20 SECRETS TO

DESIGNING THE
BEST PRICING
STRATEGY
Introduction
Customers can be hard to please, especially without the right
pricing strategy. They are sometimes erratic and over-demanding,
expecting a personalized and relevant experience. They can be hard
to accommodate, which is something every business on the face of
the planet must endure in order to stay profitable. The right pricing
strategy allows you to determine the optimum price point at which you
can maximize profits on the sales of your product.

There is a multitude of different types of pricing strategies in business

today but there is a “one size fits all” approach that suits all types
of products, businesses, or markets. A company needs to take into
account a variety of factors when formulating its pricing. This includes
production and distribution costs first and foremost, identification
of target customers, evaluation of what its competitors are offering,
positioning strategies and understanding the relationship between
quality and price. Only then will it have a clear picture of how to proceed
with its pricing.

While the majority of your customers won’t opt for a purchase if a

price tag is too high, your company also won’t succeed if the prices
it sets are too low to cover all of the aforementioned costs. Along
with the other three elements of marketing mix (product, place, and
promotion), the price can have a great effect on the success of your
business. This ebook will present some of the trade secrets to crafting
the best pricing strategy which will allow you to stay competitive and
profitable in today’s demanding business environment.

Enough with the chit-chat, let’s kick off with the list!

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1. Analyze and evaluate your costs.
We start with the basis of every pricing strategy - the cost. Simply put,
you need to cover your costs and then add in a profit, meaning you
have to know how much your product costs. The cost of a product is
not just the literal cost of the item, it also accounts for overhead costs
like shipping and stocking fees. In order to make a profitable product, a
business needs to take into account things like:

• Actual product costs - labor, marketing, and distribution;

• Operating expenses;
• A return on the capital invested;
• Capital for future expansion and replacement of fixed assets as
they age.

This is an ongoing process so a business must regularly track time,

expenses, and overhead for an accurate assessment of what a pricing
of a product should be and how to refine pricing strategy further.

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2. Create perceived value
with your pricing
Perceived customer value is one of the key concepts in the success of
a product. For the most part, it’s based on whether customers believe
the product fulfills all their needs. When a business develops a product,
it’s important to consider how customers will interpret and react to it.
A company should always design its pricing so it forms a perceived
value for its customers. In the end, the point is that the customers’
perception of the product’s benefits justifies its price tag. Once created,
the perceived value is what brings customers come back for another
purchase.

While extremely rewarding, the “less is more” approach is tough to

implement. Creating perceived value requests a comprehensive analysis
of large volumes of data in order to make knowledge-based decisions.
There is a great deal of market research involved, which leads us to our
next secret…

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3. Use price intelligence tools
Let’s be honest - creating perceived value is a hassle. It’s rather complex
and time-consuming if you do it the old fashioned way by trial and error.
Not that it doesn’t work, it’s just that it takes so much time and bears
the risk of alienating repeat customers. This is why price intelligence
software is the definitive way to go. It’s a faster and less invasive way of
performing market research.

Imagine having your brand positioning, product bundling and pricing

strategies efficiently adapted and optimized. Imagine having access
to hundreds of thousands of products through detailed analysis and
having insight into how your competitors react to your pricing strategies.
Well, there is no need to imagine anything as all those things are a
reality with intelligence software. You can also get price optimization,
custom dynamic pricing rules at a product level, possible scenarios
and much more. Analytics software provides real-time intelligence and
the process is completely automated, meaning there is minimal human
intervention required, thus saving you time to tend to other important
business matters. Since you have real-time data, it eliminates the trial
and error approach of constantly changing prices to hit the right one.

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4. Create additional values
for your goods
Customers aren’t always looking for the lowest prices out there. They
are more likely to see value instead of just blindly looking at the price
tag. So, you need to create additional value for what you are selling, be
it a product of higher quality, an easier and more convenient shopping
process that’s easier or more convenient or better policies such as
returns and refunds than your competition. Customers are most likely
to pay a little bit extra if they feel they will be pampered or experience
less of a hassle or getting a superior service.

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5. Customer retention pays off
More often than not, keeping your existing customers is much cheaper
than gaining new ones, thus making perfect sense to keep your current
customer base happy. As the customer acquisition costs (CAC) are
rising, a company needs to turn to innovation and assume a proactive
role in the market, thus retaining clients. Also, retained customer
provides increased profitability in years to come as you have built a
relationship on loyalty and trust, adding incentive for businesses to
devote resources to modeling their customer retention agendas instead
of using them use for CAC purposes. This all stems from targeting the
right kind of customers from the beginning. This includes designing
pricing to accommodate those loyal to your brand and product through
customer nurturing and retention programs like loyalty clubs or special
memberships, as well as raising prices for new customers only so they
don’t feel the price raise.

Of course, it is sometimes inevitable that customers come and go,

which brings us to our next secret...

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6. Find out why customers leave
Still, there are situations beyond your control when external factors kick
in and your customers opt to try their luck elsewhere. Luckily for you,
those customers are not forever gone and there are ways to bring them
back. As explained above, we already know it’s well worth the effort.
There is always a reason to why customers lose interest in your brand
or your product or both. Get to the bottom of this, if only to be honest
with yourself, and find out why.

In cooperation with your marketing staff, you can perform a SWOT

(strengths, weaknesses, opportunities and threats) analysis to evaluate
why your product is no longer perceived as the one with the best value.
Customer loyalty is a foundation for sustainable growth and you owe
it to your company to find out why they are leaving. Are changes in
the market uncovering your company’s weaknesses? Are you keeping
up with pricing and service? Are you being competitive? Answers to
questions like these can give you a much-needed insight into what is
wrong so you can fix your pricing (it that’s the issue) and bring back
the runaways, but more importantly - stop others from doing the same.

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7. Segment your customers
No customer is the same as each has different requirements, which
is why it’s best to focus on a specific group of customers (those that
are the closest in behavior to your best customers), rather than a
wide range of potential customers. The way to achieve this is through
customer segmentation.

Also known as market segmentation, customer segmentation is a

way to divide potential customers into distinct groups. Why? Because
the division addresses the fact that the value proposition for any of
your products (or some form of them) is different in different market
segments, making it easier for your pricing to reflect those differences.
There are numerous benefits of customer segmentations, such as:

• Product improvement
• Focused marketing message
• Better revenue
• Focus on more lucrative opportunities

By tailoring the pricing strategy to segregated market, you get a clear

idea about the people who want to buy your product, thus increasing
customer satisfaction and getting insights into your best customers.

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8. A
 nalyze previous sales
and revenue trends
It’s important to bear in mind that your pricing strategy isn’t set in
stone. As an already established business, you have the ability to reflect
on your past sales and revenue income to determine the aspect that
needs improvement. Do you fare better with new or existing customers?
Who were your best and worst customers? Why? Getting to know what
made your product and brand click (or not) with your customers in the
past can provide useful insights for the future. Make sure to follow your
metrics for success in order to track your progress and evolve your
strategy.

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9. Avoid cost-based pricing
Cost-based pricing is fine in its essence - you take the cost of the
product, slap on your profit margin and voila, you have a price. This
simple formula follows the correct tenets as it accounts the overall cost
of the product such as the materials used, time spent, manufacturing
and distributing costs, marketing costs and so on. However, it doesn’t
necessarily reflect the customer’s willingness to pay because it
eliminates how customers perceive your product.

Make no mistake - it’s all about the customer perceived value.

Determining your pricing strategy solely on costs as opposed to
customer’s perception of value negates the customer’s willingness to
pay as he or she might not feel the product justifies the price you set.
Always remember that the price is not the only factor that is important
to a buyer. Understanding what customers value about your product(s)
and why will help you set a price that really reflects that value and
achieve a healthy profit margin.

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10. Instead, use competitive pricing
Competitive pricing is ideal for pricing directors, managers, and
coordinators who are looking to stay competitive by balancing prices
with a profit margin. The main advantage here is a fairly fast penetration
of the market based on prices similar to the competition. Hence, a
business can quickly attract and influence customers from the already
pre-established competitor customer base. This pricing method is
far from perfect though, as it can lead to lowering prices too much
(underpricing) compared to the competition, usually based on the lack
of knowledgeable insights. This, in turn, affects the bottom line, as well
as brand recognition. The competitive pricing provides a fast way of
scoping the market and setting prices accordingly, accounting the fact
that lowering or even pricing higher than your competition carries risks
of being labeled too cheap or expensive while affecting your profit
margins. Carefully weigh the pros and cons and make it your mission
to use intelligence data to base your decision-making process on and
gauge it there is a demand for your intended pricing.

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11. Keep your pricing simple
There is no need to over-complicate pricing as there is enough
customer hesitation regarding a purchase decision going around. There
are numerous studies and researches that show even the little things
like extra syllables and commas affect customer’s perception of price.
Consider these two prices:

• $149,00 or $149.00
• $149

If you thought that the given prices are the same, you are both right
and wrong. Yes, it is the same price, but no, the customers sometimes
have a tendency to see it differently. Surely this must be a mistake,
right? Wrong.

Having a product priced at $149,00 actually makes customers feel

there is a higher cost as opposed to $149 price tag. It that sounds silly,
it probably is, but that is science (and human psychology) for you. The
bottom line is - keep it simple and avoid all unnecessary inclusions to
your pricing structure to avoid customers misperception.

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12. Context matters
In another seemingly silly principle, researchers at Vanderbilt University
found that customers were willing to pay increased prices for the same
product (Budweiser beer) when it was sold from different places. As
shocking as that revelation may be, this means that the environment
that surrounds your product on sale can make a significant difference in
what customers are willing to pay. Therefore, you can raise your prices
by simply changing the context in which you’re selling. Perception has
a profound effect on influencing the evaluation of your prices as part of
your product’s value is based on the context in which your customers
view it. Are you “just“ selling products or perhaps full-featured
solutions? Do you sell a complete training toolkit or a simple ebook?
The words may seem trivial but they matter and you should make sure
they emphasise that what you sell is fully available for customers and
ready to solve all their problems.

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13. Use price anchoring
Anchoring is a fine example of a human bias to rely almost exclusively
on the first piece of information presented when making decisions. The
way it works is that you put a premium product right next to the regular
option. That way, you are giving your customers a frame of reference
for valuing your product, through which they will then view your less
expensive options as a bargain.

Probably the easiest way to use price anchoring is to provide different

versions of a core product at different prices (we’ll talk about that in the
next entry). This builds in your anchor prices from the start and allows
you to take advantage of the multi-price mindset. Alternatively, you
can implement price anchoring by showing your competitors’ prices
along with your price or on the pricing page. This option carries the risk
of simultaneously presenting competitive options to your customers
while them a frame of reference to evaluate your product.

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14. Test different price points
Not offering enough pricing options can actually hurt your profits. How?
By not offering price points for your best customers - the ones that
want the most expensive option. Hence, adding a premium price will
provide them that option, while making your other prices look better in
the process (price anchoring).

As a reference point, we take a study from the book Priceless: The Myth
of Fair Value, penned by William Poundstone. The study evaluated
shopping patterns of consumers based on a selection of beer (people
are really big on beer). The first test presented only two options: a
regular ($1.80) and a premium ($2.50) option, where four out of five
people chose the more popular premium option. Next, a $1.60 beer
was added and subsequently totally ignored (resulting in a negative
anchoring), reversing the previous trend as now four out of five people
favored the regular option. In test number three, the lowest option was
replaced with the most expensive (super premium, if you will) option.
The results showed the majority (85 percent) chose the premium
option, while ten percent opted for the super premium option.

The narrative here is that you should steer away from anchoring
your prices by introducing too many lower price points, rather taking
advantage of the fact that some of your customers won’t mind paying
a higher price point as long as it offers a premium experience.

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15. Avoid pricing battles
It’s fairly easy to assume that the business with the lowest price will win
the most customers. Maybe short term, but just maybe. If your value
is formed solely around a rock-bottom price, consumers may actually
believe that the lower-priced brand (you, in this case) is of lower quality.
Don’t rely on comparative pricing solely as comparing yourself to your
competitors in a blunt way could have unintended consequences,
notably change the behavior of consumers. In this case, choosing the
higher-priced brand because it might be perceived as the less risky
choice or abandoning the purchase completely.

Your primary focus here needs to be on comparative value by providing

outstanding product and service. If you need to price your items higher
than your competition, let your customers know. Creating personalized
value can make their transition to the higher price easier and even
convince them that it’s worth it.

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16. Your policies matter
As evidenced so far, there is a variety of things that can impact whether
a customer is willing to pay for your product or not. Another one of
those is your policies, such as returns, exchanges, shipping options and
so on. The mats is pretty simple - the better and convenient your policies
are, the more customer is willing to make a purchase. If customers
are presented with options of returning or exchanging a product that
doesn’t fit or work out, they are more probable to pay a bit more than
they would elsewhere (a company that doesn’t have a wide range of
customer-friendly policies in case of any mishap). That way, you can
account those policies into the final price tag in order to avoid just
barely selling above the cost if those situations occur.

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17. Product bundling
Bundling products together effectively convinces consumers they are
getting a bargain, even if they normally wouldn’t buy the additional
offering or even if the bundled items are more expensive than if
purchased separately. Bundle pricing encourages customers to spend
more on a product they might not otherwise buy while giving them a
better value, as well as helping you make additional sales.

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18. The power of discounts
Discounts are perhaps the most used pricing techniques since the
introduction of the first price. Still, it’s important to know that not every
discount is equal. They should be a product of a careful market research
and monitoring that take advantage of the ever-shifting customer
trends. In any other way, they are hurting your profit and leaving money
on the table.

For instance, a “buy one, get one” discounted promotions (a variation of

bundled pricing) can encourage customers to buy more products than
they would in the first place or even prevent you from losing money
on some of your sales. For example, if you offer a “buy one, get one”
product at 50 percent off, in reality, customers are actually getting a 25
percent discount on their overall purchase.

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19. And promotions too
The same goes for various forms of promotions. You can offer a discount
or perks like free shipping and gifts for customers whose totals surpass
a certain price. The trick is to set that price just a tad over your average
purchase total to encourage customers to buy a little more than they
usually would.

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20. Listen to your customers
Finally, always keep an ear out on what your customers have to say.
Make sure to do this on a frequent basis by getting feedback about
your pricing. No one knows that better than the people who are willing
to spring money for your goods. Once again, cooperate with your
marketing department and conduct surveys to see specifically how
your pricing affects their judgement. Is it too low, too high, not having
enough incentives? By showing them you care about what they think,
you are building a long-lasting relationship and brand loyalty.

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Conclusion
Utilizing the best practices when determining the pricing for your
products is a must if a company wants to succeed in a fiercely competitive
marketplace of today. There is no room for improvisation when it comes
to pricing. Among all the 20 secrets presented in this ebook, there is a
one underlying theme going throughout - the key to business success
is pricing your products properly. Price your products the right way
and your business will enjoy high volumes of sale, creating the basis for
a business that will prosper in the long run. Get your pricing strategy
wrong by winging it or foolishly disregarding the principles mentioned
in the previous few pages and your company may experience problems
that it may never be able to recuperate from.

If this ebook showed anything, it’s that when considering a pricing

strategy, it’s important to think more broadly than simply a price tag.
You need to ensure that your business turns a solid profit and you can’t
do that with the price alone. Attracting customers through discount
pricing, flash sales, and other ways will only work if the proper foundation
has been laid down. With that in mind, costs are the starting point.
Covering the overall cost of the product, including overheads, creates
the basis for your winning pricing strategy. Next, you aim to create
perceived value through price intelligence tools, in order to provide high
levels of customers satisfaction, while also creating additional value to
round it off in an all-in-one package.

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Next, be sure to pay attention to your existing customers as it’s more
affordable to keep them rather than attract and acquire new ones. In
instances where you can’t’ retain them, find out why so that doesn’t
happen again. Each customer is different, which is why you should
perform customer segmentation and tap into additional value that a
segmented market presents. It’s always good to reflect on previous data
for future references, while avoiding cost-based pricing as it diminished
customer’s perceived value and opt for competitive pricing, which
gives you a good balance of competitive prices and profit margins.
Don’t complicate with your prices and use context to boost sales where
applicable.

Be sure to utilize price anchoring and test different price points to cater
to customers who are willing to pay a higher price point in return for
a superior product and experience. Don’t get into a price fight with
your competition as it might ricochet badly (you are trying to stay
competitive, remember?) and focus on your policies to supplement your
pricing. Use the power of product bundling, discounts, and promotions
to increase your sales, while always keeping your customers in mind
and hearing them out. Follow these secrets and implement a pricing
strategy that will work wonders for your business. They will definitely
be worth it.

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