Last updated: February 2018
The second-most surefire way to increase a company’s profit is to optimize its pricing, deals and offers.
(The most surefire way is to improve usability.)
But most companies don’t spend as much time as they should on pricing, deals, and offers—maybe because they don’t appreciate how fruitful it can be—or maybe because they find it harder or more boring than other aspects of marketing.
Getting your pricing model wrong can be disastrous—as this story in The Onion humorously illustrates. (Classmates.com chose to monetize early, and to do so by charging its users—two activities that are now widely understood to be disastrous for social networks.)
So if you want to optimize your pricing, deals, and offers, this page contains a huge list of tips, strategies, and things to consider. We have used them on many businesses. Not all of the points will apply to you, but we have found that one breakthrough idea is often enough to transform a business. As you proceed down the list, we recommend you make notes of how you could implement each idea.
Establish your long-term strategy for pricing
- First, decide what you will monetize, and how. (Gillette innovated by making its money from the blades, not the razors. Dollar Shave Club innovated further by selling a recurring subscription.)
- Does your market benefit from economies of scale? (Most do.) If so, your ideal pricing strategy may be penetration pricing—charging a low price, basing your financial model on eventually reaching market-dominating economies of scale:
- Supply-side economies of scale mean that your profit margins increase the more you sell, because as you sell more, your cost of sales (unit costs) usually becomes lower, and your fixed costs become a smaller fraction of your overall costs.
- Demand-side economies of scale mean that the more customers you get, the more value each customer gets from your service, for the following reasons.
- You may benefit from having a network of customers. For example, if a phone system had only two users, only one type of call could be made (one between User A and User B). If it had three users, then three types of call could be made (A–B, B–C and A-C). If it had twelve users, sixty-six different types of calls could be made. The overall value of a phone system to its users is roughly proportional to the square of the number of users.
- You may benefit from there being a market of complementary products and services. The project-management web app Basecamp has many integrations, which it promotes on its website. At the bottom of the page, Basecamp shows off how quickly it’s acquiring new users, to persuade other companies to add integrations.
- You may benefit from having a bigger knowledge base, more forums, or more trained users. The ecosystem of knowledge around a product can be valuable in itself. WordPress grows because it’s easy to find a WordPress developer and it’s easy for those developers to find answers to their questions.
- You may benefit from the perception that yours is the standard. Users are aware of the value of choosing the ultimate winner—especially when they have to invest time and resources into using your company—so they will be attracted by the perception that you’ll win.
- Price high at first, then lower prices: This approach is good at mopping up all the money available in the marketplace. A book can be launched in hardback only, thus commanding a high price from those who are willing to pay it, and then later it can be released in paperback for mass-market sales. This approach tends to be more effective with products (e.g., consumer electronics) than as a strategy with platforms (e.g., online stores). It also allows statements like “Used to be $XXX” to be used in the future advertising. However, this approach has a weakness: business writer Peter Drucker stated that high prices can effectively “hold an umbrella” over lower-priced competitors, allowing them to thrive.
- Communicate that prices will keep increasing: This approach provides a kind of scarcity. It encourages buyers to act now, because they know prices will increase. It works when the major challenge is getting visitors to act promptly.
Price your product or service
Once you have chosen how your pricing will vary as time progresses, you can proceed to your pricing strategy. The following two principles are useful when considering how to price a product.
Consider the gaps in the market
You can identify gaps in the market by asking yourself the following questions:
- Which market segment isn’t currently being served? High-end customers? Low-end customers? Enterprise customers? Small businesses? Occasional users?
- To your target market, what represents value? (Gillette, mentioned above, succeeded by being first to acknowledge that no one wants to pay for the razor handle—they want to pay per shave.)
- What would their “dream product” be? We find it’s useful to ask yourself, “What would definitely work if only we were prepared to do it?” Write it down, even if it’s miles from being possible. Once you know what it is, you may be able to think creatively about how you could offer it. This approach led us to create the highly successful $49 world phone, with no monthly fees, which became a standard in the world phone market.
Price high or price low?
For a given type of product or service, pricing low and pricing high each has its advantages. The challenge is to work out where on the continuum your winning strategy lies:
- For products that are otherwise clearly identical, low prices tend to lead to high conversion rates (customers/visitors), more repeat purchases (or higher customer retention), high tell-a-friend rates and word-of-mouth, and favorable reviews.
- High prices lead to a higher profit per customer. If you increase your prices and your conversion rate doesn’t fall too much, you may be able to afford to spend more per visitor than your lower-priced competitors.
Neither of above two options is intrinsically better than the other. But bear in mind that, in any market, there can only be one cheapest option—and that many people don’t want the cheapest option: most people don’t buy the cheapest car available, the cheapest shampoo available, the cheapest clothes available, the cheapest watches available, and the cheapest insurance available. People tend to buy options they perceive to be of higher value. There are many opportunities for selling at high profit margins, provided you can find features and benefits for which customers would be willing to pay a premium. A good mindset is to imagine that you will charge a premium price, and then use your marketing knowhow to justify that price.
Note that many companies take external investment to fund their costs of client acquisition in the short term. The investment gives them all the previously mentioned benefits of high prices and low prices, and is based on the assumption that the strategic benefits of growing quickly will be worth it in the end.
Create your offer sequences
Once you have decided on your pricing strategy, you are ready to start packaging up your offers. Here are some of the many options available to you:
Use an offer that’s known to win
Here’s a great tip: Ask your salespeople what is their most effective offer. Is there anything they can say that always brings in the deal? One of our clients’ top salespeople once told us an offer that almost always worked. We incorporated it into a landing page and presented it to the company’s CEO, who said, “We aren’t able to offer that.” We explained, to his surprise, that his company already did—and that it worked well. He agreed to let us run the page, and—to his delight—it instantly increased the whole company’s sales by over 65%.
Lead with a “no-brainer”
Decide at what point in your offer sequence you monetize your services. The winning strategy is usually to defer gratification, making the initial purchase a “no-brainer,” and then to make money on the subsequent payments:
- Make the headline offer irresistibly appealing. This often involves understanding what main criteria your prospects are using to determine value. Set low prices for the criteria people consider when judging value.
- Charge low prices for the easily comparable aspects: Supermarkets are very competitive on prices of comparable products, like Heinz Baked Beans, and charge more for products that are less easy to compare, like artisanal balsamic vinegar.
- Make your money on the things people don’t consider when making a decision: Restaurants often have low-priced meals, then make all their money on drinks.
- Consider stripping down the features of your service, then charging for extras. Car dealers often have a low headline rate, then charge for extras.
- It can help to make the initial purchase free. If you can’t make it free, then at least try to make the initial price low:
- Offer a “free trial,” which may be a no-strings, completely free sample, perhaps with a discount voucher if the customer decides to continue. This works if your service is fantastic, and the best way to persuade buyers is to get them using it.
- Offer a free trial with an ongoing monthly charge if the customer continues.
- If it’s not possible to offer a sample, consider a simulation of a sample. Freebird is a service that allows travelers to get an alternative flight if theirs is canceled. As part of its conversion funnel, Freebird allows users to experience the whole process as a simulation, to see how easy it is.
- Consider offering something small and irresistible for an amazing price, just to get something into the buyer’s shopping cart. Once the buyer has accepted that they’ll be going through the checkout, they are more likely to buy other things.
- Offer an initial discount (e.g., only $9.99/month for the first three months; $19.99/month afterward).
- Multibuy deals: “Buy one, get one free” can be more effective than “half-price,” because it keeps a high price on the product (so doesn’t lower its perceived value) and encourages the customer to buy twice as much. The same goes for other types of multibuy deals.
- State that “We won’t bill you until N days after your purchase.”
- Allow the buyer to pay in installments (e.g., three monthly payments of $9.99). This works well if your research reveals that many buyers don’t currently have the money to pay for the product outright.
- Allow the buyer to “return it within X days for your money back.”
Other principles for creating the offer sequence
- An ongoing monthly fee often beats taking a one-off charge. It represents less initial risk for buyers, and customers pay as they receive value, which feels more reasonable.
- Ensure that the first product that people buy is one of your most liked ones. This will make customers much more likely to return. Survey customers to ensure that you know which of your products are most liked. (Note that your most frequently bought product isn’t necessarily the one that’s most liked.)
- Upsell and cross-sell. Creatively think of other things that the buyer would pay for, such as:
- better service;
- better customer support;
- extra information (e.g., a valuable ebook);
- quicker or better service;
- complementary products they’d also like (for inspiration, study the conversion funnels of companies that sell commodities in highly competitive markets like domain names, business cards, and cell phone plans).
- For inspiration, ask customers (maybe via a survey) what other services they’d like you to offer and what other related services they currently use. In our article about gap analysis, we describe a useful workflow for doing this.
This article is the first in a series. The next part is here.
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