Are You Giving Away Your Product Too Cheaply?

7 Pricing Factors

Are you pricing your offering to maximize your revenue and profit opportunities? Often, marketers underestimate the strategic importance of pricing and its impact on their revenue potential and bottom line. Therefore, assess your offering’s tangible and intangible benefits in fulfilling the consumer‘s specific needs.

Determine how you can enhance your offering from a generic product, including only its core physical attributes, to an augmented product, including additional features enabling you to charge more. Be careful how customers perceive any changes in your offering.

To illustrate the pricing challenge, an online publishing client considered bundling subscriptions with $25 worth of merchandise that its target market valued in order to increase annual subscriptions. Since this merchandise retailed on its website, my client’s strategy had the opposite effect. It decreased the subscription’s value in subscribers’ eyes because consumers had considered the subscription to be worth the full price without the merchandise. By sweetening the subscription offer with merchandise that customers were already inclined to purchase they diminished the value of the subscription.

7 Pricing Factors

To help you better price your offering, here are seven steps to assess your offering’s true value and price it accordingly.

  1. Assess primary and secondary market segments. The goal is to better understand your offering’s value to consumers. Segments are important for positioning and merchandising the offering to ensure maximized sales at the established price point. You may want to use marketing personas to help you with this analysis.
  2. Determine product’s availability and near substitutes. Underpricing can hurt your product and profitability as much as overpricing does. If the price is too low, potential customers will think the quality is poor. This is particularly true for high-end, prestige brands. Another client underpriced its subscription product, resulting in depressed response and lower sales. They had underestimated the product’s uniqueness, the number of close substitutes, and the strength of the consumer’s bond with the product. As a result, the initial increase resulted in more subscribers as the new price was more in line with its consumer-perceived value.
  3. Evaluate the market for competitive and similar products. Are there new products, new uses for existing products, or new technologies can compete with or, worse, leapfrog your offering? Examine all possible ways consumers can acquire your product. Realize that many companies only consider their direct competitors who sell through identical channels. Don’t limit your analysis to online distribution channels. This is important because competitors can define your pricing. In this case, you can price higher if consumers perceive your product and/or brand as  significantly better; price on parity if your product has better features; or price lower if your product has relatively similar features to existing products. An information client faced this situation with a premium product. Its direct competitors established the price for a similar offering. As the third player in this segment, its choices were price parity with an enhanced offering or a lower price with similar features.
  4. Examine market pricing and economics. For example, a paid, ad-free site should generate more revenue than a free ad-supported one. In considering this option, incorporate the cost of forgone revenue, especially as advertisers find paying customers more attractive. To gain additional insight from this analysis, observe how consumers interacting with your product to better understand their connection to it. This can yield insights into how to package and promote the offering that can affect on pricing, features, and incentives.
  5. Determine internal cost structure and how pricing interacts with the offering. I recommended that another content client promote its advertising-supported free e-zines to incent readers to register. The client perceived that the e-zines had no value since the content was repurposed from another product and therefore didn’t advertise them. The client missed the point that the repurposed content was exactly what readers viewed as a benefit. By undervaluing its offering, he missed an opportunity to increase registrations and, hence, advertising revenues with a product that effectively had no development costs.
  6. Test different price points where possible. This is important if you enter a new or untapped market, or enhance an existing offering with consumer-oriented benefits. Understand that in today’s integrated multi-channel world this can be difficult to do. When you’re calculating your projected revenues, don’t overlook the need to maximize your audience for future selling opportunities. Therefore the price that maximizes short-term sales may not maximize long-term sales since it could diminish your audience for future offerings.
  7. Monitor the dynamic market and competition continually for pricing changes. Market dynamics and new products can influence and change consumer needs. As a result, you need to be on top of changes as they occur.

Pricing is tricky. Optimally, you should test to determine the best price with respect to meeting your long-term goals. Determine price based on a number of factors. Most important is what potential customers are willing to pay and their value to your company over time.

Do you have any other suggestions for improving product pricing? If so, please add them to the comment section below.

Happy marketing,
Heidi Cohen

On a related topic, here’s a list of 100 points to keep your marketing on track.

Photo credit: Zieak via Flickr

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