Should Your Pricing Strategy be Simple or Complex?
There is undoubtedly a desire from both Sales and Marketing professionals and consumers for a simple, easily understood pricing strategy.
Sales and Marketing people will often argue that pricing needs to be simple so that it is easily understood by their salespeople and to avoid customers getting confused and frustrated. Without simplicity, deals may slow to a crawl and sales will be lost to competitors who are more responsive and easier to do business with. Consumers are also fed up with being bamboozled by complex pricing decisions and want transparent, easily understood pricing.
However, Pricing Professionals argue that pricing needs to reflect the complexity of the marketplace. Otherwise, they say, profit will be left on the table with customers who are willing to pay more. Sales will be lost with customers who are being over-priced and share prices will plummet as profitability goes south.
Who is right, Sales/Marketing or Pricing Professionals?
Well, there is probably right (and wrong) on both sides of the argument – so, what's the solution to the conundrum on making pricing easy to understand?
Well, both sides are actually talking about two different aspects of pricing, which are:
1. The Underlying Pricing Model
Here, the Pricing Professionals are right and the Sales/Marketing people are wrong. Complex pricing models that are able to describe all of the various differences in price sensitivity and willingness-to-pay that actually exist in the marketplace are crucial for maximizing revenue and profit performance.
2. The Price Execution System
Here, it’s the Sales/Marketing people who are right and the Pricing Professionals who are wrong. Expecting customers and salespeople to make sense of an incredibly complex pricing model is a recipe for disaster. In the field, pricing does indeed need to be simple to ensure proper and consistent execution.
6 Ridiculously Simple Ways to Price Effectively
1) Use "Magic 9"
Prices ending in the number 9 are so effective that they actually outsell lower-priced goods! A recent study compared price points such as £39 and £34 for items of clothing, and "the researchers were shocked to find that" the £39 price point actually outsold the cheaper price point (£34) by 24%.
2) Literally keep prices simple
The simpler the price sounds, the less overwhelming (and expensive) it feels. Researchers found that prices that contain more syllables when spoken or even read seemed drastically higher to customers. Examples: "£1,499.00"; "£1,499"; and "£1499". Despite the fact that these prices are the same, the extra syllables (and commas) make it feel and sound like a higher cost.
3) Create Context
How people feel about price depends on the context. e.g. Customers are willing to pay a higher price for the exact same type of wine when it is sold at an upmarket hotel than when it is sold from a cornershop. This suggests you could raise your prices based on the context in which you frame it, e.g. fancy, gourmet, limited supply, convenience, snob appeal etc.
4) Offer More Price Points
Offer sufficient price points. Offer choices between regular, premium, and super premium. If you prefer, call them bronze, silver and gold – but NOT high, medium, and low. Take advantage of the fact that many of your customers will be willing to pay a higher price point as long as it offers a premium experience - as they see it in context with other price choices.
5) Reframe Your Product's Value
Make the customer, particularly the resistant ones, feel comfortable with your pricing by reframing your product’s value:
Example 1: Say "£84 per month" instead of "£1000 per year," even though those two price points are virtually the same amount overall!
Example 2: Increase your response rate by changing your description of the next day delivery charge, e.g. “ £5 fee” to “a small £5 fee”.
6) Know YOUR competitors
The secrets of knowing your competitors' product assortment and meeting and beating them on price is a sure-fired, simple way to own the keys to your own pricing. They are your "mark". They are the ones against whom you will measure yourself and make your decisions. You have to know where YOU are located in the competitive pricing landscape. Higher, lower, competitive or the only one? You have to know when and how often your competition changes prices. Knowing your competitors' pricing helps you keep pace with what the market can bear in terms of price change frequency, areas of opportunity to raise and lower your price point, and use their pricing as a benchmark to justify your own price position.
How can you have a complex pricing model that’s simple to execute in the field? Many companies are achieving this through the use of technology. Price look-up tools are very simple from an execution standpoint. Salespeople can simply enter or select the details of the quote - customer, product, quantities, timing, etc. - and the tool will then display the recommended prices.
The underlying model that’s determining those prices can be extremely complex, using dozens of different variables and containing thousands of discrete segments. Yet, the salespeople are effectively shielded from all of that complexity. Modern price monitoring software designed for the specific purpose of competitive price monitoring and tracking, and product assortment intelligence, is essential to the complete, accurate, easy-to-use pricing and assortment information gathering, analysis, and action.
- Pricing Strategy:setting price levels, managing price discounts and establishing price structures, Tim Smith 2011.
- The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016
- Pricing with Confidence:10 ways to stop leaving money on the table, Reed . Holden and Mark Burton 2014.
- Pricing Strategy:tactics and strategies for Pricing with confidence, Warren D Hamilton, 2014.
- Pricing Strategy:how to price a product, Bill McFarlane 2012.