A lot of entrepreneurs struggle to settle on a pricing strategy. Some may not even understand the dynamics of strategic pricing; they decide how much to charge seemingly at random, based on their costs or what they think the market will bear.
These are poor approaches. For the success of your business and to maximize your impact in the world, your pricing strategy needs to be coherent. Your strategy must match your market, your marketing and the value you deliver.
In this article, we’ll break down three steps to choosing your pricing strategy and detail the considerations you need to keep in mind to execute successfully.
Step 1: Know Your Market(ing)
The first thing you need to do is to understand your ideal client and what they can afford. This doesn’t mean you should try to be cheap; a high-ticket product can be totally affordable as long as it’s marketed to the right people. You can also create payment plans that allow clients to pay you in installments.
Pricing is largely a marketing issue, not a sales issue. Marketing creates awareness. Sales brings clients from awareness into a business relationship. A sale isn’t the end of a conversation. It’s the beginning of a relationship.
This means you need to understand the expectations of your ideal client and meet those expectations in every element of your marketing. If you’re having difficulty converting, or clients balk when you tell them how much an item costs, it’s because you have a market-to-message mismatch. Your marketing should be consistent with your prices so your clients receive a consistent message from start to finish.
Step 2: Choose Premium Or Economy
This step is a continuation of the previous one. You need to determine what niche you’re operating in and market accordingly. If you’re projecting a premium brand, everything you put out must match that perception. It’s no good having a website you made yourself using a templated program, or handwritten flyers. A premium brand, commanding premium prices, requires premium marketing materials.
I have a strong preference for the premium strategy, for a few reasons. The first is that there’s no ceiling. You can charge whatever people are willing to pay. At the other end of the scale, there’s clearly a floor. There’s a point below which offering your services is no longer profitable. That’s a race to the bottom.
Ironically, the economy space is more competitive, because people are competing on price. It’s a zero-sum game. In the premium space, people aren’t shopping for bargains, so there’s room for everyone. We tend to believe that more expensive goods and services are worth more.
Another reason I prefer the premium strategy is that there’s a lot more margin for error. Let’s say you’re closing sales at a rate of 50% (which would be abysmal; a closing rate of 90% is totally achievable). If your price is high, you’re still in good shape. Your competitor down the road, whose prices are a quarter of yours, needs to close four times as many sales as you do. Even if they’re closing at 80%, they’re less successful than you, overall.
I can’t tell you whether to position yourself in the premium space or the economy space. There’s room for diversity in the market. What I can tell you is you need to choose a niche and make sure everything you put out matches your brand.
Step 3: Consider Time-Sensitive Adjustments
In this section, we’ll discuss two pricing options: lowering your prices for a short time to create buzz and raising them when you’re bringing a product or service to market before anyone else. The first is known as penetration pricing, the second as price skimming.
Penetration pricing is a way to get a foothold in a market. It can be useful in some circumstances, but it can also be a trap. Penetration pricing must be limited, either by cutting it off at a certain date or offering it to a limited number of people. If you get stuck on penetration pricing, you’ll find yourself in no man’s land. You may have plenty of clients, but they won’t be paying you what you’re worth.
Instead of lowering prices to draw people in, price skimming relies on having a unique product or service that’s in high demand, allowing you to raise the price while the market catches up.
Price skimming can seem like a scary strategy. Maybe you’re worried that if you try it, people will think you’re overcharging and go elsewhere. That’s a natural response, but if you get to market with a product that delivers great value before anyone else, it’s important to remember that there is no agreed-upon fair price. You’re the first in line.
Think back to the emergence of the VCR, the cellphone and the HDTV. When they were released, the prices were extremely high. Before long, competition grew, and they dropped, but for a short time, the companies that were first to market reaped huge profits.
Crafting A Coherent Strategy
When you’re deciding how much to charge, it’s essential that you think coherently. You’re not plucking a number out of thin air. You’re choosing a price point that reflects your understanding of your ideal client.
You know who they are and what they can afford, so you position yourself accordingly. Match your marketing to the niche you’ve chosen so you’re delivering a consistent message. Your price is part of that message. Finally, make an informed decision on the question of whether to use penetration pricing or price skimming. If you raise or lower your prices, it’s with a clear goal in mind.
Follow these steps carefully and use them to create a pricing strategy that matches the value you deliver and the needs of your ideal client.