manufacturers raise prices when generally understood raw material costs are increasing EVEN IF their product doesn’t rely on those increasingly expensive raw materials. Price increases and decreases tend to be cyclical creating a “climate” or “mob mentality” for price pressure. When I sold candy we raised prices one year because we could. We tied the increase to commodity pressure but our commodity purchases where hedged for more than a year. We put through the price increase because the market would pay the extra nickel without hurting profits. The “what will the market approve” price conversation is almost as important as pricing consistent with your business model and will be covered in detail in Pricing Tip #3.

Next Pricing Tips posts:

Pricing Tip 2: How To Price Your Product or Service II: The Myth of “Suggested Retail Prices”

Pricing Tip 3: How To Understand What the Market Will Bear

Pricing Tip 4: Pricing and Social Media Marketing

Pricing Tip 5: B2B Pricing Strategies