Pricing strategy refers to the approach you take when calculating how much you should charge for your products (or products you wish to offer for sale). Different types of pricing strategies can be used in different situations, but above all, an informed pricing structure helps you determine the price point at which you can maximize profitability without pricing yourself out of the market.
There are different types of pricing strategies including the cost-plus and competitor-based pricing strategies. However, there are various downsides to these approaches, which does not make them the best means to employ in an e-commerce business.
There is only one way to make sure that you are not losing money and customers: Value-based pricing. A value-based pricing system charges customers according to the value the customers receive from a product. A successful value-based pricing system aligns with what the customer is willing to pay for a product that delivers the solution they need. Value-based pricing ensures that your customers feel happy paying your price for the value they are getting. Pricing according to the value your customer sees in your product prevents you from short-changing yourself while creating an experience for customers that is most aligned with their expectations. You will also strengthen your brand name, build better customer relationships, and ultimately improve your bottom line. Value-based pricing is the only true win-win scenario for you and your customer.
How to Implement the Value-Based Pricing Strategy
The key to implementing this strategy is a technical one but once accurately comprehended, it is quite straightforward. The following should be considered when putting in place this strategy:
- Identify who your customers are by creating quantified Buyer Personas: Buyer personas are representations of the largest and ideal sections of your market. This can be identified using this three-step framework:
- Market Research
- Feature and Product Preference Analysis
- Price Sensitivity Analysis
It is important to note that more qualitative data can be used to provide more robust buyer personas; this could include information about how likely they are to respond to discounts and other products they might be interested in.
Market Research to learn about customer demographics: This involves collecting demographic
information on your customers including age, job, and location. It could also include
information specifically related to your company and products. Thus, your data
must revolve around:
- Motivation to buy
- Interests (your company’s products or otherwise)
- Concerns about your products
- Concerns about your company
- Preferred products from competitors’ companies which you do not sell
Note that money spent on survey and research is not wasted – it is an investment.
- Conduct Feature and Product Preference Analysis to gauge value: Once you begin to sketch out who your customers are and what motivates their interests in your company, you can look closer at their perspectives on your product. It is important to know what products certain customers value most. A better way of asking for your customers’ preferences is to use the Max Diff Analysis. Present your customer with several choices, and ask them to choose the one that provides the most value and the one that provides the least value. The Max-Diff Analysis is a two-step analysis done by first asking your customers to choose their most/least valuable products, and then asking them to choose the most/least valuable features about those products.
- Conduct Price Sensitivity Analysis to find Concrete Price Points: In order to successfully execute the value-based pricing strategy, it is important to collect feedback on real price points that customers are willing to pay. The willingness to pay is a reflection of the value that customers see in your products; therefore, it is your best gauge when determining your value-based pricing scheme. The strength of the price sensitivity analysis depends on the foundation you have laid with your market research/product preference analysis.
Market research informs you of how to segment customers when asking them about price points while preference analysis helps you to determine which products are the most important to ask about. You should also bear in mind that the 80/20 principle should be considered when conducting your price sensitivity analysis: Focus on the 20% of your products that provide the highest value to the 80% buyer persona. This saves you the stress of conducting an analysis of quite an unreasonable number of products.
- Analyze buyer persona data: After gathering all that price sensitivity data, the data should be analyzed in order to determine the best prices to drive sales for the favorite product of a particular buyer’s persona. In order words, you have to use this data to determine the price that captures the largest share of your market and at the most profitable prices.
This process is quite straightforward but it can be excessively stressful when carried out on a large number of products; however, what is left in the end is a price capable of maximizing your profit as well as consumer satisfaction. To that effect, you are able to know the types of product you should target and which set of customers you should market a particular range of product to.