PART 5 Pricing Strategies: Effective Models and the Neuroscience Behind Pricing

Today, we’re going to talk about another measure in the crucial process of service productization; pricing. Pricing is one of the most important aspects and can be the difference between your product being successful or not so successful.

There are several models which can be used for pricing your product but is your understanding of your customer / various segments / their needs which will go into the fascinating world of neuroscience to determine the right pricing. It defines a very thin line between leaving value of the table and customer deeming the product not ‘worth it’

Let’s start the journey today with the effective pricing models which one can use. As each model is complex, we will not not go deep into any of the pricing models, and just list them and what it takes to use one at a customary level.

Effective Pricing Models

When we talk about pricing (whether it is for a product or service), there are several model as listed below. All the models here are not exclusive to each other, at times you may tend to use them in combination depending upon customer requirement / nature.

1. Cost-Plus Pricing:

General used for commodity pricing or where the competition is super high and customer is extremely price sensitive

• Calculate the cost of providing the service and add a markup.
• It will not reflect the value perceived by the customer.
• Over a period, if entire market offers cost-plus price, operational excellence and efficiencies need to kick in to be able to compete and survive.
• This is not my favourite.

2. Value-Based Pricing:

A preferred model for services. You get a part of the value you are able to add to the customer’s business / life.

• Prices are set based on perceived value or actual value delivery to the customer.
• This model needs you to be aware of customer / his business / problems you are solving and their willingness to pay for the solution.

3. Competitive Pricing:

Generally followed by a new entrant trying to establish in the market. You follow the biggest competitor or at time try to be slightly lower than the competition to create an opening for your product

• Base your prices on what competitors are charging.
• Useful in saturated markets but can lead to price wars.
• Ensure you differentiate your product with additional value or features.

4. Tiered Pricing:

Primary preferred by SaaS companies which has a range of services and equally higher range or segment of customers.

• Offer multiple pricing levels with different features or service levels.
• Address a broader range of customers with products / packages tailored to their needs.

5. Freemium Model:

Offered in cases where you have a large customer base, and you need to expand fast. IN addition, the customer may want to have a trial before buying the service.

• Provide a basic version for free and charge for advanced features.
• Great for building a large user base quickly.
• This is largely used for online products / services.

6. Subscription Pricing:

Primarily used by SaaS / software services, subscription pricing is soon gaining traction. Often touted as PaaS (Product as a service) or SaaS (Software as a service), the model is in demand

• Charge a recurring fee for ongoing access to the service.
• Provides predictable revenue streams.

As i wrote earlier, the model can be used standalone or in combination to deliver the best value to the customer. A word of caution, always keep an eye on your gross margins / delivery costs before pricing. The margins shall be able to cover your fixed costs.

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The Neuroscience Behind Pricing

Another aspect of pricing is the knowledge about how the customer things and makes the decision. The neuroscience of pricing is in itself a huge subject and demands a very in-depth understanding about the customer, their need and factors which drive the decision-making process.

Understanding the psychology of pricing can give you an edge.

1. Decoy Effect:

Place a service in the middle. The middle option pricing will decide which product / offering you are most likely to sell

• Introduce a third option that makes the middle option more attractive.
• Example: Offering small, medium, and large sizes where the medium seems the best value.

2. Charm Pricing:

Also known as ‘Bata’ pricing by some. Mind works in mysterious ways.

• Prices ending in .99 or .95 can make products seem cheaper than they are.
• Example: Pricing a service at $99.99 instead of $100.

3. Price Bundling:

Create a bundle of different services and price them lower than the sum of two. Marketers have at times tried to showcase a reduced cost with an addon product, signaling a extremely high value (negative pricing)

• Offer several products or services together at a lower combined price.
• Makes customers perceive they’re getting more value.

4. Perceived Value:

Bit different from value pricing. The product is deliberately priced higher to signal a very high premium value.

• Higher prices can sometimes enhance the perceived value and desirability of a product.
• Ensure your product quality justifies the premium price.

Practical Application

Let’s look at few examples in each which will help your mind work and find the best solution for your business.

Imagine you’re productizing a web design service. Here’s how you could apply these pricing strategies:

• Cost-Plus Pricing: Calculate your costs (design hours, tools, etc.) and add a markup. The costs here shall be direct costs for delivery and the mark up shall cover the overheads / customer Acquisition and other costs leaving a margin of profit
• Value-Based Pricing: If your designs significantly boost client conversions, price accordingly. You may also try model what will be incremental sales and profit and price the product to get a % of the incremental sales / profit
• Competitive Pricing: Know your customer and know your competition. Research competitors and position your pricing competitively. Normally done in a crowded market or market with one large competitor.
• Tiered Pricing: Offer basic (template-based), standard (custom design), and premium (custom design + maintenance) packages. This can be mixed with the net one
• Freemium Model: Offer free design templates to get customers in, they pay for customizations, or premium designs which are not available in free version.
• Subscription Pricing: Charge monthly fees for ongoing website maintenance.

Endgame:

Pricing is important factor in your ability to get customer as well as defining profitability of your business.

• Optimize Your Revenue: Revenue is a mix of customers and value you get per product / customer. Strike right balance between customer count and margins.
• Enhance Customer Perception: Value is in the customer perception. Understand customer well to be able to use that to your advantage to deliver perceived value.
• Expand Your Market Reach: One size does not fit all. Create different package of products for different customer segments.