Unlock the secret to pricing mastery: why high prices create loyal customers

In sales, they teach how to demonstrate value so that it exceeds the price. This is a good and correct approach, based on the idea that value is subjective, and therefore, can be influenced.

To this, it is worth adding that the perception of price is also quite subjective. For example, the same price tag for a branded item may seem low, while for a no-name item, it may seem too high. Another example of the subjectivity of price is the product line or pricing tiers. If a customer chooses between a small cup of cola for $2 and a large one for $3.50, they will likely buy the small one. But if you add a medium cup for $3, most will buy the large one because it’s only $0.50 more than the medium. The savings are obvious. It may look like manipulation, but even from the client's point of view, it is correct. It’s about the risk of disappointment. Everyone understands that it’s better to get a small cup of cola, but when it runs out before the burger is finished, the mood spoils. The situation is similar in other areas. Disappointment from lack of functionality or low quality outweighs the moral gain from a low price. Therefore, an outwardly paradoxical, but correct and universal conclusion suggests itself: for long and fruitful relationships with a client, you need to sell at a high price.

Nevertheless, there is a broader list of principles for working with price:

1. Decide on the competition strategy: Competition is possible either through higher quality and better service (product leadership and customer intimacy), or through process optimization and lower prices (operational excellence). A situation where a low price is imposed on high costs leads to difficult financial conditions.
2. The price should correctly influence all important metrics: On one hand, a low price can increase the conversion to the first sale, but on the other, it can reduce LTV due to unmet customer expectations. If the profit from the first sale is lower than the acquisition cost, and there are no repeat sales, the company will scale losses instead of profit.
3. Psychologically, the price indicates what is inside: The more difficult it is to determine the quality of a product or service, the more the price plays a role in the choice:A price below expectations creates the impression of poor quality.A price above expectations makes the client scrutinize for signs of quality matching the price.A price within the budget significantly simplifies the choice and purchase. If it exceeds the budget, the number of organizational issues may force the client to abandon the purchase.
4. Discounts and gifts: A justified discount creates a loyal customer. For example, an item from the showcase can be sold cheaper. The same goes for remnants, test samples, etc. However, "eternal" sales destroy relationships with customers. Gifts are another matter. The smallest gift is perceived as a sign of attention, and this is much better than savings.
5. Test hypotheses: On one hand, the market is constantly changing, and you need to maintain the attractiveness of your offer; on the other, there is no guarantee that we have worked out all the options and found the optimal one. Often we perceive what exists as what should be. HADI cycles and a hypothesis testing table allow us to think outside the box. Hypothesis testing will be especially useful when choosing a pricing strategy.

Pricing strategies:

The strategy can change depending on the product's life cycle stage, changes in sales geography, the appearance of competitors, legislation, and other external factors.

1. Market entry: A low price provides the new product with first sales, customer reviews, cases, and usage examples. Despite the logic of this approach, in most cases, it is unnecessary. Customers who buy new products—innovators and early adopters—are driven by innovation, not price.
2. Decreasing from high to medium: A high price allows for more investment in marketing and the formation of a sustainable positive opinion among early users. As the product spreads, its prices decrease. This happened with mobile communications. The first devices cost about $2000, plus connection. Over several years, the price of the device decreased tenfold. Then the price rose again, but these were incomparably more innovative devices.
3. Individual pricing: Used in corporate sales. A predetermined price still exists, but generally, no one buys at that price. Bargaining revolves around the discount. Thus, for telecommunications equipment, a so-called GPL (Global Price List) is set, from which the system integrator can give discounts of up to 40% and even 50%.
4. Super low price: If a company manages to create conditions under which it has lower costs than others, it can successfully compete on price while maintaining margin. This can happen due to innovative production, access to cheap resources, or the creation of a substitute product.
5. Brand pricing: In mature markets, where it is impossible to significantly improve consumer qualities or service, companies invest in brands. For the client, it is important to have a badge that demonstrates their status. This strategy can also work in the B2B sector.
6. Psychological pricing: This strategy includes all promotions and clearances, fixed prices, auctions, etc.
7. Bundle pricing: A bundle is a combination of items, thanks to which the client receives a favorable offer, while the seller maintains margin.

Pricing methods: There are three main pricing methods:

1. Pain price: Selling at the pain price motivates finding this pain and making more and more high-quality and necessary products. The disadvantage of this method is that high qualification is needed to determine the price.
2. Above costs: The simplest and most transparent method. The output is clear unit economics. The problem is that market opportunities to increase the margin are not considered. Or there is a risk of overpricing.
3. Lower than competitors: A very operational method. It is enough to analyze 5-7 competitors to determine the price. There is also a disadvantage. It lies in the fact that we do not know if the competitors' sales are going at such prices. If they are not, it is unclear how much they need to be reduced.

If you liked the article, please leave a like, share or comment.

This is important for me and LinkedIn algorithms??