How do you know when the price is right?
First of all, what IS the right price anyway?
I would say the right price is the price that drives the most interest and purchases from your desired target audience.
So here is our thought process to find the right price:
- Who's buying? Sometimes the target audience ends up being entirely different than the first group you imagined. The best way to find out is always to have a prototype or minimal viable model to test out what price people are actually willing to pay. So if your target group of buyers are young, urban professionals age 23 - 30 working in the tech, then try selling your minimum viable product to them and see if they buy. Focus groups are great, but unless people REALLY have to part with their money and buy your product, you don't know if they are willing to put their money where their mouth is.
- Review your current strategy. What is the quality and what market / brand perception are you trying to drive? For example, take a look at some fashion brands that have been trying to move upmarket. They try to do this by altering some components of their marketing strategy - increasing their price and promoting their products in high(er) end magazines to align with more affluent consumers. Usually they neglect to improve their product quality to offer more value for their increased prices. Since consumers aren't stupid, this often backfires when a company thinks throwing money at promotions and increasing their prices to cover for the additional expense will result in a premium brand positioning.
- Observe your competitors. What are they doing? Is there a gap you can fill? Most of the time we are too close to our own products/services to be objective about our flaws. Take a look at the competition - do their strategy components match up? For example, if they are offering a premium product is the product quality high, premium priced, distributed in high-end retailers and promoted in online / offline publications and channels targeting an affluent audience? That's the basics bird's eye view. Figure out what they are doing right and check if you can improve your strategy based on your observations.
Let's take a look at an example in the cereal industry.
Premium Cereal - touts health benefits such as low fat, low calories, but also includes ingredients such as flax, chia seeds, almonds, oats, whole grains to increase the perception of it as a premium brand.
Mid-tier / Moderate Cereal - markets on low fat, low calories proposition, but is probably still heavy in sugar and doesn't have organic ingredients - this used to be the premium category 2 decades ago before the arrival of organic, health-driven cereals.
Value-priced Cereals - bottom shelf, no name brands that satisfy your breakfast needs. Beyond that offers low nutritional value, packaging, etc.
So, how do you want to be perceived in your industry?
- Set a price. After all this reading, now is the time to decide how you want your brand to be perceived by the market. It's time to set a price. The three usual tiers you would consider are: premium, moderate, low / value-priced. Take a hard look at your product and figure out where you want to be in the market and HOW you want to be perceived by your customers. Do you want to be the efficient, premium priced, online alternative with great after sales service? Do you want to be the value-priced offline alternative that has a more transactional (one-time only) sales relationship with your customers?
The follow up question we often get is how long should we test for and what would indicate success? There is no set duration to test out your pricing, but if you frequently hear your customers saying 'wow, what a great deal!' then it's time to adjust your prices UP, because it sounds like you are leaving money on the table. If you hear your customers saying 'this is too much for us and the competitor offers similar services for 20% less', it's time to take a look at where you could potentially cut costs OR, the better way would be to figure out where you can offer value-add to justify your higher prices.
In terms of what indicates success, I would say the right price is when you are happy with your margins, and the healthy margins allow you to grow and sustain your business.
If you have any questions on pricing strategy please let us know in the comments and we are happy to address it in our upcoming blog posts to help you solve your problem. Want our team to help you navigate your business strategy? Read about our business strategy consulting services.