How much should you charge for your products? Sometimes finding the right pricing strategy can be a real challenge for your business and your small business budget.
Getting the pricing wrong can mean losing out on thousands of dollars in sales.
Did you know the average consumer visits three websites before making a purchase? The more expensive an item the more sites they are likely to visit. So getting your pricing right can make the difference between people buying from you or from your competitors.
A study by the e-tailing group concluded that consumers are invested in finding the lowest price:
94% of online shoppers invest time to find the lowest price for everyday commodity products
51% visit 4+ sites before finalizing a purchase
36% spend 30+ minutes comparison shopping before making a decision on purchasing a commodity product; 65% spend 16+ minutes doing so
The one thing you can be sure of is that you cannot accurately predict a consumer’s response to something. People just aren’t rational.
People tend to be clueless about prices. We make do with guesstimates and a vague recollection of what things are supposed to cost – William Poundstone, author Priceless: The Myth of Fair Value
For this reason it’s worth looking at some of the pricing strategies that other businesses are successfully using and seeing what you can test yourself.
For instance why do supermarkets often have shoppers move in a counterclockwise direction through the store?
Here is a list of 14 pricing strategies that can be used to maximize your revenue.
14 pricing strategies that bring in the dollars?
1. The number nine
The pricing strategy to end a price with a nine rather than round it up might be one of the oldest tricks in the book. For example, charging $39 rather than $40. But it does work. William Poundstone, in his book Priceless found that sales increased by 24% when using the ends in 9 strategy.
In another experiment by the University of Chicago and MIT, a mail order catalog was printed in three different versions with identical items for $34, $39, and $44. They sold more items at $39 than any of the other prices.
2.The sales price
Consumers want value for money and everybody loves a deal, fact. Which might explain why the second oldest pricing strategy in the book is to show a sale price next to the original price, and why this increases sales compared to just showing the lower price.
You can see it in action in this example from a popular department store.
3. Demonstrate value for money
Research shows that almost 1 in 4 of your consumers, called “Tightwads”, will hold onto their money and will need convincing about the utility and practical value for money. The other 3 out of 4 of your consumers might be more convinced by a message that appeals to less rational utility messages.
Here is a contrast in two ads for cars. Which do you think would appeal to the tightwads?
The following 3 strategies will work well with convincing tightwads to buy.
A popular pricing strategy is called Bundling. Bundling is when you offer extra items on top of the selected product at a lower combined price than if purchased separately. This can be a great incentive to purchase as it offers customers greater perceived value for money. It works well when the items are related and are low cost to you. Common examples are Telcos with cell phone plans which offer different types of phones with varying amounts of talk, text or data per month.
Bundles make the decision easier for customers. Just imagine the hassle of trying to pick and choose each individual element: the type of phone with the amount of time, text and data you’ll needed each month. By giving too many options you cause indecision as consumers don’t know what to buy and so buy nothing.
5. Don’t price everything the same
If you’re selling a range of products, don’t make them all the same price as too many options can make people buy nothing at all.
For example, you’re in a supermarket and are looking to buy chocolate ice cream. You love chocolate ice cream and there are two to choose from, double chocolate chip or dutch chocolate. If both ice creams were exactly the same price, would this make it easier?
Well no, researchers found that actually if two similar items are priced the same, consumers are much less likely to buy one compared to when prices were slightly different. Researchers found that when a tiny price difference makes similar products more alike and increases the probability of someone deciding to purchase rather than deferring the decision.
Having the same prices for multiple products actually makes choosing harder.
6. Reframe the price
Would you buy something on impulse if it was on sale for $500 per year? Most people would definitely think about it as its not peanuts.
What about, something for $42/month?
The thing is $42/month is the same as $500 per year.
This example reframes the price in terms of the number of cups of coffee per day and $8 per day doesn’t sound bad for a new car!
7. One small word can make a big difference
A fascinating case study by Carnegie Mellon University showed the impact that one small word can make. Researchers changed the description and tested two versions
“a $5 fee” vs. “a small $5 fee”
The version “a small $5 fee” increased response rates by 20%.
Tip: be very careful when writing your copy and think about testing even small changes in wording.
Too many options can cause buyer paralysis, but too few options can also limit your sales. Nothing is cheap or expensive by itself, but compared to something.
In retail stores, obscenely high-priced items (such as a $5,000 handbag) make everything else (such as similar $1,000 handbags) look affordable. Similarly, more $500 shoes will be sold when $1,000 shoes are displayed next to them.
You often see pricing like this for cloud based software. Have you ever wondered why?
Well it might be because of price anchoring and something to do with William Poundstone, in his book Priceless: The Myth of Fair Value. He has an excellent anchoring case study for consumers buying beer.
In the first test, two options are available. Regular beer and premium beer
The majority of people chose the premium beer.
Second test, three options were available. Bargain beer, regular beer, and premium beer.
Now most people chose the regular beer and no one bought the cheapest beer.
So a final test was done with a more expensive premium priced beer.
The final test performed the best in terms of generating the overall most revenue.
Tip: Price points are worth testing and spending time on as you might be able to charge a higher price as long as it offers a premium experience.
Having the right pricing and packaging can double or triple your revenue. Nathan Barry recently talked about a good example of how bundling and anchoring can increase revenue. Nathan suggested to the seller that rather than selling 10 courses with over 50 videos on hand-lettering individually, one course at a time for $29, that they package them up into 3 tiers:
Masterclass – 10 courses for $199
Intermediate – 3 courses for $79
Starter – 1 course for $29
The result is that the seller sold $93,000 in just 2 days!
Common pricing ratios for anchoring and bundles are 1x, 2.5x and 5x or more.
How to test this: Try offering 3 packages and make the middle option the one you really want to sell.
9. Pay what you want
Pay what you want (or PWYW for short) is where the buyer pays the amount they want for something, normally a suggested price or minimum is set. The buyer can then choose whether they want to pay a higher amount than this. A suggested price won’t necessarily prevent low offers, but can work really well in your favour and increase your overall revenue. It does require a good loyal following and high perceived value for the product. It is not for the faint hearted.
Tom Morkes is a great advocate that PWYW can work. Tom has hundreds of examples of people and businesses successfully using PWYW that follow a number of basic principles that he outlines in his ebook. Tom has even used it for his consulting services with the result that his median hourly rate was higher than some doctors or lawyers.
10. One purchase is better than multiple purchases
Getting consumers to spend more in one transaction is better for you than trying to get the equivalent revenue spread over a number of sales. The more the number of individual sales needed, the more likely that the consumer could purchase elsewhere.
One strategy of selling products that are regularly consumed is to offer the option of buying larger packet sizes that offer better value for money. You often see super sized packets in the supermarkets.
Another option is to offer a discount or something for free if purchasing a year’s subscription rather buying something monthly (especially if there are no commitments). Telcos, insurance and cloud based software companies often do this.
The following example shows the discounting for purchasing the annual plan compared to monthly for Moz SEO tools. It includes some of the other pricing strategies we have talked about.
11. The power of FREE
The word Free is a magical word and a significant motivator for consumers, just look at the importance of offering free shipping or buy one get one free.
Free – two free shipping examples with minimum order values from popular ecommerce sites
The Freemium model
People inherently are looking for value for money but may be hesitant to try a new product. Freemium means offering a free option and a premium option. The free option may be for a limited time, such as a 30 day free trial or have reduced functionality compared to the premium version. Freemium pricing isn’t for everyone as it tends to work best for those businesses that rely on high networking and user growth. According to CEO of Techstars, David Cohen, typically only 1% or 2% of users will upgrade to a paid product. Good freemium examples include Skype and Dropbox.
12. Comparison pricing
A study found the second most common reason for consumers to leave a site before buying was that “I was not sure that the site provides the best price”.
However, excessive chest thumping about your low prices and making an explicit comparison to competitors can have a negative effect according to new research from Stanford University. A word of warning on comparing your prices against competitors. The fact that you asked them to make a comparison can cause them to worry they are being tricked in some way.
You should be wary of triggering customers to think about a competitor’s price and instead focus on selling to customers based on the value of your own products.
13. Selling time over money
If selling a product with a low price, you don’t necessarily want to focus on what a bargain it is and the money that has been saved. You can concentrate on a time when it is used or the enjoyment from using the product. Budget airlines do this well.
14. What’s in a comma?
Compare the following 3 prices:
Would your customers view them as being of equal value? According to a recent study, researchers found that people perceived the first and second examples to be higher cost than the third. They are all the same price, but when reading the price, the extra characters can make it feel more expensive. You can see that the comma strategy was used by Moz in the example that we showed for tip 10) One purchase is easier than multiple purchases.
While split testing or A/B testing is a good thing for testing squeeze pages, copy or call to actions on a website. It is not generally a good idea to A/B test different prices for a couple of reasons. First, it might be illegal to arbitrarily vary the price for different people. Second, you’re likely to upset customers who see the different prices and realize they paid more. You should focus on the price presentation, color, numbering, bundling etc. The best alternative to A/B testing price is to survey potential or existing customers.
What might work for you, might not work for someone else. So it is important that you consider pricing sooner rather than later and to try some of these pricing strategies. Don’t leave it to luck, or you could be missing out on maximizing your profits.