If your company isn’t charging customers the most they’re willing to pay, it may be time to optimize your pricing. Here’s how.
- Do your research. “The quickest and most effective way of optimizing price is conducting pricing research,” says Per Sjöfors, founder of Atenga Insights. This involves analyzing customer data and competitor pricing, as well as calculating the relative value of each product feature. The alternative is to begin with an educated guess (perhaps by considering how much your product or service actually saves your customer compared to other solutions), and work down from there. But, Sjöfors warns, expect a lengthy, iterative process during which revenue and sales volume may suffer.
- Start out high. “If you do conduct price testing, you want to set your prices high, and then offer different levels of discounts to see what happens with your sales level,” Sjöfors explains. This way, you aren’t confusing your customers with changing prices. Be sure to make each discount available long enough to capture the response before trying the next.
- Deliver the value promised. Remember, however, that the premium you hope to command has to match the value in the eyes of the customer. “You can’t just increase price without adding value,” Sjöfors notes. “For instance, I go to my favorite coffee shop and I’m happy to pay $3.50 for a cup of coffee, because the product quality and store ambience make it worthwhile. Recently, I went into a typical greasy-spoon diner that also charged $3.50 for a cup of coffee — a mediocre one. They were pricing way above the perceived value, and I won’t come back to that place.” The lesson: even if your product is a commodity, adding actual value — in terms of service, for instance — can garner a higher price.
- Weigh the emotional factors. There is a wild card in all of these calculations, however: “The smooth price curve they teach in business school doesn’t really exist,” Sjöfors argues, “because buying decisions are always emotional.” And the emotional impact can be difficult to predict. He cites Atenga’s own research, which has shown that if a streaming music service would charge $5 per month rather than the current price, which is $4.99, sales would increase about 70 percent simply because of increased perceived value. Such emotional effects, Sjöfors points out, even exist in the B2B realm.
There are many additional factors that affect perceived value, as well, such as the current stage of a product’s lifestyle or overall consumer confidence levels. But these complexities shouldn’t stop your company from commanding the highest price customers are willing to pay. After all, to do otherwise would be to leave money on the table.
