Todays blog is by guest blogger, Patrick Campbell, co-founder and CEO of Price Intelligently.
Understanding how to develop a pricing strategy is not only one of the important parts of creating a successful business, it’s quite possibly the most important. Pricing strategy has the clearest direct impact on revenue and your bottom line, and it’s the ultimate reflection of the value your company offers through its products and customer service.
You’ve put all your time, creativity and energy into developing a great product and a beautiful website, but nothing communicates those efforts to your potential customers quite as succinctly as your prices.
Every aspect of your business works to justify them, but from a numbers perspective, pricing has a huge impact: a 1% improvement in pricing equates to an average boost of 11% in profit. It’s that huge to revenue maximization and growth.
5 Steps to Create and Implement a Value-Based Pricing Strategy
All that being said, let’s help you out by looking at the first five steps to developing and executing a value based pricing strategy that pushes your revenue in the right direction.
1. UNDERSTAND YOUR BUYER PERSONAS
Buyer personas are fictional characters that represent your ideal customers. They help you refine your marketing activities and lead to an understanding of your customers’ willingness to buy at a given price. There’s plenty of literature out there on defining your buyer personas, so we won’t go too deeply into that process. Yet, in terms of pricing and packaging, understanding them helps you to customize and develop your product for the valuations of those customers and price accordingly.
You’re probably already versioning your product into tiers or levels, but understanding these personas ensures you’re capitalizing on those customers willing to pay more and appealing to those who are more price sensitive. The big thing here is that it’s all about your customers. Understand them, align your offerings to them, and you can’t lose.
2. SURVEY AND TALK WITH YOUR CUSTOMERS
Once we’ve identified our buyer personas and understand them how do we figure out how much they’re willing to spend, or what exactly they want their plan to be for your product? The key to creating optimized prices and measuring the value you’re providing is to survey the customer base and collect hard data. You already should be talking to your customers about everything else, there’s no reason pricing should be an exception. You’ll find customers truly appreciate the conversation, because it’s directly related to providing them the right amount of value for how much they’re paying.
You can ask them point blank how much they’d be willing to pay, but you’ll find it’s hard for customers (and the human brain, quite frankly) to cognitively come up with a number. Instead, asking the customer value-based questions in ranges (“at what point is this way too expensive or at what point is this so cheap you question the quality?”) will generate data that can take most of the guesswork out of pricing your product tiers, and with that data you’ll be able to price your products for affluent clients who want all the bells and whistles as well as frugal ones who don’t need every feature.
3. ANALYZE THE DATA AND PICK YOUR PRICES AND PACKAGES
Now that you’ve collected some quantitative and qualitative data, you can analyze it and create value-based pricing that appeals to the target segments. Pricing is a process, and while looking for one perfect price is like trying to find a needle in a haystack, the data will generate an optimal price range that narrows it down significantly. You’ll see patterns emerge (I promise), especially when segmenting this data by persona.
You’ll also need to compare the data to your costs and competitors before making a final decision (although that data shouldn’t be the driving force behind your analysis). Your final list of offerings and SKUs should then be a listing that is discrete and collectively exhaustive. Essentially, you need to make sure there’s an option for every one of your customer personas, in addition to ensuring that when a customer visits your pricing page they know exactly what bucket they fall into across your offerings.
From a pragmatic standpoint, make sure that you set a deadline for your team and that one person will make the final decision. The process should and can involve someone from every part of the business, but we’ve seen plenty of pricing paralysis when there are too many cooks in the kitchen. After all, pricing will always be an aspect of your business.
4. COMMUNICATE VALUE TO YOUR CUSTOMERS
Prices and value are only as good as how you communicate them. Fortunately, collecting price sensitivity data not only determines a more accurate price for your product, it also allows you to provide great customer service. You’re further developing that customer relationship and assuring customers that you’re providing the value you claim in your prices.
Once you have those prices though, you need to make sure you communicate the value, pricing model and purchase process clearly. If you publish your prices, make sure it’s clear what features are available for each tier at the given price so that customers know exactly what they’re paying for when they put down their credit card or invoice number (more on pricing pages). Make it as easy as possible for customers to predict their costs and see the value they’re receiving.
5. CREATE THE RIGHT, PROFIT FOCUSED CULTURE
While it’s definitely imperative that you communicate the value of your product to the consumer, it’s equally as important to accurately convey that value to everyone on your team. The individuals on your team, from the sales team to developers, have just as much power over your profitability as your customers. If the company culture isn’t unified around the value and pricing of your products, then none of the effort put into generating data, conducting a thorough analysis or choosing your price points will maximize revenue or help your business grow.
To create a culture that reinforces your pricing strategy it’s important that your company’s costs, pricing, and profit margins are clearly visible to the team. This transparency guarantees their bought in, and you’ll realize that the collective will do a better job at figuring out how to market and sell different versions of your product to the right customer segments.
If you decide to run promotions or offer discounts, make sure the team knows the limits so you don’t lose out on margins. Discounts need to be discreet, used sparingly and executed consistently.
PRICING IS A PROCESS THAT PUTS THE CUSTOMER FIRST
We say it over and over, but it bears repeating: pricing is a process. The stakes are too high to let your pricing strategy fall to the wayside, and you need to keep fighting the well worth it, ongoing battle. Fortunately though, after each focused iteration, the process becomes easier and easier to manage, allowing you to continually evolve and communicate the pricing model along with the rest of your business - all while growing that bottom line.
Now that you know how to develop a pricing strategy for your business, understand how to align sales and marketingto improve your bottom line.
Patrick Campbell is Co-Founder and CEO of Price Intelligently, a value-based pricing software company based in Boston. He focuses on developing solutions that eliminate the guesswork in discovering a customer’s true willingness to pay. Prior to Price Intelligently, Campbell began his career working in the U.S. Intelligence Community before making the leap to Google, where he worked on different prioritization and value models for its Adwords sales teams.