Pricing software is now widely used to test the impact of minute pricing changes on consumer demand and conversions. Analysing how users respond to various elements of these pricing change will help you hone in on the best combination that works for both you and your customers.
Pricing Change 1. Price Anchoring
Anchoring refers to the human tendency to rely heavily on the first piece of information offered when making decisions. So, if you place pricier products and services next to standard options this helps create a clearer sense of value for potential customers, who will view the less expensive options as a bargain in comparison. The best way to sell a £2,000 watch is to place it right next to a £10,000 watch!
Price Anchoring is therefore about giving your customers a frame of reference for valuing your product – you guide those customers to choose the exact product you want them to choose at the exact price you want them to buy.
Pricing Change 2. Reduce Pain Points
Reframe your product’s value
It’s easier to evaluate how much you’re getting out of a £89.00 a month subscription than a £1,000 a year subscription, even though they average out to around the same amount.
Bundle items purchased together
The luxury version of car "packages" is a good example of successful bundling. It’s easier to justify a single upgrade than it is to consider purchasing the heated leather seats, navigation, and roadside assistance individually.
Amend your wording
In a Carnegie Mellon University study, trial rates for a DVD subscription increased by 20% when the messaging was changed from “a $5 fee” to “a small $5 fee,” revealing that the profit is sometimes in the wording.
Pricing Change 3. Keep Prices Simple
In a paper published in the Journal of Consumer Psychology, researchers found that prices that contained more syllables seemed drastically higher to consumers. Sceptical? Here are the pricing structures that were tested:
The top two prices seemed far higher than the third price. This effect occurs because of the way one would say the numbers out loud: “One thousand four hundred and ninety-nine,” versus “fourteen ninety-nine.” This effect even occurs when the number is evaluated internally, or not spoken aloud. The message here is to avoid all unnecessary additions and use the simplest style possible.
Pricing Change 4. Implement Penetration Pricing
Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price.
Penetration pricing is most commonly linked with a marketing objective of increasing market share or sales volume. In the short term, penetration pricing is likely to result in lower profits than would be the case if prices were set higher. However, there are some significant benefits to
Penetration pricing is often used to support the launch of a new
The aim of penetration pricing is usually to increase market share of a product, providing the opportunity to increase prices once this objective has been achieved.
Pricing Change 5. Introduce a Loss Leader
A loss leader is a product priced below cost-price in order to attract customers into your business. The purpose of making a product a loss leader is to encourage customers to make further purchases of more profitable goods while they are shopping or engaged with your business. But does this strategy work?
One risk of using a loss leader is that customers might take the opportunity to "bulk-buy". If the price discount is sufficiently attractive then it makes sense for customers to buy as much as they can (assuming the product is not perishable).
However, if you undercut your competitors on price, this attracts new customers and increases loyalty in existing customers.
Using a loss leader is essentially a short-term pricing tactic for any one product. Customers will soon get used to the tactic, so it makes sense to change the loss leader every so often.
A Competitive Weapon
Pricing is a key competitive weapon and a very flexible part of the marketing mix – it's not merely about cost plus
Smart Pricing involves thinking like a buyer instead of a seller, meaning you can hone in on interesting and profitable strategies tailor-made for your business that have the added benefit of setting you apart from the competition. The pricing changes mentioned here are easy to implement and you should quickly see some good results.
Pricing for Profit: How to Develop a Powerful Pricing Strategy for Your Business, Peter Hill, 2013
Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability by Jagmohan Raju and Z. John Zhang, 2010
Smarter Pricing: How to Capture More Value in Your Market by Tony Cramm, 2005