The easy steps you need to know to make pricing a key component of your company’s marketing mix
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You can have the best product or service in the world, but if you don’t have a solid and contextually based go-to-market (GTM) strategy and execution plan, you will fail. Marketing plays the critical role in building brand awareness, lead generation, prospect and customer nurturing. Business schools and countless business books discuss the importance of the 4 Ps (Product, Place, Price, and Promotion) as the key components to a solid marketing approach. While all four Ps are important to a founding team’s marketing strategy, the “P” I get asked the most about is pricing. Pick the right pricing model and you can transform your goals from concept to reality. Chose the wrong pricing strategy and you risk immediate failure.
Miriam Christof, principal at JustJump Marketing, and pricing coach Jenny Wholly recently hosted a pricing workshop for entrepreneurs. Creating the right pricing strategy can be excruciating. It is a complex endeavor that brings out insecurities in the best of us. Christof and Wholly cut through the potential rat-holes of pricing discussions and recommended an easy to follow five-step process:
Step 1: Determine your business goals. How you make money determines everything about your marketing and sales GTM strategy. Christof and Wholley outlined the following business goal considerations for startup founders to use as a determinant for the basis of pricing:
- Increase profitability
- Improve cash flow
- Market penetration
- Larger market share
- Increase revenue per customer
- Beat the competition
- Fill capacity and utilize resources
- New product introduction
- Reach a new segment
- Increase prospect presence
- Increase prospect conversion
Step 2: Conduct a thorough market pricing analysis. While the first step is grounded in your business goals, this step ensures that your pricing strategy considers the context of the market in which your product or service will compete. “Low cost providers like Walmart often market to a broad audience while high cost providers like Tesla market to a specific audience.” If your market and product are broader with many players who offer similar products or services, chances are you will compete on price. You will “need to do everything to keep operational costs down to ensure a maximum profits margin,” says Christof. Conversely, if you have a high value, highly differentiated product or service, your offering may be more conducive to premium pricing, which lends itself to a different form of targeted marketing. “With a superior product, it is important that you are able to place emphasis on high quality marketing and customer service,” says Christof.
Step 3: Analyze your target audience. This steps enables you to answer why, what, and how customers will use your product or service based on their specific and urgent needs. “Be guided by the most important question: what perceived and real value does my product or service bring to the customer. What is the task they are facing? How does my product or service ease the pain associated with this task? What does my customer have to gain by using my product or service?” says Christof. Your pricing model and promotional campaigns must align with why your customer would buy your product. For example, if you have a best-of-breed product that uniquely fulfills a customer’s urgent needs, value-based premium pricing may be the best strategy. Creating low-cost promotions and giveaways will confuse your customers, undercut your value, and shrink your profit margin.
Step 4: Profile your competitive landscape. Whether you are a low-cost provider or a differentiated vendor, the pricing model and price point of your competitors is a significant pricing strategy influencer. Christof suggests the following approach for direct and indirect competitors:
- Identify at least three direct competitors. Study the structure of their pricing. For example, do they have component pricing and allow for heavy discounts? Do they bundle with other products or solutions? Or, do they employ value-based pricing where clients pay a percentage of the total perceived ROI.
- Consider the substitutes a customer may use to solve the task or problem that your product or service addresses. Find out how much these indirect competitors cost the customer. And remember, sometimes your indirect competitor is the word “no”. Consider of self-solutions, or no resolution, as well as other indirect vendor alternatives.
Step 5: Create a pricing strategy and execution plan. At this point, you have gathered enough information to formulate an action plan. Christof identified 10 pricing strategies to consider based on your market, customer, and competitive analysis:
- Penetration pricing: Price is artificially low to break into the market
- Economy pricing: Everyday low price with the focus on low manufacturing/delivery cost
- Premium pricing: High price for high value
- Price skimming: Go into the market with a high price, but once your competitors follow, lower your cost and implement other pricing strategies
- Promotional pricing: Discounts over a period of time, one-time deals
- Psychological pricing: Price products or services which triggers action. For example, charging .99 instead of $1.00
- Versioning: Offer different tiers for your services or products: good, better, best
- Sandwich pricing: High, medium and low priced item with the intent to drive customers to the medium priced item
- Competitive pricing: Set the price equal to what your competitors are charging and win the service game
- Value pricing: Understand the value for your customers and their willingness to pay. Also understand what alternatives do they have
After you have completed the five steps, take the time to work the steps backwards. This will help you ensure that the GTM actions you chose to take give you the best shot at successfully competing in your target market segments, gaining revenue and market share.